When is the last time you considered the link between your employees’ performance and your company cash flow? If you are like most petroleum managers today, you have a keen concern with escalating payroll costs and with ever-tight cash flow. Wouldn’t it be wonderful to increase productivity and increase company cash flow concurrently? Well, the good news is that you can!
I will provide you with the most effective cash flow enhancers for the petroleum industry and then how to link employee compensation to those enhancers. With any compensation plan, it is absolutely critical that the bonus criteria is measurable and that the staff being bonused have control over what is being measured.
#1) Faster receivables. Traditional thinking says to bonus credit staff based on a percent current target. Instead, consider a bonus based upon percentage of existing customers converted to EFT terms. Since receivables collection is a joint function with sales and even distribution staff, consider making EFT percentage an entire wholesale division bonus. Everyone in your company should be talking up the advantages of EFT payment terms, and they will if their paycheck reflects it!
#2) Inventory optimization – The first trick with inventory is to have exactly those products your customers want to buy. Trick number two is to have just enough of those items to maximize sales. Anything more, either products that don’t turn or too much of anything that is turning, is considered excess inventory. It costs your company money to carry, count and clean. Your inventory bonus compensation must depend, therefore, upon your unique situation. If it’s better turns you need, then bonus on exactly that. If it’s better product mix you need, bonus on sales dollars.
#3) Delivery efficiency – What we’re talking about here is getting the right product to the right place quickly, safely and without wasted time. Again, bonus based upon where the bottlenecks in your system occur. If drivers have a hard time getting to the right place, add a bonus based upon correct customer information getting to you, in your computer and efficiently to dispatch. Percentages of correct information works well as a measure since the number of deliveries usually varies day to day.
#4) Cost containment – For each department, isolate controllable costs and then bonus out a portion of the savings, being careful that required preventative maintenance does not get slighted. Remember that reduction of paperwork and streamlining work flows are both cost containment measures. Employees need to have cost information, often including total payroll expense for the department, to be able to put a dent in total costs.
#5) Asset purchases – Too often our sales and administrative departments spend money without considering the return on the money invested. Consider commissioning salespersons net of a factor for capital invested in customer accounts. If you only commission on margin, they will spend your company’s hard-earned cash on tanks, pumps, canopies, etc. just to increase their commissionable gross margin. If they are held responsible for equipment, using an appropriate amortization schedule as a cost, they will make better spending decisions.
These are just a few ideas to get you thinking and right now you may be thinking, with all these bonus programs my payroll would go sky high! Remember, however, that any bonus amount should be set as only a portion of the savings you enjoy when the goal is achieved. In this way, your bonus program will be a win-win. Both the company and the productive employees will increase their bottom-line.
Finally, make any bonus program contingent upon company profitability and ideally have an ongoing profit-sharing program. Many companies find success with a quarterly profit sharing where whatever the pool of money, it is distributed 10% first quarter, 20% second, 30% third and 40% fourth quarter.