Human Capital & Careers

Sun Uses Incentive Compensation to Boost Supply-Chain Perfomance

A former Sun Microsystems employee gives an inside view of how the company ties on-time delivery, inventory turns, and customer satisfaction into pay.
Jennifer CaplanMarch 26, 2001

You can spend millions on enterprise resource planning (ERP) software. But unless employees throughout the business use new technologies effectively, the potential efficiencies may be lost.

So how can senior managers get employees to buy into E-business initiatives?

By paying them for it.

To be sure, companies have long reserved incentive compensation plans for senior executives, salespeople and others who directly affect revenues and earnings. But now, some are extending incentive plans down through the organization.

Corporations have also begun linking compensation packages to broader operational metrics like customer satisfaction, inventory turns, and cycle times.

“Incentive compensation plans used to be just for salespeople,” says Mark Stiffler, president and chief executive officer of Synygy, a provider of enterprise incentive management (EIM) software. They are now being rolled out to include most company employees, he adds.

The benefits of using compensation as a way to pushing through initiatives, that can increase corporate performance, such as E-business, seem to be catching on with CFOs.

“We get business from finance departments, especially, that recognize the big potential return on investment,” comments Stiffler.

Bob Ferrari, senior research analyst at AMR Research, says incentive compensation plans are increasingly being linked to E-business initiatives. “This is a new concept that will catch on eventually,” he claims.

Ferrari, a former employee of Sun Microsystems, says Sun is on the cutting edge of incentive compensation. At Sun, pay is predicated not only on traditional metrics, like profitability and revenue, but also on customer satisfaction, he adds.

“Sun has a quite intricate customer-satisfaction index—a combination of on-time delivery to customers, return rate, and other quality metrics,” he comments.

Within Ferrari’s business unit at Sun, compensation metrics was weighted toward the supply chain, he says.

“On-time delivery, inventory turns, [and] customer satisfaction were all tied into pay,” Ferrari says. At the start of each year managers clearly laid out the performance metrics by which his unit would be measured and the specific ways in which employees could contribute to those metrics, thus potentially increasing their total pay, he adds.

“If our unit was going to put in an application, such as [an] SCM application, that was intended to impact inventory turns across the division, the incentive portion of employee compensation was predicated on that business metric being achieved,” says Ferrari.

A Sun spokesperson declined to comment on the specifics of the company’s incentive compensation program for “competitive reasons,” saying it is sensitive information. But she generally confirmed Ferrari’s account.

“Once compensation is tied to specific metrics being met, things begin to happen,” says Ferrari. Things become very clear for people, and they become more interested in the ways they can affect the metrics driving the overall business strategy, he adds. Incentive programs can thus be an effective means of aligning processes with corporate goals.

“My experience is that [incentive compensation] tends to modify behavior very quickly,” asserts Ferrari.

A 1999 study by compensation consultants Towers Perrin found that 40 percent of 770 American companies surveyed offer some form of incentive-based compensation to all their employees, not just salespeople or upper management. And Hewitt Associates survey found last year the 78 percent of the 856 businesses polled have at least one type of variable pay plan in place, up from 70 percent in 1999 and 47 percent in 1990.

Besides rolling incentive compensation plans out to more employees, companies are also making them more complex.

“These plans now include many different measures of performance and a wider variety of data,” says Stiffler.

Today companies can get large amounts of accurate data about inventory turns, cycle time, delivery performance, and customer satisfaction that they couldn’t get in the past, he contends. The newly available data stems from supply chain management (SCM) and customer relationship management (CRM) applications.

Companies now have the information they need to measure employee performance and thus link compensation more effectively to it.

There’s one potential pitfall of tying pay to performance, however. Because companies often cut base salaries when they institute incentive compensation plans, employees could become uncomfortable with having their salary linked to metrics that may or may not be met, and they may leave, says Synygy’s Stiffler.

“But the flip side is maybe you want to lose those people anyway,” he contends. “That’s the deadwood.”

To be successful, an incentive compensation plan done in connection with an E-business initiative must be accompanied by extensive education and training, says Craig Ulrich, a principal at William M. Mercer, Inc., a human-capital consulting firm. “First there is education and training that needs to go on, separate and distinct from compensation,” he says.

If employees are not convinced of the concrete benefits of new systems and how they affect E-business initiatives, then an incentive compensation program will not be very effective. For E-business projects to be successful, companies must also have a clear understanding of how their work processes will become more efficient as a consequence of their investments.

Only when these steps have been taken can companies begin to tie the success of E-business initiatives to employees’ paychecks, Ulrich cautions.