New Approach to Employee Bonuses?

Seattle Times columnist Jerry Large cited some interesting research on performance bonuses: 

Researchers at the University of Chicago took advantage of the brain's strong aversion to the loss of anything it values.

They gave teachers a bonus at the beginning of the school year and told them they would have to give the money back if student performance didn't improve.

By the end of the year, students did significantly better on an academic test than demographically similar students. The experiment was done in a high-poverty district.

Previous studies have shown that the lure of a reward at the end of a successful year produced no academic gains. The fear of losing what we already have motivates people more.

Wow! What an intriguing incentive compensation program this could be for retailers! Here's why.

• Focus. It requires clear definition and agreement on what performance earns the bonus. 
• Measurement. Both employer and employees must be able to know where they stand vis-a-vis keeping the bonus. 
• Motivation. The research found that the fear of losing something we've already received - in this case, an upfront bonus payment - is more motivating than a bonus paid after the fact!

Why Not Try It?

You don't have to totally revamp your incentive compensation program to give this a try. Just pick your spots. 

In fact, it may be more appropriate for some of your management team, rather than front line sales associates. The key:

• Have a clear understanding and consensus about what is to be accomplished. 
• Decide what that is "worth"; that is, what should the bonus be?
• Pay the bonus upfront.
• Enforce it! If the results are NOT achieved, take back the bonus!

The "Loyal Retail Army" at Apple Stores

The Apple Stores' Approach: Can It - or Even Should It - Work for You?

The lengthy front-page article in the Sunday, June 24 New York Times about "Apple's Retail Army: Long on Loyalty But Short on Pay" sought to explain why Apple Store employees - who each generate on average $473,000 in sales while earning about $25,000 per year - show such loyalty to the company.  The average tenure at an Apple Store is 2-1/2 years. The annual retention rate for those working the "Genius Bar" is 90% (versus the average turnover rate of 70% for the retail industry as a whole!)  How do they achieve this kind of loyalty?

Our sense is that Apple has a very good understanding of what motivates the people they most wanted to hire: the computer-savvy, college educated Millennial Generation. Here are some things that jumped out at us. 

1. From the start, Apple chose to not pay commissions, believing that "such incentives would work against the company's primary goals – finding customers the right products, rather than the most expensive ones, and establishing a long-term rapport with the brand. Commissions would foster employee competition, which would undermine camaraderie."  
2. Apple's pay scale is still higher than many retailers, plus they offer benefits particularly appealing to those they seek to employ: health care coverage, 401(k) contributions, employee discounts on Apple products, Apple stock purchases, etc.
3. Apple does not use the word "sales" to describe retail jobs; they're called "specialists". 
4. Apple seeks job candidates who are "affable and self-directed rather than tech-savvy. (The latter can be taught, is the theory, while the former is innate.)"  Such confidence about training is especially easy with employees who have been successful in school.
5. Clear expectations and accountability: Job candidates selected from online applications are invited to a hiring seminar. Those 3 minutes late are turned away! 
6. "If there is a secret to Apple's sauce, it is this: the company ennobles employees. It understands that a lot of people will forego money if they have a sense of higher purpose."

What's the downside, according to former Apple employees? As quoted in the New York Times article, "Disillusionment settles in not because of pay, though pay is a part of it. The problem: there is no career path."  Yet, for many of those college-educated Millennials, it turns out they weren't looking for a career in retail Instead, they wanted a "hip job" before their "full-on dive into the white collar world."

Are there lessons here for other retailers? We think so. The most important take-away: know what matters to your employees! And many studies support that wages are not the #1 priority. For more thoughts on this, see "Beyond the Paycheck: Motivate Employees with Creative Compensation"  on The ROI site. 

Think about your very best employees, and then consider what qualitative factors are a priority for them.  And remember, there is no one-size-fits-all solution. Mimicking the specifics of Apple's policies would be a mistake. But, applying their approach  to create a customized solution in your stores could be very useful.

Raise Turns...and Raise Cash!

Looking for ways to get more cash out of your retail business? Start focusing on raising turns! Here's why.

For every $1 million of annual sales, assuming 40% Gross Profit (Margin), the difference between 2 inventory turns and 3 turns is…$100,000 in cash!   

(Have a $3 million operation? That's $300,000. $5 Million in sales? That would be $500K cash. And so on.)

The dynamics of improved inventory turnover are impressive indeed!  And well-known to successful merchants. The Retail Owners Institute believes that all retailers should know and use this powerful cause-effect lever.  

Want an Example? Here Are Two: H&M and Zara 

Consider two retailers that are re-inventing apparel retailing worldwide, H&M and Zara.  By effective use of technology, both are raising inventory turns in their stores to unprecedented heights. And now, consider the ripple effect of that management focus:

• The high turns have reduced markdowns
• thus raising margins. 
• Meanwhile, stores always full of very fresh merchandise 
• excite and please their customers! What a concept!

Cause-effect, cause-effect. It all starts at the top, with the discipline to focus on ever-increasing inventory turns. H&M and Zara offer powerful examples for all retailers.

Or, as Michael Gould, Chairman of Bloomingdale's, so famously said:

"No retailer ever filed bankruptcy because their turns were too high." 

"So, what should my turns be?"

Wonder what your turns "should" be? Or, how your store compares to others like yours?

The ROI posts 5-year trend charts of 6 Key Ratio Benchmarks that retailers should be monitoring. These trend charts are available for 55 retail verticals. One of those key benchmarks is inventory turnover. 

To see how your operation compares to other stores like yours, check out the Key Ratio Benchmarks at The ROI site. Go to this page on The ROI site to find your retail segment.

"The Hacker Way" at Facebook: Sounds a Lot Like a "True Merchant"

In the 197 page prospectus for Facebook's IPO is a "letter" from founder Mark Zuckerberg. He devotes nearly one-third of his letter to explaining what he calls "The Hacker Way" at Facebook.

• "In reality, hacking just means building something quickly or testing the boundaries of what can be done."

• "Hacking is also an inherently hands-on and active discipline. Instead of debating for days whether a new idea is possible or what the best way to build something is, hackers would rather just prototype something and see what works." 

Parallels to Retailing: "The Merchant Way"

Zuckerberg goes on to explain how The Hacker Way affects the product development and management style at Facebook (where "Done is better than perfect" is painted on the walls.) Given the magnitude of Facebook's $5 Billion IPO, we will be hearing much more about The Hacker Way.

As we read about it, we were struck with its parallels to retailing. In our view, anybody can be a retailer, whether they are running a garage sale, selling on eBay, or owning their own shop.

But only a few in retailing are true merchants.  Perhaps this should now be known as "The Merchant Way"?  

First, merchants have a bias for action. That is a signature characteristic of merchants. "Get the merchandise out on the floor (or up on the site). Let's see what the customers like...ASAP!" 

Then, just as important, the need to continually adapt and adjust. And to be dispassionate about it! "Hmm...that didn't sell like we thought it would. But - look what we ran out of over here!  Who knew?? Okay, here's what we're going to do. No matter what we thought of the first item, it's a dog. Mark it down. Get it out of here!  Now, whether we personally like it or not, let's re-order this hot item."

Merchants also show relentless resilience, adaptability, and optimism. 

We encourage those who celebrate "The Hacker Way" to also pay their respects to all the true merchants among us, those who practice The Merchant Way in retailing.

Get Perspective - Now! Latest Benchmarks for 6 Key Ratios, plus GMROI

The Retail Owners Institute is known for its display of key business performance benchmark data for 50+ retail segments, from hardware stores to bookstores, to clothing stores, gift shops, wine stores, music stores, furniture stores, tire dealers, and more. These now have been updated with the latest figures for 2011.

The Institute has identified the 6 Key Ratios that are most important for retailers to monitor. And, it has charted and graphed the 5-year trends of each of these key ratios for each retail segment.  

• Turnover
• Gross Margin %
• Pre-Tax Profit %
• Debt-to-Worth Ratio
• Current Ratio
• Return on Assets %

Go here to see benchmark trends for your retail segment.

Plus, The ROI has calculated GMROI (Gross Margin Return on Inventory Investment, the #1 measure of inventory productivity) for each of the 50+ retail segments. Go here. Find the GMROI for your retail segment. How does your inventory productivity compare?? 

How Can These Benchmark Numbers Be Used?

First, for perspective! Caculate these ratios for your own business, and then see how you compare to your retail industry segment.

Second, use these benchmarks when you are setting your own target ratios for the next year.

And third, you should know that whenever you are seeking a bank loan for your business, the bankers will look at industry benchmarks such as these as they assess your store's performance.

Go here to see how your store compares!