Performance Based Compensation

Performance Based Compensation

If a company offers to perform a service for you, and the only compensation they will receive is based on a percentage of the money you actually save, what would be your reaction?

  • There’s got to be a catch.
  • This is too good to be true.
  • I’m too busy to investigate.
  • Show me more!

One such company has been using this model, Innovative Cost Solutions (ICS) based in North Andover, MA. Their field is Waste Consulting. ICS helps businesses reduce their waste and recycling costs.

In this post, we discuss the pros and cons of a performance-based compensation model and compare it to the LPS compensation method.

THE RISK TO THE SUPPLIER

Any company working on a pay-for-performance basis will have a high skill level in their specialty. They bet that they have enough of an advantage through experience to make an offer and be compensated based on the difference between what you are currently paying, and the price or fee they can negotiate.

THE RISK TO THE CLIENT

There are three worst case scenarios:

  1. You elect to work with the company and invest a significant amount of time transferring the information they need to them. In the end, you are told that they can’t help you.
  2. You invest the time and effort to work with the company but the savings ends up being marginal.
  3. The suppliers they choose to replace your previous suppliers don’t provide a satisfactory service level.

THE REWARD

The reward for using a performance based compensation model is a win for both the supplier and the customer. The supplier’s definition of a win depends mainly on the size of the transaction. The customer’s definition of a win is saving without much time and effort. Secondly, the new supplier must perform as well or better than the previous supplier.

The moneysaving potential can be calculated at the front end of the proposal. The performance level of the supplier is determined over time.

MINIMIZING RISK TO MAXIMIZE THE REWARD

Do your due diligence!

The best way is to get references from the company and contact a few existing customers to get their feedback on the experience. If the company offers a large number of references rather than choosing a couple for you – that’s a green light!

Get it in writing and read the fine print!

Read and understand all documents carefully.

Interview the proposed service provider!

Understand who will be providing the product or service. Make sure that they service your geographic area, and have a good track record with other customers located near you.

HOW ICS DOES BUSINESS

Just as LPS has expertise in the lab supplies and equipment market, Innovative Cost Solutions are experts in the Waste Management market.

From their web site:

“Innovative Cost Solutions is a cost reduction firm in Andover, MA that primarily focuses on helping businesses throughout the country reduce their waste and recycycling costs."