• May 30, 2017 at 4:53 pm #1433
    Sean Iddings
    Keymaster

     

    In Les Schwab’s book Pride in Performance, Schwab recounts an original incentive scheme at retailer J.C. Penney. This is a great example of a proper incentive and how it can dilute over time as a company grows. Today the incentive doesn’t exist, it died with founder James Cash Penney. J.C. Penney’s operational success has not sustained either.

    Great organizations, like Les Schwab, maintain effective incentive schemes as they grow. The right incentives maintain success.

    J.C. Penney Founding Manager Incentive

    James Cash Penney opened his first store, J.C. Penney, in 1902. The chain of clothing stores would grow exponentially to 1,000 stores by 1928 ($190 million in revenues). One of the keys to establishing so many stores was the incentive scheme. The program Penney set up was for a store’s founding manager to receive 33.3% of the stores profits.

    If a J.C. Penney store did $1 million in sales and netted a 10% profit margin, then the manager received a $33,333 bonus. Founding managers were treated as true partners, so it was undeniable that J.C. Penney workers were eager to become a founding manager.

    By 1971, the year James Cash Penney died, the company’s revenues reached $5 billion. Throughout this growth, however, the incentive scheme would dilute itself. Once the founding manager moved or retired, the new manager would receive a different incentive. Les Schwab said:

    “…the new manager was told ‘we already have $1 million in sales, you had nothing to do with this, so we will give you a new program. We will give you a base of $500,000, and, if you hold the $1 million in sales, you will get half bonus on the $500,000, 10% of $500,000 is $50,000, and half bonus would be $8,250.’ He would get a bonus of $8,250 just for holding the store the way it was when he took it over. He got 100 percent of the bonus program for everything he built over the $1 million in sales and the $100,000 in profit. The company kept the difference between the $33,333 the first manager got and the $8,250 the second manager got.”

    The incentive went from incentivizing the manager as a true partner to one where the new manager could tread water and make money. This surely would incentivize new managers, but what was the incentive to do better? There was none.

    As time passed, all incentives were done away with. Since, J.C. Penney’s fate has been sealed as the company has gone into obsolescence.

    Les Schwab’s Plum Store Policy

    Les Schwab had a problem: his managers weren’t eager to apply for smaller stores. Why would they? Assistant managers of some of the older, larger stores could be making more money than the head manager of a smaller store. To get around this he devised a clever incentive and the company never has a problem getting applications for small stores.

    In 1983, Les Schwab made it necessary for workers to earn the reward of becoming a top store manager, or as he called them “plum” stores. Credit in the selection was now given to those who: pioneered a new store, had turned around a less profitable store, had been thrifty in their profit sharing contract, had previously shown a great ability to train and promote people, and the managers maturity level.

    Unlike J.C. Penney even after Les Schwab’s death, the Plum store policy and the financial incentives that were successful in Les Schwab’s founding are still in effect today. The incentives are just as effective. The strong culture of clever incentives has been impeded into Les Schwab Tire Centers, and the strong family/employee ownership will not tamper with what works.

     

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