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Why Incentives Should Be Not Too Big, Not Too Small

July 1, 2000
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Related Topics: Compensation Design and Communication, Recognition, Featured Article
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Wardrobe consultants at the Men's Wearhouse are paid a base salary and a commission.

The base salary in 1997 was about $5 per hour. The commission system has two tiers: 3 percent for sales under $500 and 7 percent for sales over $500.

The commission structure is designed to encourage wardrobe consultants to not just fill the customer's initial request -- what a clerk would do -- but to see what other clothing needs the person has and help implement a plan to develop the individual's wardrobe.

The company fired one of its top-producing salespeople because he stole other people's sales.

Including both base salary and commission, wardrobe consultants receive between 8 and 9 percent of the revenues they produce. Most consultants earn between $25,000 and $30,000 per year. In a typical small store in a mall such as those where the Men's Wearhouse is located, an assistant manager makes about $18,000 per year. So, the wardrobe consultants earn somewhat more than standard for the industry.

Sales associates earn about $12,000 to $14,000 per year and share a pooled commission based on their sales of accessories such as belts, socks, and ties. Store managers receive a base salary and a commission on their own sales, since all managers in the store are expected to sell. They also receive bonuses based on the sales volume and shrink (inventory losses) in their store.

Each person in a store, except the managers, receives $20 if the store meets its "good" sales target for the month and $40 if it meets the "excellent" target level. Managers receive a $1,500 bonus if the inventory shrink is less than 1 percent and $3,000 if it is less than 0.5 percent. About 15 to 20 percent of the typical store manager's salary is based on store performance. The rest is based on the manager's individual sales.

The $20 and $40 monthly storewide awards, paid in cash, seem quite nominal and one might wonder what their effect is on people. George Zimmer and his colleagues, however, have over the years developed a very sophisticated view of the use of incentives:

"Incentives can sometimes be so large financially that it becomes very important in the actual day-to-day life of the recipient. And in that case it can overwhelm the intended spirit, if you will, because it's too much money. It can also be too small, in which case, it may be meaningless and believe it or not, the [$20 to $40 monthly bonus opportunity]is the perfect situation. It creates so much excitement, even though the money is not material. It allows the team spirit to become the focal point, and not the money."

Managers throughout the company are eligible for a bonus plan based on the company's profits. Almost 100 percent of the company's people own stock in the Men's Wearhouse because there is an employee stock ownership plan and the company actively promotes participation in its 401(k) retirement program. Senior executive salaries are low compared with similar companies, given the firm's performance.

One important issue is how to build a team-oriented, collective feeling in a company that pays people essentially on their individual sales achievements.

The Men's Wearhouse has addressed this problem in several ways. First, in much of its training, the company notes that if you help a colleague in his or her sales efforts, that person will, in turn, help you. The idea of reciprocity is emphasized.

Second, the company tracks the number of "tickets" written by each salesperson in a month. If the [uncooperative] behavior persists, the individual will probably be terminated. In fact, the company fired one of its top-producing salespeople because he stole other people's sales and didn't buy into the company's values and philosophy.

Although no one in that store subsequently sold as much as the person who had been fired, total sales went up almost 30 percent. That one individual brought the others down, and when he was gone, they could also do their best.

Perhaps the most important answer comes from the values, philosophy, and culture that is built and maintained through the various training activities and other management practices -- all of which emphasize the responsibility of every person to help his or her peers develop their potential. George Zimmer commented:

"When I hand out certain awards at those [Christmas] parties, I always say the same thing: 'I love the fact that we are a company in which somebody writes a thousand dollar sale and somebody else comes over and gives them a 'high five;' that we celebrate each other's successes. "

"I like to live in a world in which I can celebrate my colleague's success without feeling inadequate, or jealous, or envious. We have to walk that thin line between having motivated incented people trying to really do the best they can and also being part of the overall team."

This article was reprinted with permission of Harvard Business School Press. Excerpt of Hidden Value: How Great Companies Achieve Extraordinary Results with Ordinary People by Charles A. O'Reilly III and Jeffrey Pfeffer. Copyright 2000 President and fellows of Harvard College; All Rights Reserved.

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