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The company is a major, privately owned digital media organization with revenues of approximately $3 billion. It is headquartered in the US with a large global presence and more than 3,500 employees worldwide.
The company operates in a market that has undergone wholesale change in its business model, and continues to face ongoing market pressures. The move away from physical product sales (e.g., CDs) to digital distribution and streaming services has further complicated regional differences in demand and purchase style. As a result, there was a divide in goals and performance between local regional offices and the global corporate headquarters.
The company began to experience difficulty understanding its own definition of success and how it could be achieved.
In addition, the company was comprised of numerous acquisitions over many years, each of which had each been integrated into the wider group to varying extents. As such, informal policies bred confusion and a lack of common direction in business strategy and career development, particularly in comparison to competitors. Discord and turnover were high and distracted from addressing market challenges and growing the company. It became clear that addressing the fragmented nature of the organization and setting common strategy and objectives that were well-defined and achievable for all was needed in order to effectively address the market challenges.
The company’s compensation plans, for both the general workforce and the executive team, appeared to have elements that exacerbated the broader strategy issues.
For employees, the existing annual bonus plan was an important element of overall compensation and focused primarily on the performance of the company as a whole. This approach failed to recognize the unique positions of business units and regional offices and individuals felt unable to influence their bonus outcome. Crucially, performance was measured against budget and offered no reward for outperformance.
While the company had an equity plan in place for top management, not all of the management team opted to participate. This led to a disjointed leadership group each with different long-term group targets. Further complicating the disparity, a majority of the team had individually negotiated contracts with personal targets focused purely on individual gains rather than group performance.
First, a detailed analysis of the existing employee bonus plan was conducted by looking at historical payouts versus performance, employee turnover by region, and employee opinions through a series of interviews.
It was clear that payouts were subject purely to performance against budget which was becoming increasingly hard to set. Employee turnover varied regionally, but compensation was often quoted as being the reason for departure. There was also a widely held consensus that participants had no line-of-sight and no way of influencing their bonus outcome.
A transparent bonus plan which would reward outperformance of budget was therefore proposed. This was based on equal split funding between group and business unit performance. In this scenario, individuals had line-of-sight for at least half of the bonus pool funding. The global bonus pool was then allocated according to business unit performance and combined with the business unit bonus pool. Subsequent allocations to participants could then be made based on individual performance.
Delegating responsibility for individual business units to fund and allocate bonus pools was a significant step for the company and was intended to increase transparency and gain trust from participants. In turn, it was anticipated that this would improve loyalty and reduce employee turnover. Ultimately, the future of the company was reliant on its leadership team’s ability to clearly define success. A key element of this was to first bring the leadership team together and reinforce a partnership culture that would support teamwork. A long-term incentive plan for management was proposed that allowed participants to share in the growth in value of the company. This incentive required no target-setting and provided a single, overarching objective for all participants—increasing the value of the company.
The new bonus was successfully implemented and the company adopted a universal “reward curve”, which was tailored to each business unit. It has given ownership to business units and promoted collaboration between business unit leaders to deliver broader group objectives. This approach enables participants to share in the success of both group and local performance. In addition, the increased transparency of the bonus has increased employees’ trust in the bonus plan, making it a more valued element of the overall compensation package.
This incentive structure has also allowed the CEO to bring about cultural changes that would otherwise have been impossible to contemplate, let alone deliver. Previously, top management was comprised of individuals each working towards their own version of success to ensure their individually negotiated schemes would pay out. Today, top management is aligned via a single incentive with a common goal and company-wide view of success.