Rko Warner Video

Executive Summary

RKO Warner Video is currently a very centralized organization located in a relatively compact area. As the company grows, it must make sure that the organizational architecture grows with it. The senior management team is going to have to power decisions down to lower levels as the company expands. Having the right people in place to make these future decisions is vitally important to the health of the organization. We feel that the proposed incentive plan differentiates good managers from bad managers. The plan provides incentives to improve the current performance of the stores. The plan also serves to attract and keep quality employees for the future growth of RKO Warner Video.

We propose a mixture of a subjective plan based on day-to-day responsibilities such as alphabetizing the racks, store cleanliness, opening on time, etc with an objective plan based on total revenues generated. This mixture ensures that managers are doing what needs to be done to take advantage of what management sees as RKO Warner Video's competitive advantage in service and selection, while at the same time allows talented managers to be creative and try to increase total revenues.

We propose a subjective plan where District Managers set objective goals and also subjectively evaluate their district stores along with others to arrive at a base bonus. If the base bonus is achieved by stores, then an additional bonus can be earned based on achieving revenues above targets.

Summary

RKO Warner Video is a subsidiary of RKO Century Warner focusing on the videocassette retailing and rental industry in the New York Metropolitan area. RKO Warner Video is growing and CEO Michael Landes wants to ensure his vision is being implemented down the chain of command. To ensure this happens Michael Landes hired a consulting firm to work with RKO Warner Video President Steven Berns and Vice President of Operations Ken Molnar regarding the implementation of an incentive compensation package.

Berns firmly believes subjective performance reviews conducted by his District Managers of his store managers is the way to go. Subjective measures such as store cleanliness, opening on time, getting returned cassettes back on the racks, keeping proper inventory levels, and maintaining short checkout times during busy periods are examples of what Berns wants to measure because they are very concerned with the compliance issue.

On the other hand the consultant favors a completely objective performance measure based on revenues from video cassette sales and rentals. The consultant believes Berns will get all he expects subjectively by incentivising based on revenues. Berns decides to go with the consultant's recommendation and implements the objective incentive plan over a two quarter trial period. The bonus structure implemented is highlighted below.

If actual quarterly sales > 95% of the quarterly sales target and

Actual quarterly rentals > 95% of the quarterly rental target then:

Total quarterly bonus = 0.25 x Total annual bonus base +

0.06 x (Actual Rentals - Target Rentals) +

0.02 x (Actual Sales - Target Sales)

Between 95% & 100% of target bonus reduced by 6% of rental shortfall and 2% of sales shortfall

No bonus for falling below 95% of target in either sales or rental revenue.

The results of the incentive plan are disappointing to Berns and Molnar, and it has received mixed reviews by store management. Berns and Molnar believe in its current state the costs do not outweigh the gains because as Molnar puts it " I can still find the same things that bothered me six months ago going on today." Store managers are anxious as it is the end of the trial period and some show indications of displeasure if the incentive plan was removed.

Alternative Plan

The above plan appears to be only slightly effective and the simple fact of the matter is there are good and bad managers out there. The only way to determine who is a performer and who is under-performing is to have some form of subjective measurement. The solution lies in having a balanced incentive plan that relies more heavily on subjective measures than objective but still includes both in the plan.

Since RKO Warner is really focused on growth we suggest a shift in risk to the District Manager (DM) level giving them more control over pricing within their respective districts. As RKO grows it will be more and more difficult for Berns to have his eyes on everything. Tying the DM's directly to the VP of purchasing and VP of operations will give them a clearer picture of how much leeway they have in pricing their videocassettes for sale and rental. This will allow for the DM's to have sufficient control and knowledge of the financials to implement the objective based portion of the incentive plan. The objective portion of the plan should be discussed with the store mangers before implementation to provide some transparency into the process and reneging fears down. Keep in mind the objective based portion makes up the minority of the incentive plan and will based on total revenue with no distinction between sales and rental revenue.

The senior management team believes that RKO's major sources of competitive advantage are quality appearance, and the breadth and depth of the store's PRC inventory. RKO believes they can outsell their competitors who are discounting, while selling at list prices. Steve Berns said "Our 'discount' is in the selection and service we provide, not in the price." All this comes together to say that the management team believes that focusing on service and selection will make the stores profitable. However, we see with the current incentive plan that stores are able to grow profits through other means that don't necessarily have anything to do with service and selection.

Because the leadership firmly believes subjective measurements are what will differentiate good managers from bad managers and will bring the day-to-day operations of each store up to levels expected by Berns and Molnar this will be the backbone of the incentive package.

The ability of the DM's to impart Berns and Molnar's vision is essential to giving store managers a clear picture of what is expected. There should be some training on the standards that are set and what is expected of the managers who are expected to live up to the corporate standards. The