Performance-based incentives reward excellence, at least that’s the theory. Experience, though, has shown that performers can manipulate the system. Causing additional problems with the theory is the unrest that results when differing measures exist within the company. Individual performance incentives breed self-centered, individualistic behaviors. Team incentives work to build a common set of behaviors, working toward a company-wide goal, says Ken Klein, CGR. His company, Kleinco in Tulsa, Okla., has in place such an incentive system that stands as a best practice recognized by the NAHB Research Center. Kleinco won the National Remodeling Quality Award in 1996.
Kleinco’s team incentive program rewards all members of the team—sales, production, administration—only if the team meets the company’s goal: "We want to hit production goals with a predictable gross-margin rate and achieve customer satisfaction that’s a minimum 7 out of 10."
Klein describes the team as a three-legged stool: sales, production and administration. "It’s all sales initially," he says. "When we turn the lead into a qualified lead, estimating joins in, with dotted lines to sales and production. Estimators don’t show up as an independent unit, but they’re incented the same way. Estimating stays involved with sales until the contract is signed. Once it moves into production, sales and the estimator educate the project leader, and the project leader becomes the key point of customer service delivery. Although sales stays involved, they all look to the project leader.
"We have a salesperson, project leader, production coordinator, estimator and, to a lesser extent, administrative people who are focused on one thing: 7 out of 10 on the customer response survey" with an on-time delivery and on-budget cost.
The incentive fully rides on customer service, Klein says, because the marketing dollars needed to rebuild lost satisfaction offset any other bonus that might be paid. "We [would] have to take the incentives that everybody can earn [that] and multiply by three or four and put into our marketing budget in order to make up for the lost leads," he says. "We don’t really [do that, but] it’s the way we embrace the practice that if we don’t have a satisfied customer, we give no bonus."
That’s not to say people aren’t paid. Each member starts with a base salary. The incentive, though, is focused on the company goal: customer service. Once that goal is attained, the team members become eligible for individual bonuses. The project leader, for example, can make a higher percentage if the project finished on time even if over budget, Klein says. But "if we didn’t have them joined at the hip, focused on the same performance measurement, we would have the same finger pointing as in other companies."
The customer satisfaction measure is a third-party telephone survey conducted upon receipt of final payment and signing of the Certificate of Completion by the customer. The questionnaire contains 11 statements to which clients respond with a rating between 1 and 10. This total becomes the team’s score. Other questions provide additional information about how the customer felt the company performed. Questions include details about weekly meetings, for example. Because the company uses these meetings to manage the quality of the project, it’s important to Kleinco to know if the client felt the meetings add value or if the client even attended all the meetings.
"If the customer complains on the survey that we ran late, then the communication broke down," Klein says, because all changes or adjustments to the schedule are explained and approved by the client. "If you think of on-time completion as being geared to the incentive, communication is important."
Customer satisfaction is the base, but on-time completion and finishing the project at or under the budget are the other important measures. "It make no difference if it’s under budget or on budget," Klein says. "[The team] doesn’t get any of the savings."
Klein says this approach allows the company to disarm the self-interests and to instead focus everyone on the customer. He compares the system to a bicycle wheel, with the client as the hub and the team as the spokes. "If you turn the bicycle upside down and tested [the wheel], it would spin forever. If it’s not tuned, it will roll out of round, then rock back and forth. All forward progress will stop.
"If the customer doesn’t give us a 7, there are no incentives. We could finish two weeks early, 10 percent under budget, but nobody gets an incentive."
Klein can be reached at (918) 493-3406, or rwilson@KleincoBuilds.com.
Download an application for the National Remodeling Quality Award competition.