Monthly Musings

September 2010


Jim Harter
Sigma Pi Consulting, LLC

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Volume 1 Number 6



Profit Based Incentive Plan Case Study


Strategic Planning  


Profit Based Incentive Plan Case Study

Last issue, I talked about the process of creating a profit based incentive plan.  This issue, I give a case study of an actual plan created for a real client.  But before getting into the specifics of the plan let's review the principles. 

  1. Any incentive plan not based on increased profit is a gift. A good incentive plan always results in increased profit for the company. It is from that increased profit that you fund the plan. 
  2. You need to know your costs in order to calculate the increase in profit. Your real cost isn't usually the face value number. There are all of the hidden costs as well.
  3. Don't focus on the small stuff. The 80/20 rule applies universally.  Identify the items that have the highest bang for your buck.
  4. Start small and don't promise too much until you have well documented benchmarks. You can always increase the payout later if the real profits justify it. But it is very tough to reel in a system that isn't producing the profits to support it without disappointing your people. 
  5. KISS - Keep it simple but not simplistic. If the plan is too complicated, your people will think you are playing them. If it is too simple, they will figure out how to game the system.

So with this groundwork, let's look at the case study.  The client was a roofing contractor.  If you think of his business, he sold fixed price projects - say a new roof for $25,000.  But his employees were paid by the hour.  What was the incentive for the employees to work quickly and to move on to the next job?  NONE!  

At best, the contractor could watch them like a hawk and badger them to work harder.  But he always had more than one job going and he couldn't watch them all simultaneously.  When he was not around to cajole, the effort level had a tendency to drop.  He had a team leader on each job but that person never carries the weight of the owner with his crew.  So how do you get the team to perform when the owner isn't watching?  We created an incentive plan that included all five of the principles above. 

Every fixed price project must include a contingency factor because Murphy's Law is universal.  That contingency factor became the profit source for the incentive plan.  It they didn't use it, it is profit to the bottom line.  If the project came in on time and on budget, then the contingency fund was used to fund the team that performed the work.  The business owner needed to know what his true costs were in order to know what the contingency fund was.  That ground work was done in advance.

Since labor costs are the single biggest variable cost, it did represent the biggest bang in terms of profit impact.  Starting small meant that the costs were conservatively calculated.  As a profit sharing program, the owner got his cut of the pie first and that cut also took into account G&A costs as well. 

The system was simple.  Each job had a labor hour budget.  If they met or beat the budget, the plan was funded with the employee portion of the cost savings.  But here is where the plan addressed the "gaming" issue.  You can always finish faster if you do a slipshod job.  The trouble with a roof is you don't know if it leaks until the first big rain.  Compounding the problem is the fact that where the water appears in the house usually is not where it came in.  Finding the leak and fixing it is non-trivial.  To combat this problem, the profit sharing fund is set aside for 90 days to make sure that the team had done a quality job.  If a leak was found, the repair crew was paid out of that fund.  This was a huge incentive to get it done right the first time.

This system had a number of great benefits. One of which was that the teams were self-policing.  The other team members would not put up with slackers.  Nobody took a 2 hour lunch break. The other team members kept that from happening. Lunch breaks actually turned out to be shorter than allowed. This was simply because the less time the job took, the bigger the pie. They worked together as a team to get the job done quickly and quality was insured. 

I don't have the final numbers on the impact this plan had on the business. But early indications showed that it accomplished all that the owner had hoped for and more. The 80/20 rule tells us that once you have solved one problem, you now have the 80/20 rule applying to what remains. The next issue for him to attack was materials costs.  But that is another incentive plan altogether.

Can you see how an incentive plan might improve your business? I would be happy to help you design it.   

What do you think? 

Let me know at

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Strategic Planning


I recently facilitated a strategic planning meeting for a client.  It was downright exciting. It felt like a war council.  When they were done, everyone was energized and I pitied their competition.

Many consultants put too much emphasis on strategic planning.  The real problem with small businesses isn't strategy but rather execution.  But we must always remember that if you aim at nothing you are bound to hit it.  So you have to make sure that you do indeed give strategy its due consideration.

A good strategic plan is set against long term goals of the company with short term objectives with hard dates, tasks assigned to specific individuals, and appropriate resouces allocated.  Issues are discussed and everyone gets buy in.  With these in hand the key players leave energized and the company is far more likely to succeed than if this step was skipped.  

This in no way understates the importance on execution.  But knowing what to do is the first step.  The first strategic planning meeting may take a few days because you need to set the long term goals.  But subsequent meetings should be kept short and focused on the short term initiatives.  

Let us help you with your strategic plans.

Contact us at:

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I am always interested in your feedback.  Please email me at

Sigma Pi Consulting, LLC
1248 Rolling Meadow Rd.
Pittsburgh, PA 15241
Phone: 412-576-2685
Fax: 954-206-1184