November 05, 2009

Gliebers Dresses: Bonuses

Welcome to the weekly Gliebers Dresses Executive Meeting:

Glenn Glieber (Owner): "After watching Brett Favre mulch his former team, I started thinking about Sarah Wheldon. It's really the same situation, in so many ways."

Meredith Thompson (Chief Merchandising Officer): "Kevin, is that you?"

Kevin: "Yup, it's me."

Lois Gladstone (Chief Financial Officer): "I'd like to take time today to talk about bonuses."

Roger Morgan (Chief Operations Officer): "I love bonuses! Bonuses are how I pay for just about all of my major home improvements, and they are used whenever I need a new car."

Lois Gladstone: "Well, Roger, I've got some bad news for you."

Roger Morgan: "Oh no."

Lois Gladstone: "We have less than two months left in the calendar year. As you already know, we are eligible to earn up to 60% of our salary via an annual bonus payout. Our bonus is broken down into three components. 35% of the bonus is based on achieving total net sales goals. 50% of the bonus is based on achieving total profit goals. 15% of the bonus is based on individual objectives, based on your area of expertise. "

Pepper Morgan (Chief Marketing Officer): "Here it comes ..."

Lois Gladstone: "Based on year-end projections, here is where we stand. Year-end net sales are forecast to be $45,000,000. In our bonus structure, this will earn us a grade of "D", so we get 25% of 35%, or 9% of our salary. Year-end profit is forecast to be $0, break-even. In our bonus structure, this also earns us a grade of "D", so we get 25% of 50%, or 13%. Assuming that every Executive member earns a grade of "C" on individual performance, we tack on another 50% of 20%, or 10%. This means that the average bonus for this team will be (9% + 13% + 10%) * 60% = 19%.

Roger Morgan: "After taxes, I won't even be able to buy a Hyundai for 19% of my salary!"

Meredith Thompson: "I'm worried about our rank-and-file staff. Their bonus target is just 15%. On average, they will get, what, 5%? If they are earning an average of $50,000 a year, that's a paltry $2,500.

Lois Gladstone: "But here's the problem. That paltry $2,500, which also goes to contact center staff who work 3/4 of the year, really adds up. Add in our bonuses, add in bonuses for our Directors and Managers who are at 30% and 20% bonus targets respectively, and you're looking at a million dollars or more that we pay out in bonuses, roughly 2% of EBIT. For Gleibers Dresses, bonuses are going to be the difference between being a break-even company, and being a company that is profitable in the face of The Great Recession."

Meredith Thompson: "What are you thinking about doing, Lois?"

Lois Gladstone: "I'm thinking of taking away bonuses from any individual who has not achieved the level of 'Director' or 'Vice President'. It just makes good financial sense to do this, and to do this now, while the economy is just plain awful. Employees are just happy to keep their job right now."

Pepper Morgan: "Aren't bonuses supposed to inspire us to perform well? Without the incentive, who's to say we would have even achieved profitability?"

Roger Morgan: "I agree with Pepper. And for crying out loud, we're like the only company who pays a bonus to call center and distribution center staff. It is our competitive advantage. It is the way we get to hire the best employees in all of New England. It's like free marketing for us."

Glenn Glieber: "I love free marketing!"

Meredith Thompson: "How can you even think about taking something away from our people? If we did this, it would be devastating to our employees."

Lois Gladstone: "If we did this, we'd protect the profitability of our company. The only way we stay in business is if we generate profit. And right now, what we're doing as leaders are not generating enough profit to allow us to continue running our business 'as-is'. If we had magical merchandising or marketing ideas that were proving to yield huge levels of profit, I'd feel differently."

Meredith Thompson: "But why take money away from the folks who need it most?"

Lois Gladstone: "Well, of course they need it the most. But our compensation package is a bit too generous. We need to scale it back to levels that are competitive with our competitors. Anna Carter sure doesn't pay a sales rep on the phone a bonus, I can tell you that."

Meredith Thompson: "Kevin, help!"

Kevin: "I know you are planning on freezing salaries this year, and you've already communicated that to your employees. Couldn't you give each employee a 3% salary increase at the time you take away the bonus, so that the employee doesn't feel completely ripped off?"

Lois Gladstone: "Absolutely not. Salary increases are like compound interest. Next year, when you give the employee a 3% increase, it is actually 3% on top of 3%, or a two-year increase of 6.1%. That's why bonuses are such a good idea, as a compensation philosophy. You take away that compounding of interest, which, in the long-term, helps a business be a lot more profitable."

Meredith Thompson: "But you're also taking away the bonus, Lois! The employee just gets clobbered."

Lois Gladstone: "Look, I didn't bring on the economic crisis, did I? But it is my job to respond to the crisis in a way that protects all of us. Do we want for this business to be profitable? If we do, then we do one of two things. We can increase merchandise productivity, something we're not good at. Or we can reduce expenses. Salaries and bonuses are two components of the expense structure. Until we figure out how to grow our business via merchandise and marketing productivity, I am taking away annual bonuses from hourly staff, analysts, and manager staff. I am freezing wage increases for all employees, including us sitting here at this table. The combined impact of these decisions is $1.2 million that goes straight to the bottom line, making Gleibers Dresses profitable once again."

Kevin: "So the question is, what are you going to do with the money at the end of 2010? Pepper showed me reporting that suggests if we invested the money in various paid search activities, we could generate profit within the calendar year. Wouldn't that be a good thing? If you are taking something away from employees, can't you at least demonstrate to them that you are going to make an investment that protects their jobs, long-term?"

Lois Gladstone: "It's my job to protect shareholder value, and in this case, Glenn is the shareholder. At the end of 2010, we'd pay our fair share of federal taxes, and Glenn would pocket the savings as personal profit, being the owner of this business."

Meredith Thompson: "By doing that, it means that profit would significantly increase, and that means we'd all get paid bigger bonuses, right? And Lois, a portion of your bonus is based on personal performance, so in essence, you'll double-dip on your bonus. That's lovely! In essence, we're now taking money away from our own employees, so that we can pay ourselves more. That's just sheer greed."

Lois Gladstone: "None of this would be necessary if merchandise productivity were better. And we need to keep our leadership bonuses, in order for the compensation structure to remain competitive. Otherwise, our Executives will leave. We want to keep the best Executive talent, right?"

Meredith Thompson: "Not true. Not true. We could break-even again next year. We are making a conscious choice to take money away from employees, so that the company is more profitable, so that we can earn bigger bonuses and so that Glenn can take home two-thirds of a million dollars."

Lois Gladstone: "As owner, Glenn can do what he wants to do. This is his business, he owns it, the employees do not own it. It is our job to make sure Glenn is paid as much as is humanly possible. That's capitalism. I am only doing my job. And if we want to avoid problems like this in the future, we better get a lot more efficient with other expenses, or start putting merchandise and marketing out there that customers crave. Roger, Pepper, if you disagree, make sure your voice is heard, but regardless, the train is leaving the station."

Pepper Morgan: "I'd rather invest the money in marketing, so that our customers pay us back, so that we earn more profit, so that all employees can earn salary increases and have their bonuses re-instated."

Roger Morgan: "Lois, are you going to come to the contact center and distribution center and communicate this message? People are going to be livid. They should hear the message from the person responsible for the change in compensation strategy."

Lois Gladstone: "Each department head will communicate the strategy to their employees, just like we've always done. We'll have human resources draw up 'talking points', illustrating why we need to make this decision, pointing out that this is better than another 20% headcount reduction. In this economy, with 10% unemployment, employees will be happy to simply keep their job, right?"

Roger Morgan: "This is how the middle class gets wiped out. When business is good, they borrow money out of their homes at 5% interest. When business is bad, they lose their job or they lose their bonus or their salaries are frozen. No matter what, the employee keeps getting further and further behind."

Lois Gladstone: "Or maybe the employee needs to figure out how to make this company more money. Maybe the employee needs to take personal accountability. Maybe the employee shouldn't lounge around on a 90 minute lunch break. Maybe the employee should try to make Gliebers Dresses more money instead of tweeting about salary freezes to the social media folks. The only reason we come to work each and every day is to make this enterprise as profitable as possible. That's it. All of those niceties and mission statement quotes and dedication to customer service, that's all secondary to the main point of capitalism, that being to earn as much money as you possibly can. The culture of this place needs to change. People need to be accountable to profit, and if they generate profit, the business will take care of them. Listen, folks, if your people don't like this, they're free to leave. They should go find another job, have at it! Prior to me arriving last year, this place was run like a family. It needs to be run like a business if it is going to survive."

Roger Morgan: "Glenn, are these your thoughts channeled through Lois, or what?"

Glenn Glieber: "I think we've lost focus on profit, to some extent. We spent this year talking about marketing and merchandising strategies. None of what we've talked about is working. We've cut marketing expenses to the bone. I'm not sure I know what else to do in order to make us profitable. I don't see any other way out. I lost 40% of my 401k last fall. I invested all of my profit either back into the business, or into my 401k. The economy cost me 40% of my career. Think about that. I've run this business profitably for 39 of 42 years, and just like that, 40% of my 401k was gone, the same thing as losing 16 years of effort, 5,800 days of toil and effort vaporized just like that. I devoted my life to this business. I deserve a better end to the story. I'm tired. I'm not sure I'm going to keep coming in to work in 2011 and beyond. So, yes, if I want to benefit from the profit of this business, I am entitled to channel some of my wishes through Lois. And it is her job to find a way for my business to be more profitable. I'd rather freeze salaries and eliminate bonuses than lay off another 20% of the workforce. And that's all I have to say about that topic. Now, on to the next item on the agenda. I wanted to communicate to each of you that we will no longer be serving Snickers bars, Milky Way bars, or Three Musketeer bars in the vending machines, because they keep getting stuck, and Henrietta Geldon in purchasing is sick of hearing employees thump their fists on the vending machine. Roger's team tells me that Twix bars slide out much easier, so we will be switching to Twix bars, going forward. Any questions?"