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More Culture Changes at Sears Holdings

April 19, 2006

By George Anderson

Aylwin Lewis, president and CEO of Sears, is looking to change the culture at the retailer, making it second nature for associates to greet shoppers and work as a team.

The focus on serving the customer and building teamwork is part of the "performance-based culture" that Edward Lampert, chairman of Sears Holdings, is looking to instill throughout the organization.

Group performance is linked to the company's plan to cap bonuses for top executives at $5 million a year or $15 million over three years. Mr. Lampert is looking to tie compensation for all employees directly to the company's ability to make a profit. Last year, the company cut benefits and bonuses to some salaried employees as it sought to improve bottom line performance.

According to a Chicago Sun-Times report, Mr. Lampert told shareholders at the company's annual meeting last week that the new management team in place at Sears Holdings has been put there to turn the business around.

"We took a lot of time putting this team together," he said.

Moderator's Comment: Should bonuses paid to retail employees, regardless of their position in the corporate hierarchy, be tied to group (company, department, store) performance measures alone? How do businesses go about creating company-wide compensation plans that all employees can understand and support? - George Anderson - Moderator

Discussion Questions:

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What is the biggest reason within retail organizations for unhappiness over how they monetarily reward employees?

Comments:

Retailers with a true customer focus tend to do well even if merchandising, price and other elements are not the best. Examples that come to mind include Publix, Wegmans, H E. Butt and Trader Joe's. Too much emphasis on a single Key Performance Index has significant risk. In the case of Sears and Kmart, this is too little too late. It takes years to change the culture. Then it takes even longer for the consumers to appreciate it. How many consumers will never go back to shopping either of these names? How does one prove to these consumers that a change has occurred if they will not visit the store? Nice try, but 5 years from now Sears Holding will just be a memory with double digit like for like store sales declines.

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W. Frank Dell II, CMC, President, Dellmart & Company

I think putting too much emphasis on Bonus plans is a mistake. People are hired to produce results. Is Sears hiring and then having to pay more to produce those results? Could it be that Sears is not paying employees enough and using the bonus as a Scrooge measure to try and get superhuman results out of employees that already deserve more? This typically results in "high pressure" tactics like "selling extended warranties" and advertising appliances and then charging extra for an electrical cord. I think Sears employees would appreciate management working a little harder to get customers in the door in the first place. If traffic rises and Sears floor personnel can stick to their high level of product knowledge and salesmanship, then Sears and their employees will be OK. If Sears management is using the latest from the MBA bag of tricks, then the good employees will go elsewhere (as many already have) and Sears lofty stock price will be a great place from which this management team may leap.

Ed Dennis, president, Dennis Enterprises

To properly develop a compensation system that is fair for ANY business (retail or other), the following need to be considered (this is not an exhaustive list):

Does it truly reward the performance it is intended to produce?

Is it accurately measuring performance results?

Is it within the control of the person being measured to change or impact results or contribute to results?

Is it accurately measuring the person's impact on those results?

Is it motivating?

Does it create an incentive to "win" by having someone else "lose?"

Does it encourage cooperation or competition? (and is that intentional or desired)?

Is it understood by the person(s) being rewarded?

Does it unfairly reward or incent results on factors other than performance?

We all have heard the bromide - Management can only expect results on what it chooses to inspect, because that is what employees think is worthy of respect. If you evaluate and reward based on a single variable - don't be surprised if that single variable (to the exclusion of other critical measures) is what you receive back in return.

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David Zahn, Owner, ZAHN Consulting, LLC

If the objective is to build a team, then the more people tied into the results dependant on each other, the better. The more people know about what is going on, how it is measured and what is rewarded, than the more the team as a whole can focus and drive the truly important things a company needs to achieve to grow.

Charlie Moro, President, CFS Consulting Group, LLC

I think bonuses need to be tied to various factors -- company, store, and department. They need to be set up so a bonus is achievable. Low level employees have no control of executive blunders, stock market prices, or competitive changes. Therefore, they should not be financially punished if some of the bonus criteria is out of their control. The bonus program should be structured so there is always a carrot on the stick but never out of reach.

David Livingston, Principal, DJL Research

Here comes my pet company again. Privately owned, with all employees owning shares, everyone top to bottom got the same percentage of their salary as a bonus this year. This company is renowned for the loyalty of its employees, all referred to as partners. It is also renowned for excellent customer service and knowledgeable shopfloor staff. It is an innovative company and one of the few British retailers that made money during this past year. I think that says it all.

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Bernice Hurst, Contributing Editor, RetailWire

Hopefully there is more to the "cultural change at Sears" story than evident in this brief article. If not, we should make funeral arrangements.

The apparent thinking that building high performance teams at Sears is simply a matter of a new comp plan explains fully how Sears found itself in this mess in the first place. Obviously compensation plans are part of the picture but aren't even close to being the whole picture.

What seems to be missing is an exhilarating sense of purpose and vision. That's the pilot-light of any cultural transformation. When you get employees seeing a meaningful purpose in their work and THEN you reward them well they'll climb any mountain you put in front of them.

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Ian Percy, President, The Ian Percy Corporation

Sears' problems - at the moment - seem to be that they offer more negative reinforcement ( "my way or the highway" ) than positive; that and frequent changes in direction and management drawn from the idea-of-the-week playbook. Of course when everything has been falling apart for years, I suppose stability seems almost like a luxury good...too bad, because that's usually when it's needed most.

'notcom'

I like David's list and agree with those who argue that employees have to feel some measure of control over incentive pay. A bonus that is too disconnected from an employee's daily work is worse than no bonus at all. That's not to say that a group bonus can't be an important part of the mix, even the primary part of an incentive plan. But it is up to management to explain just how each employee contributes to the goal, then measure and, most importantly, communicate progress against the goal to those employees.

A bonus should never be a surprise, either pleasant or unpleasant.

Jeff Weitzman, CMO, Buysight, Inc.

David Zahn did a great job on this, but here are a few additional observations. First, my own twist on the "inspect what you expect" parable goes like this. "You get activity around that which you manage and results around that which you reward."

The other critical pitfall in having too much focus on group incentives is that the individual begins to lose touch with their ability to materially affect the outcome, and therefore the reward. This leads quickly to abdication of responsibility, apathy and some very robust cross-functional finger pointing.

It is much better for management to take the time to create an integrated market plan that spells out the details of what each department or function is expected to contribute. (E.g. Our plan calls for Advertising to drive incremental foot traffic of 5% and for Merchandising to reduce markdowns by 3%.) Then everyone knows exactly what they are expected to contribute. Functional or departmental roles can be further broken down into work team or even individual goals. No rule of thumb is perfect, but 50% corporate, 25% functional and 25% individual or team seems to work pretty well at balancing the variables.

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Ben Ball, Senior Vice President, Dechert-Hampe

Major American companies typically have lucrative bonus plans for the top 5 or 10 executives, with nothing for the majority. It's very enlightened for Sears to suggest using bonus plans broadly. Even better, it focuses everyone, not just top management, on measuring success. We all know that the simple step of measuring often improves results all by itself. Even if the plan isn't perfect, it can be improved as time goes by. Many people love Nordstrom's customer service. Isn't their broad-based commission plan similar to a broad-based bonus plan? Yes, Sears may have dozens of other problems. But the current chief, Alwyn Lewis, helped turn around Jack In The Box. Let's give him credit! I remember Jack In The Box years ago as one of the worst run fast food chains: a place you'd go only if there was no other place for miles. Well it's sure different now.

Mark Lilien, Consultant, Retail Technology Group

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