A Compensation Program That Works

Nature Scapes, an Atlanta, Ga.-based commercial maintenance and installation company, is a very successful organization. Its owner and founder, Rick Upchurch, has guided the company through 16 years of growth and change.

Last year, however, as he thought about the full potential the company possessed vs. the success it had already achieved, he felt he could do even better. What was needed, he reasoned, was a "tweak," something that would help focus the management team, allow them to share in the results of their labors and do this without significantly increasing his fixed salary costs.

The "tweak" he was looking for came to him during a meeting he had with GreenSearch, an Atlanta-based management search and human resource consulting firm. They helped him devise and implement a management incentive plan designed to help him achieve these objectives.

"We were experiencing steady growth with eroding profits," said Upchurch. "The company was outgrowing its current management style and we needed a tool to help us reach the next level."

Indeed, there was nothing broken at Nature Scapes. It is a solid, viable business with healthy key indicators and performance results, a strong market niche, good financial information systems and experienced, competent people.

"For years, I tried to give my managers a real sense of responsibility for the business, and they kept giving it right back to me," reflected Upchurch.

The decision to implement an incentive plan prompted a major review, discussion and identification of the "key results areas" in the business. Many of these areas were already embedded in the budget and profit-and-loss statements that the company’s accounting manager prepared each month.

One of the reasons the managers in Nature Scapes kept giving responsibility back, as Upchurch described it, was because the results the company needed to achieve had never been identified, established and aligned with those managers whose decisions had the greatest impact on their accomplishment.

When the analysis was completed, the key results areas of the business around which the incentive plan would be structured were defined as:

• Company revenue
• Cost of sales
• Labor costs
• Company gross profit
• Other costs (defined as vehicle, small tools and shop costs)

The identification of these key results areas was followed by a discussion of how all of the plan participants could be linked together and rewarded for both their division/department results as well as the overall company’s results. This exercise produced the linkages among the key results for which each of the plan participants was to be held accountable.

The following demonstrate several important principles upon which this plan is built:

• All managers are linked in terms of the company’s revenue growth, cost of sales and gross profit.
• Each division manager has accountabilities for the revenue improvement, labor cost percentage and gross profit of his/her division.
• The design of the plan and the way it will provide the greatest financial rewards for its participants require the managers to work together and have a vested interest in each division’s performance.
• Since each manager has a different level of direct control over the elements in each key result area, formulas were developed using weighted percentages for each result area and each manager. These weighted percentages were higher in cases in which the manager had a higher degree of direct control over the result and lower in those areas in which he/she had only limited influence over the desired result. A good example of this would be the fact that a division manager might have less control over company revenue growth, but more direct control over the revenue growth of his/her division. In this example, the weighted percentage assigned company revenue would be lower than the weighted percentage assigned for division revenue.
• Weighted percentages are important elements in the development of the formulas by which each participant’s incentive award is determined.
• The common thread throughout this plan is that no participant "wins" unless there is real improvement in the overall company results.

This incentive plan requires regular and accurate communication with its participants regarding how the business is doing. Upchurch handles this requirement by scheduling a one-hour meeting with his operations managers on the last Thursday of each month. No plan participant misses this meeting. During this session, the company’s accounting manager passes out the month and year-to-date results for each of the key result areas included in the plan.

This information is organized into the following categories:

• Current period
• Current budget
• Monthly budget variance
• Year-to-date results
• Budget year-to-date
• Year-to-date variance

The meeting participants, most of whom have no formal financial backgrounds, examine this information and candidly discuss what must be done to correct unfavorable trends. They work as a team because they all have the same information available to them. The managers also hold informal meetings on their own during the weeks prior to their next monthly operations meeting.

They are able to calculate their potential incentive earnings from previously supplied formulas. All of a sudden, how the company will end the year is very important because participant incentive awards are based upon the company’s annual performance and are not paid out until those numbers have been calculated at the end of the year.

Has all this been worth it? Have there been any improvements since the introduction of this management tool?

"My managers anticipate and plan more than they ever used to," stated Upchurch. "We’ve moved away from managing an internal job costing model requiring tons of data for every project and moved toward managing the bigger picture. We track percentages more closely now, which are key indicators that our costs may be out of line."

After one full year in place, the plan has helped generate almost a quarter of a million dollars in incremental revenue with an accompanying improvement in gross profit.

The management team has a more acute appreciation of all of the components of a successful business and is busy at work improving them as a team.

A new irrigation division has recently been added and construction is underway for a new 18,000-square-foot facility that will put all company offices, equipment and storage space under one roof.

Upchurch has already begun a project to design a plan like this for his foremen, many of whom are Hispanic and have never been exposed to this method of earning additional compensation.