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These Incentive Programs Are Ruining Your Business

Have you ever met someone who wanted to shake your hand just so that they could steal your watch?

In this episode, we cover:

  • Incentive programs (PM’s/Spiffs) and how a well-intentioned program can wreak havoc on your profits;
  • Walkmans and MC Hammer
  • Beware of those who steal from you then help you look for what they stole from you;
  • The Cobra effect
  • Rats in Vietnam
  • COVID at VYU
  • The rich reps of the 1900s
  • The 3Cs
  • How to incentivize your team for the best results.

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Doug Stewart 

Hey, what’s up, fam, welcome to another episode of the retail podcast. I’m your host, Doug Stewart. And today, the episode is titled, positive incentives with negative results. You know, it’s it’s really interesting that a lot of times on sales floors, we do things, we provide incentives programmes, contests, with the intention of driving business, whether that’s velocity, or a USP average unit selling price or some some other metric, maybe an attachment rate. And we do it to get our people motivated to incentivize them to get them excited. And then sometimes, and I think a lot of times, it has a negative effect. But it’s not just negative and outcome. Sometimes it can be negative way before that. It’s like, it’s like I was thinking about this, this issue. And I started thinking about all the people that I’ve met throughout my life and my career personally and professionally, that seemed to only want to shake my hand so that they could steal my watch. Have you ever met somebody like that? You might be related to some people. You know, it’s like, the only reason they want to get close to you is to take something from you. It’s like, the only reason they want to hug you is so they can stab you in the back, you know. And sometimes sometimes these people know what they’re doing. And sometimes it’s inadvertent. Like, they don’t even they don’t even know what they’re doing. So an example of this example of this is, I can remember when I was when I was 10 years old, I took I got a brand new Walkman. And for those of you who weren’t born in the 1900s, like I was a Walkman was this device that you put a cassette tape in. And the cassette tape had a very limited number of songs, and they had half of the songs on the front side and half of the songs on the back side. So when you finished listening to half, you had to pop it out, turn it around, and put it back in. And yeah, that was a Walkman. And that was my absolute, prized possession. And well, that’s not true. It was my second most prized possession, my most prized possession was the MC Hammer tape. That was that was inside this Walkman. And also proud of this thing, man. And there was this one particular day camp, this basketball camp that that my parents sent me to. And I decided to take my Walkman with my MC Hammer tape to this camp, and I was so excited to get on the bus and like, show off my technology, and my, my taste and music. And like man, I was, I was so excited. And so I get on the bus. I don’t I don’t know anyone this is this is just kind of a camp my parents had signed me up for and I guess we’re probably going like 45 minutes to an hour away to this camp. And then we were gonna come back. And so I sat beside this kid, who I didn’t know who I’d never met. His name was Jason. He seemed to be like a cool kid. You know, he liked me. He liked basketball. He liked music. You know, we had complementary tastes in in a lot of ways. And so because we became fast friends, we took turns listening to this MC Hammer tape. And we had this like, amazing time on the bus. And I was so excited. Because I mean, you know, you get on a bus when you’re 10. And you don’t know anyone. There’s a certain amount of like fear and trepidation. And like, who am I going to sit with? Are they going to like me? Am I going to get picked on like, you have all of this stuff going on. And I had this great experience in the in the bus right there. And so then we finally get there. And I take my Walkman I put it in into my bag. And then we go into to, to camp to have our day camp. It so happened that Jason and I, my friend from the bus we got we got split up and so we ended up in different in different places. And

I had a pretty good day at camp. I feel like I remember that like the drive down. There seemed to be more fun than the actual day but the day wasn’t bad. And so the day concludes, and I grabbed my bag from the gym. I get back on the bus and I don’t see Jason he doesn’t sit in the same seat we were in before. So I figure he’s not he hasn’t gotten on the bus yet. So I get in my seat But, and I’m watching and looking for him to come back in and so we can kind of reengage and hang out a little bit. Well, it turns out, I turn around and I notice that he’s in the other side of the bus. He’s in the back of the bus and he’s hanging out and sitting with someone else. So I’m a little confused by this because it’s like, Yo, man, I thought we had a fun time, like, like a while. Why are we gonna hang out on the way back? And so no one ended up sitting by me. And I’m just like, Alright, whatever, man. Well, who needs friends when you have MC Hammer? You know what I mean? So I reached down into my bag to grab my Walkman. And it’s nowhere to be found. It’s not in my bag, and I dump out my entire bag in the seat next to me. No Walkman. No headphones. No MC Hammer tape. And my heart, man, my heart just sank. Like, I felt like the blood ran out of my body. Like where did this go? Someone must have taken it. When I was in the gym playing or I don’t know, maybe I dropped it. Like what happened? So I look under the seat is not under the seat. I look, I like look deeper into my bag. It’s not in my bag. I start asking the people that are around like, have you seen it? No one knows what I’m talking about. Everybody says no. I get up and I start walking through the bus just asking people like I’m on the verge of tears here. Like have you seen my Walkman? Have you seen my tape? Have you seen my headphones? And everyone’s saying no shrugging their shoulders. So then I finally get back to where Jason is on the bus. And I look at him and I go, man, like, I can’t find my Walkman. And he looks not only surprised, but he looks almost like in indignant, like, he was upset with me that I had lost this Walkman. Like he was upset. And he jumps up. And he starts asking people with me starts looking under, under the under the seat of the bus, he goes up and even ask the bus driver. And he’s like really supporting me here really helping me. In fact, he was helping me so much that he accused another kids straight up for taking it and said, I think I saw you with it. And it turns out that we searched this kid’s bag the kid well, we didn’t search it like we’re the SWAT team, the kid opened his bag and let us see that he didn’t have my Walkman. And despite all of my efforts, all of Jason’s efforts, we never found it. And so there were a few tears, I got home, I cried to my mom and dad. I got in trouble. Because I was I didn’t take care of my stuff. So I cried more. And I was assured that I would not be getting another Walkman anytime soon. Because I didn’t know how to take care of the things that belong to me that I was responsible for. So then months went by, no Walkman, no MC Hammer tape, I just had to go off the memory of the music. And then I was signed up to play to play right basketball in town. And I walk into my first game. Months later, like months later, I walk into my first game. And lo and behold, I see Jason for the first time I hadn’t seen him in months. And look guys, this is this is before there was like social media. So like when you met someone when you were 10, they didn’t have a way for you to connect with them unless you called their house phone that their mother or father would answer. So it’s not something we did. Often in exchanging phone numbers. It’s just like, hey, man, great to see you. Great to meet you. I’ll see you around. And then we just expect that we would see people on it. That’s just kind of how it went. So I’m sitting there on the bleachers waiting for my game. Jason walks in the door and I’m like, hey, my man, Jason. I haven’t seen him in months. And then on closer observation, guess what Jason had in his hand and over his ears. You got it. Jason was wearing

my headphones, listening to my Walkman that was playing too legit to quit. And I was furious. So that was like the first moment as I’m as I’m watching Jason sashay across the gym with my stuff. that he, that he pretended that he didn’t know where it was. And he even pretended to help me, he made a fool out of me. It was the first time that I realised the truth in the saying, with friends like this, who needs enemies? Like Jason had only stolen from me, but he made me believe that he was my friend while he was stealing. And that is a real big problem. So fam, beware of people who help you look for the things that they have stolen from you. Keep your eyes peeled for these types of people. And again, sometimes they are like Jason, and they do it on purpose. But that’s not most of the time, in my in my experience most of the time is people that are helping you look for the things they stole, but they don’t even know that they stole it. And this happens every day in furniture and bedding stores. Every single day, and this is something that’s called the perverse incentive. And it’s prevalent like is really prevalent in our business like so here’s, here’s some examples. Like you might be wondering like, okay, but I don’t have people coming in stealing Walkmans and MC Hammer tape. So like, how does this apply to my business? So there were there was a couple of there was a couple of studies that were done. One One is called the Cobra effect. And this is something that you can all of these things you can easily Google and find as substantial as substantiate, but the first one is called the cobra effects. So this this is something that happened in India, under under British rule, so it was quite a long time ago. But the British government, they were really concerned about the number of cobras in in a particular part of of India. And so they offered a bounty, you might call it in your store, a pm or a spiff for every dead Cobra. And in the very beginning, this bounties seemed like it was working, it looked very successful. Until the government realised that people started to breed cobras for the bounty. It’s so so then they realise like, oh, no, this people aren’t going out and getting wild Cobras and killing them and bringing them in to get paid. People are catching cobras, breeding them in the city, and then bringing, bringing these cobras in, in getting paid. So they’re the government’s like, oh, no, we’re spending all this money. This bounty isn’t working. So guess what they did, they did what any reasonable programme manager would do. And they discontinued the bounty, they discontinued the programme. So when they made the announcement, when the British government made the announcement that they were discontinuing the programme. All of these people that had been breeding cobras, they realised that their cobras weren’t worth money anymore. So they released them, which made the problem significantly worse than it was in the beginning. Okay, so here’s another one, this is a little bit closer. This was a rat infestation in Vietnam in the 1900s. So this was under French rule. So the French were ruling over Vietnam at the time. And they created a bounty for every rat that was killed. Now, and this one was a little different, because you didn’t actually have to bring the rat in, you just had to bring the rats tail in because rats, brats carry disease. And so the government didn’t want people like bringing a diseased rat and like piling them up some in some in some, you know, government building or something like that. So what they decided to do is they just said, Look, just just brings the tail to substantiate that you’ve killed the thing and will pay you. And so then they started noticing that there were rats in the sewers that had no tails.

And so the government looks into this a little bit. And as it turned out, that people were trapping these rats, they were cutting off their tails, and then they were releasing them into the sewer so that the rats would produce more rats so that they could trap and get more rat tails and then they could take those rat tails and they could turn them in for money. So again, another incentive programme creates a perverse incentive that not only doesn’t solve the problem it seeks to solve it makes the problem worse. You might think like, okay, rats, Cobras. Like, that’s kind of stuff doesn’t happen anymore. And look, those are, those are far away places and long, long time ago. Sounds kind of like fairy tale ish. Well, let me give you a let’s talk about one that happened last year here in America. So this is October of 2021 at Brigham Young University. So Brigham Young University is a exceptional school, this place has exceptional, exceptionally bright students. It is it is not a second class place by any stretch of the means. And the leadership there at Brigham Young found some evidence that students were attempting to become infected with COVID and trying to infect others on purpose. So they had a problem, like, why are our students on purpose trying to infect each other? And why are they trying themselves to get infected with COVID 19. So it turns out that there was a programme on campus where students would receive $50 for donating plasma. But you would receive $100 If you donated plasma with antibodies from having COVID. And so if you had had COVID, or if you had COVID, you got $100, you got paid twice as much. If you did not have COVID, you got paid half as much. And so students being the resourceful group of individuals that they are, they recognise that look, I’m I’m healthy, I’m probably not going to get butt so sick from this, I’m at home anyways, I can make more money, I can donate more plasma. And so they on purpose, infected themselves and their roommates and their friends, so that everyone could go and make more money. Donating plasma another example of a programme that has an incentive that ends up having a negative impact. So you might wonder, like, what is this what does this really have to do with retail, you know, like, how do I how do I apply this to my business? So this this happened to me, I can remember when I was when I was running stores, we would allow reps this was like think 80s 90s, we would allow reps to, to give out PMS, we call that push money, and some people call it spiffs. And they, they would get to choose which products, they would spiff and for how much the spiff would be for. So sometimes it was on like a special buy. Other times it was a promotion. Other times it was just because the manufacturer was maybe overstocked on a particular thing or or sales were down or particular thing. So they would come in and they would go hey, look you get we’ll give you $20 pm, on top of your commission for every one of these things. Every one of this so far, this bed or this recliner that you sell, and the PMs would go up and down. And if you’ve been in the business, any amount of times you remember the good old days where the rep would roll up in their suit. And they would walk in with 20 and $100 bills, cash and they just walk around and just hand out their PMS and hand out their money. They were like the rock star like I can remember thinking, especially when I was a kid, like being a furniture rep, you must be one of the richest people in the country. Because you just walk around and your job is just down money. Later I became a rep and found out that’s not necessarily true. But

that’s how it used to be and as as technology has progressed as we become a bit more sophisticated, those programmes have changed a little bit. It’s not as often when a rep is going to walk in and hand out, hand out gift cards or dollars. But we do run programmes and have incentives and sometimes they’re through the manufacturer or sometimes they’re directly from, from the company that that employees these that employs sales associates. But one thing I noticed when this was happening after I when I was actually running stores was I noticed that my a USP, my average unit selling price categorically would start to fluctuate the more PMS then the more push money was, was in play. So I did a little math and I realised that my salespeople were making more money. When they would sell a, let’s say, a $1,299. Mattress, then when they would sell in 1999 mattress, so they would sell more money, or they would make more money for selling a mattress, this $800 less in top line, which means it’s, you know, three to $400 Less of profit for me, but they’re making more money. So I start to look around and think like, Okay, who are they working for? Because they’re certainly not working for the benefit of the organisation that employs them. It’s something else. And so there’s a couple of things that we put into place when we realised that the first thing is we discontinued all spiffs and pm programmes from manufacturers like hard stop, because what we found was, we had reps that were stealing from us, and then helping us look for what they had stolen, which was profit. on accident, like they didn’t even know they didn’t mean to. And that’s the kind of thing that happens when strategies aren’t aligned, particularly selling strategies when they’re not aligned. Then you end up getting perverse incentives, you end up getting rat tails, and coat and dead Cobras and, and infestations instead of profits. And so we discontinued but then then it’s like, okay, so we took took all this stuff away, and our salespeople were like, Hey, man, like, what gives like now, so we’re just going to make less money. And so that wasn’t a tenable solution for them or for me. And so

the next thing I thought was, okay, so we need to, we need to put this money back in play, but we need to put it in play in a way that drives our strategy forward in a way that we control it. So what we did is we took all of the allocated pm and spiff and programme money and we put it into one pot. And then we changed the way we were training our people. So what that meant was, we stopped allowing vendors to come in and train the way that they had before, we still allowed vendors to train. But we would vet every single training to make sure because, like less, folks, let’s be real, like most, training is hard. And most training doesn’t last very long. It’s like fruit, you know what I mean? Like, when you get it today, you get it, it looks good, and it may taste good. But the longer it sits, the fat the the more it spoils, like the shelf life becomes less and less than less and less every single day, and it doesn’t last very long. So if training isn’t something that’s a continual part of the of the of the culture and the structure of the business, then training here and there or just letting a vendor come in and do a training here and there. Not only is unproductive and probably not a great use of your team’s time. But it also could be a perverse incentive as well. Because we’ve most of us listening to this have been in the business long enough to know that, that there are a lot of training strategies out there that go sort of like this. I’m not skilled enough as a trainer to help you become more proficient in selling my product. So the way that I’m going to train my product is by disparaging the other products on your floor. So one vendor will come in and they’ll disparage all the other products and then another vendor will come in and they’ll disparage the product from the vendor that was there the week before training. And then there’s another one there come in and disparage the both of them that were there the two previous weeks. So then you end up creating this confusion on the sales floor where you’re selling salespeople aren’t able to clearly articulate the benefits and connect those those said benefits to to the customer’s needs. They’re not able to do that. But what they do know is they do know the bad things about every brand because the other vendor has told them the bad things about the the brands you have on the floor. So we stopped doing that we pulled out the PMs we put all of them. We put together a coherent and consistent strategic training programme. And then we incentivized based on the products that were the most important for us as a business so we focused on the products that customers were more likely to say yes To the products that were more profitable, the products that were there were more likely to be in stock. And we stopped. We stopped having multiple masters in terms of our selling strategy.

And we instituted this thing that we briefly talked about in the in the previous episode, the the move over dose, Marco’s tress LeChase is in the building in that episode, which is this idea of the three C’s. And so the three C’s kept us from putting anything in place or allowing anything in the business, that would be a perverse incentive, either for our team for us or for our partners. So before we would make any decision about anything, we would ask ourselves these three questions, the three C’s, is, is it good for our customer? Is it good for our compensation? And is it good for our company? So let’s walk through those really quickly. And here’s, here’s why we instituted these three C’s. Because the first thing the first thing is our is our customer is that is it is the end result. And so we had to ask ourselves, if we’re going to put together this this product, this price, this programme, this, this, this strategy, is this a good thing for my customer, because if is not good for the customer, that’s where the idea should be done. It was not good for the customer. It cannot move forward. But there are some things that are good for the customer. That shouldn’t move forward as well. Like, which is the next step is is it good for compensation, okay, so we can give away things for free to our customers that good for the customer? You bet it’s good for the customer. They’re gonna love it. But we’re gonna be out of business in six months. So just because it’s good for the customer, doesn’t mean it gets to it gets a yes. And a green check. If it’s good for the customer, it just gets to go to the next phase, which is is it good for compensation? Which means is it good for our sales team? Is it something that is helpful and useful? Is it something that they can sell is something they can make money with? Is it something that is going to be a positive incentive for them? Because just because a product is good for the customer, if it’s something that’s going to cause a high level of turnover on our team, because they’re not able to get paid or incentivized or compensated appropriately for their work, then it can’t be a yes, no green check. But just because it’s good for the customer, in the end, the compensation of the team doesn’t mean that it gets a full green check. Because there are things that are good for the customer. They’re good for compensation. But they’re not good for the long term strategy of the company. And so we must be able to look at an at an incentive at a project at a programme at a strategy and say, is it good for the customer? Yes. Is it good for our peoples compensation? Yes. Is it good for our company as a whole in the direction that we’re going? Yes, then and only then can we move forward with a programme, and that filter keeps us from these perverse incentives, it keeps us from having things stolen from us. And then the people in the search party being the people who actually stole from us in the first place, either on purpose, or not on purpose. And so the advice here is for your partners, for your vendors, for your, for the people who you’re doing business with, make sure that you’re aligned in a way that, that that pays attention to the customer, the compensation, and the company. And if you can line all those things up, then not only will you steer clear of perverse incentives, but you will be able to move forward and have more more synergy with your partners, your vendors, your employees, your customers. And overall you’ll be more profitable, your culture will be better and in every way, in every way. Things will be better. So fam, look we got to look out for the rats in the Cobras that will steal our watches while they’re shaking our hands so if you if you have a comment about this you want to have a conversation please feel free to reach out my informations below in the description and my LinkedIn link is down there as well. So come say what’s up say hi. Make sure that you spend a little bit of time on fam dot news this week. Catch up on some of the newest happenings and things and as always Blessings to you and your family and your business we will see you in the next episode fam

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