Promoting Investments in Intangible Organizational Assets through Aligned Incentive Compensation Plans

BY ALIGNING EVALUATION AND COMPENSATION PLANS WITH THE CONTINUED GROWTH AND DEVELOPMENT OF ORGANIZATIONAL ASSETS, A COMPANY CAN ENSURE ITS STRATEGIC BUSINESS UNIT MANAGERS CONTINUE TO FOCUS ON ITS LONG-TERM STRATEGIC OBJECTIVES RATHER THAN SACRIFICE THE FUTURE FOR SHORT-TERM GAINS. EXECUTIVE SUMMARY Strategic business unit managers are often evaluated based upon return on investment targets- targets that reward lower expenses and lower investments. This focus, however, may be at odds with the strategic objectives of the larger organization that require investment in organizational assets, generally large-scale intangible assets that form the basis for achieving the organization's strategic goals. Investments in these intangible assets have the potential to reduce profits in the short term but enhance profits in the long term. To encourage investment in organizational assets, organizations must align their compensation schemes with their long-term objectives. We examine the experiences of the Steak n Shake Company to illustrate how one company aligned the objectives of its business unit managers with its strategic plan to build human capital. Today's global business environment places increasing pressures on large companies to create or expand their global presence. More than 20 years ago, however, Gary Hamel and C.K. Prahalad noted that a global brand franchise requires significant investments that are greater than the resources and scale found in individual business units.1 In practice, however, decentralized organizations often focus on business units and develop incentive compensation schemes that reward unit performance. This may interfere with positive returns at the organizational level. Hamel and Prahalad claim that few companies with a strong focus on strategic business units are able to successfully build either global distribution systems or brand positions. They suggest this occurs because strategic business unit managers are often evaluated based upon return on investment targets that reward lower expenses and lower investments- a focus that is at odds with the strategic objectives of the organization as a whole. Within this article, we discuss the importance of developing organizational assets, the large-scale, generally intangible assets that increasingly form the basis for achieving the organization's strategic goals. Next, we provide an overview of a compensation scheme often used in organizations with a focus on business units. Finally, to illustrate the need to align business unit incentives with organizational strategic goals, we highlight the experiences of the Steak n Shake Company as it works to align the objectives of business unit managers with its strategic plan. ORGANIZATIONAL ASSETS: IMPORTANCE AND EXAMPLES A review of recent business articles indicates that many U.S. companies identify intangible organizational assets as key factors within their long-term strategies. Some of the more frequently mentioned assets include innovation, brands, research and development capabilities, human capital, and supply chain efficiencies. Innovation. Innovation and its link to enhanced profitability is well documented in the business press.2 To develop future products and services perhaps not yet identified by consumers, companies are developing organizational cultures, processes, and employee teams that are key to innovation success. For example, since 2000, Whirlpool has worked to increase innovation by assigning a diverse group of 75 employees, ranging from hourly workers to vice presidents, to a nine-month innovation training experience.3 The specific annual cost figure attached to Whirlpool's innovation is between $20 million and $40 million.4 Brand Value. The importance of building the value of global brands is exemplified in the annual ranking of the Top 100 brands as determined by Interbrand and published annually in Business Week.5 Investing in brand building is seen as a means to increase revenue and operating income through higher sales volumes and/or premium pricing. …