October 09, 2012

Setting Up Your Bonus Structure For 2013

If you're a good CEO / VP, you're about ready to set up goals and objectives for your staff for 2013.

This means you have to set up the bonus structure for your team.

I tried to have between three and five goals for people who reported to me.  The goals had to be simple, and needed to be tied to the dynamics that cause the business to be successful.

For a typical e-commerce or catalog Director, I might set up something like this:

Objective #1 (40%):  Increase new customer acquisition counts by 20% vs. 2012.
  • 2012 Forecast = 50,000 new customers.
  • Exceeds Goal = 65,000 or more new customers.
  • Meets Goal = 55,000 to 64,999 new customers.
  • Missed Expectations = 0 to 54,999 new customers.
Objective #2 (30%):  Increase twelve month buyer repurchase rate from 40% to 42%.
  • 2012 Forecast = 40% of 2011 buyers purchased again in 2012.
  • Exceeds Goal = 43% annual repurchase rate in 2013.
  • Meets Goal = 40% to 42.9% annual repurchase rate in 2013.
  • Missed Expectations = < 40% annual repurchase rate in 2013.
Objective #3 (30%):  Increase profitability of all marketing activities, from $5,000,000 in 2012 to $5,500,000 in 2013.
  • 2012 Forecast = $5,000,000 profit in 2012 from marketing activities.
  • Exceeds Goal = $6,000,000 profit in 2013 from marketing activities.
  • Meets Goal = $5,000,000 to $5,999,999 profit in 2013 from marketing activities.
  • Missed Expectations = < $5,000,000 profit in 2013 from marketing activities.
Notice that the objectives are highly dependent on teams not reporting to marketing.  If merchandise stinks, well, the marketing Director is not going to meet goals.  And that's the way it should be.  Because, quite honestly, the merchant isn't going to meet goals if the marketer fails, right?  So there's cross-dependence.  The marketing Director needs to step up and take accountability, for all activities.  If the merchandising team is struggling, then the marketing Director needs to analyze a few issues and try to partner on solutions.

Notice that if the marketing Director outperforms last year, the marketing Director meets expectations.  That's life.  In sports, there is a saying ... "if you're not moving forward, you're standing still".  Same thing in marketing.  You must move forward, or inflation will eat company profit.  I want my team to strive for outstanding results.  In each case, if we match 2012 results, we miss expectations, and bonuses are not going to be plentiful.  Conversely, if my marketing team has outstanding performance, well, they get an outstanding, rewarding bonus!

Notice that I do not tell my team HOW to do anything.  I tell my team WHAT outcome they should strive toward.  It is the job of the e-commerce Director and catalog Director to figure out what to do and to figure out how to get there.  I am only telling my team what we need to accomplish.  The marketing VP should not micro-manage online conversion rates, catalog response rates, or email click-through rates.

Notice that I am communicating the objectives in October 2012.  This gives the team a head start on making progress on 2013.  When I worked at Nordstrom, it was awful to get objectives for the year in February or March ... anything I could do would only impact Q3 or Q4, I missed out on half a year of opportunity.  Don't be lazy.  Set objectives well ahead of 2013, communicate them, and give your team a chance to succeed.

Notice that the objectives only focus on new customers, annual repurchase rates, and profitability of marketing activities.  Quite honestly, from a marketing perspective, these are the only three things that matter.  Almost every marketing activity we can think of falls into one of these three categories.  Increase average order value?  That grows profit, right?  Maximize SEO opportunities via non-branded keywords?  That grows new customers and profit.  Improve email click-through rates?  That grows customer retention/repurchase rates, and grows profit.  Every marketing activity you can think of ties into one of these three objectives.

Notice that the weights are not equal.  I am clearly signalling to my staff that new customer acquisition is most important.  Now, if you spend too much on new customer acquisition, profit will be hurt, so this has to be managed delicately.  It is likely that you value one objective more than another, so give it an appropriate weight to reflect what is important to you.

Notice that I put a 2012 forecast in each objective, even though we have three months left in the year.  I will adjust each objective once final numbers are known.

Notice that channels are irrelevant.  I don't care if a customer is acquired via search, or via email, or via catalogs, or via social media, or via mobile, or via display, or via affiliates, or via comparison shopping engines, or via billboards.  I care about customers, and I care about how profitably we manage customers.  My staff will need to analyze the customers that have the lowest cost per acquisition and highest lifetime value, and they will need to manage this balance in order to achieve each of the three objectives.  Again, I am not telling my team HOW to do their job.  I am only telling them WHAT the outcome needs to look like.

Executives - please give your team a chance to have a great 2013.  Give them three simple objectives, create stretch goals, and then richly reward your team via bonuses when they exceed expectations!

9 comments:

  1. I suppose it is a better move to identify a target for the marketing team but letting the team choose what path they should take to reach that goal. Sometimes giving marketing staff some leeway and legroom for creativity gets more positive results than just having them blindly follow orders.

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  2. Anonymous1:35 PM

    of the 100% bonus weights, what would the total bonus comp be? 10% of base? 25% of x?

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  3. It depends on the employee ... analysts typically have a 5% to 10% base ... managers are usually around 20% ... directors are usually around 30% ... executives are somewhere between 50% and 125% of base.

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  4. Kevin,

    Thank you for the insightful post. How do you recommend tracking progress on twelve month repurchase rate throughout the year? Is it simply a rolling twelve month repurchase rate target each quarter that could be broken down into smaller checkpoints (e.g. weekly or monthly) or would you focus the individual on another metric altogether (e.g. repeat transactions)? If you think a rolling repurchase rate target is best, how would you calculate the twelve month repurchase rate each month?

    Thanks!

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    1. Pretend it is September 28. Take two years of data - query your database, and identify all customers who purchased between 9/29/2011 - 9/28/2012. Then, measure the percentage of customers who repurchase between 9/29/2012 - 9/28/2013. This is your repurchase rate.

      Next week, the dates shift ... ID customers who bought between 10/6/2011 - 10/5/2012, then measure the percentage of customers who purchase again between 10/6/2012 - 10/5/2013.

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    2. In the above scenario you have laid out, what happens to the customer that purchased on 10/15/11 and then again on 6/15/12? While this customer has made a repeat purchase, it would not be accounted for in the above equation. Is there a way to account for this repeat sale?

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  5. Correct, that customer did not place a repeat order in the subsequent year - the customer is a 2x buyer in the prior year.

    You are free to segment your customer file however you like - if you want to account for that customer as being a repeat buyer, do it, no worries!

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  6. Is there an industry accepted calculation for twelve month repeat purchase rate? If so, is it the calculation you have used in your posts?

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    Replies
    1. Most of my clients pick a segment of customers at a point in time, then they measure the percentage of the customers who repurchase in the next twelve months. The segments vary wildly, the metric (probability of purchasing again in the next twelve months) is very consistent.

      I have numerous segments in my analysis - I measure the percentage of them that purchase again in the next year - I measure the amount customers spend if they purchase in the next year - and I measure profitability after subtracting costs in the next year. But I have the flexibility to define my segments however I want - given that, I care about downstream 12 month value.

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