Why does the Flight Centre incentive model work so well?

The concept of skin in the game or variable pay structures within retail stores is an area that is experiencing a renewed focus in response to the near full employment status of the Australian market and the increasing pressure on the fixed costs of business.

Groups such as Flight Centre and Michael Hill Jeweller are stand out examples of groups that have underpinned their performance with practical and motivating remuneration incentive structures that are aligned to the performance of the business. However many rudimentary incentive arrangements are failing to deliver the intended outcomes for both franchisors, franchisees, employees and the business.

Why?

Primarily, there are two consistent issues:

(1) the lack of identification and alignment with the real drivers of the business performance;

(2) the size of the incentive proportional to the fixed component of remuneration is insignificant.

The opportunity created by incentives is simple in its philosophy.

The objective should be to grow the total size of the pie available and share it according to how and who created the outcomes. It should not be an exercise of carving up the same size pie in different proportions.

The process of committing to a remuneration structure that delivers this outcome requires a solid foundation of understanding, analysis and identification of the business drivers.

Understanding an employees likes and dislikes is important but it should not be the starting point.

The design of a remuneration system needs to reflect the future direction of the business as much as current performance.

It is worth considering that, anecdotally, the skin in the game in a franchise structure will typically yield revenue increases of 15%-20% in a business unit. This gives some indication of the remuneration incentive opportunity that is dormant in many businesses at a time where increasing fixed costs continue to place pressure on profitability. How much would you pay for an extra 10% revenue?