I said, “Well, yes, but then we have to sew them up and put buttons and zippers and logos on them — and we don’t sell them.” The incentive system was independent of what the business needed. And these guys thought that they were really kicking it by hitting 90 percent fabric yield.
Steve Player: You talked about unintended consequences at Walls. Do you have any other examples?
Michael Kramer: Here’s a great example. We had a group of people in manufacturing who were pattern makers. They got the bolts of fabric and they cut it into the patterns for the garments we made. They would decide the layouts of larges, extra larges oakley juliet sunglasses, mediums, and smalls, and their goal was 87 percent to 88 percent material yield — that is, usage of the fabric. At the end of the season my first year, we had an excess of small jackets. I started asking the sales guys, “Why do we always have smalls? Our garments are made for big people oakley juliet sunglasses, for hunters and construction industry types.”
So I found myself in the material utilization department, and they said, “Well oakley juliet sunglasses, the reason we make so many is because we get better yield from the fabric if we just throw some smalls in there. If we just make mediums and larges http://goodcoachoutlet.weebly.com, we’re only going to get about an 85 percent yield, and we don’t get our bonus unless we get 89 percent.”
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SP: And then pay doesn’t match up with how the company operates.
Kramer: Right, and you end up with 3 million dollars’ worth of small jackets that nobody wants, and everybody’s doing high-fives because they thought they were doing what they were supposed to do.
In a new interview with me, Michael Kramer talked about his stint as CFO of clothing manufacturer Walls Industries http://goodcoachoutlet.weebly.com, Inc., where he tackled the problems caused by an incentive system based on EBITDA. Here’s more on the theme of siloed compensation metrics.
SP: A classic case of siloed measures.
Kramer: You’re always going to have those at some level, but you want to be aware of these issues. The trick is to make sure that you’re always going back and checking on the incentives and how everybody gets paid, because things can change.
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