Well I apologise initially that I have some sound attached to my presentation today and it is really entitled "Performance Related Pay - making it happen". My name is Alex Tatham, and I'm Head of the Ideal Institute of Ideal Hardware and I'm sure that many of you have not heard of our small but innovative company but I will endeavour to tell you a little bit more about it as we go through my presentation. I have also got a rather fluffy job title, "Head of the Ideal Institute" and I shall endeavour to explain that as well as we go forward during the presentation.

So why have Ideal been asked by the Foundation to come here to give a presentation on Performance Related Pay. Well it is because we are winners. We are winners not only for our industry awards which are sponsored by the trade magazine PC Dealer, we are the distributor of the year for the past two years running and have, being in the small sector that we cover which is Computer Data Storage, been the distributor of choice for all of our customers for the past four years in a row. We came top in every independent survey that has ever been done on computer distribution. The latest one I know is that they did a survey on how long it takes for a distributor to answer a sales call from their receptionists, and our receptionists at Ideal answered in nought rings. One of our receptionists managed 247 which must have been a joy to survey. However, most importantly, we are the winner of 1997, and as announced we were nominated for 1998 and we also won in 1998, hence my previous question to Legal and General, "Did they think it worth re-entering?" I felt that when we did win the 1997 award we won it rather unfairly. We had all the ideas at the time but we hadn't actually implemented anything and we got awarded for what we were going to do as to opposed to what we had done. I feel we were vindicated by our 1998 win as well.

Are we really only a small business, we turn over £200,000,000 per annum. We employ over 350 employees, I think there are 372 on the pay-roll this month for the full stock exchange listing. and we are the largest based storage distributor in the UK and hope to be in Europe very shortly. "What does that mean?" Well it certainly means that it is easier to win the small business award, and that is what we manage to achieve. However, being a smaller business does represent some difficult and some opportunities and I am going to endeavour to explain what those are and the things that I found having come in from an accounting background.

Well, we still very much have an owner managed feel to our business. The business was set up 10 years ago by 3 guys who are now multi-zillionaires having listed on the stock exchange and they like to feel that it is their company still. Anytime that you do anything you are still spending their money directly out of their pockets; and that represents some challenges. You heard from Legal and General earlier that when you try to do something, you only got a short span of attention from management. When you are spending any money at Ideal Hardware you get a lot of attention. Once the bill has been cleared then the attention goes away very fast and onto the next project if you like. I very much concur with the previous speaker in really saying that actually you need to move pretty fast, in order to maintain management attention and excitement about any particular project. We have obviously got much smaller resources than Legal and General have, and I am very excited about their £22,000,000 marketing money, oh to die for! However, we also have a motto of changing age profile at Ideal. When Ideal was first set up, the guys were in their early 20's, the PC industry was at a young stage and there was a lot of money to be made. Effectively, they brought through a lot of blokes to shove this stuff out the door in huge volumes. That hasn't really changed and what is interesting is that the age profile in our business, is to see people going to get married and have babies, and therefore the generous paternity leave policy that we have is making our work-force look a little barren on some days, when people take two weeks off per child, and someone had triplets the other day.

However, we have got a change in our policy and one of the things I came across the other day being Head of Human Resources at Ideal was setting a retirement age. Retirement, don't be ridiculous, I don't know of anybody that has claims to retirement. It shows how little I knew as I set the retirement age at 65, thinking that was quite reasonable as we have got a good 30 years out of the rest of our work force when we found that two of our drivers were 67, so I immediately changed that of course to 70! However, certainly we have a significant amount of board overload, I believe with our business.

The three guys tried to cover everything and of course the business is growing tremendously fast. Whilst they brought one other member of the Board on, including some non-executives, they are having to delegate more and more to their senior managers in order to cope with the volume of decision making in business. I think that is an interesting stage in our development as a company, and there is no question that above all that they are in absolutely transition time here at Ideal, and that can be very nasty. Change, we are absolutely changing very rapidly as a company, and growing as I would describe as a small business into something quite significant.

Well, with any change programme, one of the first things that I did was set about developing a vision for our business. When I came in I asked the MD, James, "what is your vision?" and he said "to be the best UK distributor in the UK". I said "you have won the award for the past year or so; you're the best storage distributor by miles; and you are going to win it again this year; surely you mean something slightly bigger."

Effectively he came up with a mission to be the benchmark of success across the whole global computer industry. We want people to say when they are doing computer distribution all the way across the world, and there are many computer distributors now being set up, we want them to say "we want to do it like Ideal do it". As such we endeavour to be very different and innovate. Well how do we Benchmark, the most important thing of course is that we ask clearly by our awards, and I think awards are a very good way of Benchmarking yourself of just how well you are doing. The Human Resources Awards, for example, are independently audited and are a cheap way of getting some consultancy and some confidence that actually you are heading in the right direction. The distributor of the year awards, as an example, are voted for by customers. So again, that gives you a huge confidence boost that you are actually going in the right direction. We are very pleased with the results of those, and what is interesting of course, is that that affects all of our performance as a business and the performance of our people.

We survey on just about everything. Technical Support Department - does that make a difference to you our customers? Our customer care Helpline - does that make a difference to you our customers? The fact that we answer the phone in nought rings - does that really make a difference? Every box that we send out, and we send out around 3,000 boxes a day, goes out with a questionnaire, and around 10 per cent come back telling us what they think of us. Normally what they have criticism on, given that is the reason that most people return the form. Even so we are very happy to receive that and hopefully we have a regular, what I would describe as a goods out committee. They look at performance of our stock in and the performance of our delivery service which again, neatly to our business is our own delivery service, and we have our own distribution network.

We measure our logistics meticulously. Every wrong shipment, every right shipment, every cost of packing, shrink wrapping , just about everything is measured throughout our Logistics Team, and again that very much helps to benchmark our performance to make sure that we are delivering the best service. Of course, unsurprisingly, with don't just fire our employees, we also ask them what they think. We get a lot of employee feedback, and we ask all our employees, how they are feeling about their job, what they are really looking for, and we have regular meetings, suggestion forums, and very much open forums, particularly when it comes to discussing results. We also have annual awards when people have done especially well. Whether they get hand-held television, or new computer equipment, or the digital cameras that we have been handing out this year; various things in order to try and make sure that we are all actually one team in a small company. As we grow of course that is creaking a little.

The culture that we have at Ideal Hardware, is also very important. In terms of participation, every single member of the company, when they join the company receive some share options. That is not necessarily to reward them, it is to make sure that they take an interest in some of the pressures that Ideal have from the outside, from the City and from our bankers. We very much want them to be involved in and excited about are the share growth, or question why the share prices are going down, and we are very open to find out why that is happening as long as it is obviously not price sensitive. In fact we involve our people in just about every decision and one of the biggest ones was our Performance Related Pay Scheme, which I shall come onto in a second.

I also said that I would explain my job title as Head of the Ideal Institute. We very much need a learning culture within the computer business. The average life span of a computer product is around 3 months before someone else invents a better one, and we start distributing that over the previous one and send the rest back. Therefore our people need constant learning, and in fact we give about 30 days training a year for every single member of our sales team, and customer servicing facing teams, receive one hours' training every single day, as well as weekend work, and weekend training, and it is very important for our people are seen to be, similar to Legal and General, intelligent and a one-stop shop for knowledge.

We also have an uplifting environment, in that it is a fun place to work, we have regular incentive schemes that most sales forces have. For instance, we have just raffled a car that one of our suppliers gave us. There is a real sense of excitement about every single day at Ideal and it is very much a sales driven culture and one feels very customer focused, and I think that as a company we need to do more of that.

The key to our success is motivating our people, to really feel that they are building something that is truly good, and involve them in the company as it grows and as it gets more exciting. As such we have given every single employee some Performance Related Pay. We did that effectively by freezing pay last year and introducing it as their up to 10 per cent pay rise. We already had some form of Performance Related Pay before we introduced some of this. Our sales force, for example, were paid on a basic plus commission, as any sales force perhaps would be. We changed that at this point to 100 per cent commission only. You heard earlier that you need to have a significant amount of Performance Related Pay to motivate anyone, hopefully 100 per cent will just about do it. We very much feel that our work force is very highly motivated. However, there is little doubt that it can be de-motivating. When you are on that downward spiral that salesman go through, we find that we have to have a support mechanism in place whereby they are questioned, appraised to understand why they are going on a downward spiral, in order to hopefully lift them back up again. That is what we need to do as we have put so much training into them. It is very important that we don't let them spiral out of control, but obviously some do.

One of the keys to the success of our Performance Related Pay was very much involving all the line managers and all of the staff in its implementation. In fact one of the reasons that we implemented it in the first place was because the consultant that we used from Z-Yen said that it was very much what our staff wanted. He said "would you like more Performance Related Pay if it was offered?" - "Yes" was the answer; "would you like to swap out some of your benefits for more Performance Related Pay?" - "Yes" was the answer. Not only "Yes" from the sales force, perhaps you can understand that, but surprisingly it also came from the whole of our logistics team as well. They wanted to be rewarded for the hard work that they do, picking and packing these boxes, making sure that we have the best delivery system from all our competitors in the computer industry. They wanted to be rewarded for that and they didn't feel that they were being. So introducing Performance Related Pay was not a painful process for us. It was very much asked for by our employees. Not only that, but we involved all the line managers in discussing what they wanted their departments to do. Because our Performance Related Pay Scheme is not a global performance Related Pay Scheme, I remember being under Ernst and Young which was really a tax dodge, because Ernst and Young design that sort of thing, the Performance Related Pay was very much 'what did we want our people to do.' How could we change their behaviour to reinforce what we wanted them to do. Not just what we wanted them to do, but what their line managers wanted them to do.

We effectively discussed with the line manager and one member of his team:

a) what it was feasible to measure;

b) how we would measure it ;

c) make sure that the right measure was in place.

However, I totally agree that now that we are coming to the evaluation stage, having implemented it for almost a year now, and we started evaluating some of these schemes, some of them are not working as perhaps as well as we thought they were. We are coming up to another pay review so we have got another opportunity again to revise those schemes and make sure that we do evaluate them well.

Some of them have worked spectacularly well, as an example, our warranty warehouse. Warranty is a big issue when you have a hard disk drive, its the only mechanical bit really in a computer these days and we do receive quite a lot back. It is very important that we provide a fast turnaround, because if you were a company IT Manager, you would want to make absolutely sure that you have got the right bits of kit to service your users, who are notoriously fussy. We needed to make sure that we had a very fast warranty turnaround. In fact we needed to turnaround in 4 days of someone saying we've got a problem. By the time we have got a new bit of kit, tested it, or the old bit of kit fixed, we really wanted that to move very fast. Given that we are a tele-sales operation, and not a retail operation, as we're a distributor selling wholesale distributor if you like, it was very important to us that we managed to give our customers that service.

Currently, we achieve this in around 10 days, so we focused each part of the warranty team with a new system, and a way of reinforcing that system, by paying them and making sure that they did things quickly as well as effectively. Here we had measures on quality and on speed and we have now managed to achieve a 3 day warranty turn around. As a result, the release of those provisions that were within the warranty warehouse and the warranty stocks that we held, we could actually release a lot of stock, and we have released approximately £800,000 worth of provisions and that really has been an outstanding success. Although I can't really claim that Performance Related Pay has been the sole reason for that, I can say with certainty that it has reinforced what we have tried to do and has certainly helped our people to achieve it, and of course has rewarded them for the success that they have also achieved.

How do we get everyone on board with some of these schemes? One of the PRP schemes we have actually introduced is on piece-work. Our builders, people that shift the boxes all night, have to actually work harder when we sell more. Profit doesn't mean much to them; it's the number of boxes that we sell that makes them work harder. So we introduced the piece-work scheme were they get paid by the box that they pack, but we tempered it very much with a quality measure, such as that if it is the wrong kit that they picked and packed and it goes out the door, then everyone in the team loses.

One of the things that we have recently seen in a staff survey, is that people are really fed up with people consistently under-performing. So whilst we have tried to make sure that it was a team measure, we are now seeing people saying "I know that there are two people here that are costing me money", and that is going to be an interesting situation when we deal with that coming into the pay round. A lot of our people are focused on our customers indirectly from selling, our customer care team as an example, or our technical support team. We said that we surveyed just about everyone. One of the things that we do is that we pay people on the results of that survey. We're benchmarking them this is what we are expecting them to achieve and hoping that they will achieve it. Clearly, we can not only use the survey as a result of hoping to improve our service, it also focuses the minds very carefully on the people that are being surveyed. This not only applies to customer facing departments but also internal customer facing departments, such as information systems, and of course Human Resources.

We have a quarterly Human Resources staff survey that myself and my team get paid on ourselves. We have an enormous focus on using the Internet. Margaret was talking about E-commerce; we have an E-commerce system already in place, we have four Internet sites and for those people that are involved on the Internet, one of the problems on any Internet or Intranet is that people actually don't take ownership for it and they think it's somebody else's job all the time, and "I'll just contribute here and there." Anyone who contributes gets paid in some way on the number of hits their bit of the site gets and it focuses the mind somewhat.

Warranty turnaround we have already talked about, now cash collection for example. We are a cash business and it is critical that we move cash around our business very fast. Everyone that is involved in that cash area of our business is targeted on making sure that they either collect the cash, or perhaps don't pay off suppliers too often. The gross profit clearly comes from sales people who are focused not on turnover but on gross profit, and they decide the margins that they sell at. They are very much a wheelie-dealie sort of sale, and effectively it is based on a call that every single person is allowed to make a decision about what price he can sell a bit of stock at. There isn't a standard price list - it is: " how much are you buying sir and when do you want it for" and what sort of service are you expecting in return will dictate what price you pay. So our sales people are now 100% focused on gross profit.

However, one of the things that we have really had to make happen, was that we had a series of product managers that were wined and dined by our huge computer company vendors that we distribute for; Hewlett Packard, and others, all giving fantastic World Cup experiences or cars or all these things to our product managers that effectively wasn't helping our business usually. All very nice, they enjoyed it very much, but they weren't really helping our business. What we really wanted them to do was to turn on to help our Sales Force sell. They are the people with the technical knowledge; they are the people with the real experience of making sure that they can get the product out of the door as well as in the door. So at this point of PRP, we changed our product managers from being half commissioned led on stock turnover to 100% commission based on gross profit. This was a huge change for them and we didn't lose any of them, because all of them were bought into it by seeing that that was their job and that's what we really wanted them to do. We reinforced it, and we felt so strongly about it that we reinforced it by paying them 100% on gross profit. That was the toughest one that we had to achieve as you can well imagine given that these are the most senior members of our company. They very much felt that this was what the company needed to achieve, and of course they were very much company people so they really bought into the whole thing.

Certainly, our purchasers are still focused on stock turnover and those departments that are perhaps less easy to manage, like the accounts department or our internal audit department are focused very much more on the appraisal way of measuring management by objectives, and those objectives are altered depending on what the manager wants that team to achieve for that quarter. It is not some huge scheme that every single member of the company has to fill in. It is not a form filling exercise. It is much quicker and more flexible than that, and the managers and line managers can use it effectively to reinforce the message that they are trying to give to their team each quarter.

How do we get everyone on board? Well the first thing without doubt was to make sure that all these measures was communicated effectively. Those organisations that haven't got an Intranet, then I can highly recommend it. It was outstanding to see that every single person was logging on to see how well they were doing, sometimes on a daily basis. Some people can actually measure how much they are getting paid and no one else can see how much that they get paid, but everyone can see what the measures are and how each department is performing. There is also a summary page of how every department is doing in the measures that we are adopting as a company; really reinforcing the benchmark of success very much internally. Communication can be seen by everyone on a daily basis and they can also see historically how they have been progressing over the past year, month on month on month. Have they achieved what they set out to achieve? What were the benchmarks last month? Had they improved this month? The warranty example shows an amazing progression in terms of the month's turnaround. You can see it coming down and down and down each time, and the quality as well staying consistently good.

We've called it Ideal Net. It is led off by the Intra-statement; very much to be a benchmark; it pervades very much all the Human Resources work that we do. The contents as I said, we have got the PRP measures and targets but also I find that the Intranet is hugely useful from a human resources point of view. It provides much less paper work; you can send these things out much quicker; it is always available, company hand-books, plus personnel documents that you need, they are all available on-line and every single person is on-line that has a PC. Surveys, for example, are done across the web. There is a very useful piece of software called Pinpoint, which allows people to fill in the survey themselves. It is compiled automatically, and I can get results within 2 minutes of the survey been completed. We have a big Ask the Director's Forum over the Internet, and the Directors themselves are actually targeted on making sure that they answer the questions within 24 hours of the question been posted. So there is pressure on them too to succeed and we do pay them on that.

Perhaps the future of our Internet is certainly that we will have full stock information, rather than what I would describe as our stock accounting system. This will be done on a WEB based system. We will also have a full human resources data base system, linked with a front end that everyone can see that has non-sensitive information on it. So, where are we off to? Well we will increase that use of Internet technology in the way that we talked about, and increase the use of evaluating the performance measures that we have put in place. We have talked about board overload. We have established now an operational board as of last week to really run Ideal Hardware Ltd, as opposed to the PLC, and really focusing on these measures and that is very much how the operations board will get paid, on the measures that we set out.

We will increase the focus on evaluating these benchmarks, making sure that we have got it right, and paying people in the right proportions. Some people have done outstandingly well that they have rather exceeded the 10% that we all budgeted for and have gone onto around 20%, and that really is some element for concern, if they are not contributing in the right way that we want them to. It means, have we got the performance measures right?, or are we being too generous? As we come up to this pay review in August, that is what we are all asking at the moment.

How can I call all of you to action? The first thing that I suggest is that if you haven't got one I would develop an Internet culture. We have already looked at Legal & General developing E-Commerce. Whilst E-Commerce people may not be buying over the Internet yet, they are certainly finding prices over the Internet. You can update these prices on-line, daily, instantaneously if you have a commodity business. We are pushing products all the way across Europe, hard disk drive, CD Rom drives, and we are able to target grades of customer and give them pricing on a hourly basis, if someone is servicing that Internet. We find that it has reduced the call times to our sales people for quotes. They now trust the Internet as being their quote station and they say "Yes, I will buy at the price quoted on the Internet". We have very much seen that the calls and productivity that our sales people can actually have, is much increased as they spend more of their time servicing the sale as opposed to giving a lot of needless quotes, that actually doesn't convert into a sale.

If you are not measuring your business. I think that PRP is an outstanding way of really focusing on what is important to your business. We heard that Legal & General significantly focused very heavily on measuring parts of their business; we didn't hear huge amounts of how you linked that to reward. I can say that Ideal focus absolutely on rewarding people on the measures that they have put in place. I think that we have had some outstanding successes on that.

Finally, I would encourage total participation in any business. We heard in the first talk about involving line managers, those people that involve the people in setting up these pay schemes, that is when it works. That's when it worked for Ideal. Finally, there is a lot to do, so start early in the morning,

Any questions.

1 Mike Bourne, Cambridge University. It seems to be in the honeymoon stage to put it in and run it. How difficult is it going to be to change some of these things?

We have already tweeked some of them. We have been going for a year now, and we have been able to tweek some of these schemes. However, I think that we will have some difficulties in some areas. Again, involving the people discussing those changes and the evaluation of the PRP, say "listen, you've done very well out of it this year, this has affected our business and this is what we want you to achieve next year. Again, let's tweek your PRP Scheme or develop another one if you like". It may be a radical change to make sure we're re-inforcing the message that we want them to achieve next year. Again it involves people and I think that if we can go through the same process, the difficulty is really introducing it in the first place. Now all that we are doing is tweeking it, at least it is not a concept change.

2 Stephen Bevan, IES. Would you say that your sales force is highly incentivised by PRP or highly motivated by your culture participation or style of management.

A very good point. I can't claim that they are incentivised but they are obviously motivated by our style of management and the sort of business that we are in. The excitement surrounding the business and the excitement of the products that we are actually selling. Again there is little doubt that people get very excited when they do a big deal and they are going to get a lot of money out of it. The fact their commission is uncapped means that they always feel that they are never hard done by and we pay some of our people a lot of money for the work that they are doing. Some of our sales people focus on the big deals as opposed to the run rate daily business. If you have got them both then that is even better as it gives one some security. When the big deal drops you can hear the hollering and the whooping a long way away.

3 Brian Pickthall, NPI. The non-sales staff, PRP is budgeted at 10%. I can quite see how you pay for sales staff at 100% commission, but how did you come to the decision about what would be the incentive for other people who are not in that category.

I rather regret to say that it was our Financial Director that told me that was what I was allowed to incentivise people for. Effectively we had budgeted for 10% pay rises for the year and said let's put that as performance related. It was actually about 6% that we had budgeted for, and I said that I would like to go up to 10% if it is PRP, such that we are expecting to pay in between 6% - 8%, and that's actually how it has worked out. What is interesting of course is that again the jump was a conceptual one for our people, in that many of them had never had a PRP Scheme before and that was the big jump, i.e. "are you taking something away from me?". The fact that we introduced it as the pay rise caused a few concerns and a few queries. Now that it has settled down quite nicely, or since we come to this pay rise, are we still going to freeze that basic pay or introduce yet more incentive pay. The answer is Yes, as my Financial Director will allow me to.

4 Richard Game from Metapraxis. You seem to have very strong buy-in from your employees. Business has been very good for the last 5 years and that's economy wise. If the economy has a downturn and we go into recession, what if times are worse, are employees prepared to accept the risk to their salary, if those people haven't got control over performance.

Well I think it is fair to say that the growth in data storage, and the data storage products that we have, is still predicted to go on. However, there is little doubt in the computer industry that margins are becoming wafer thin and we are certainly not enjoying the sort of margins that the distributors got in the 1980s. They are hovering very close to single figures. The storage business is the high end of consultancy work that allows us to get more margin from that, and because we are specialised we are not really shifting boxes in by the million. We are really trying to shift the right boxes to the right people at the right time. However, there is little doubt that we will be affected by the far east recession, but will be benefiting from some of the other things that are affecting the IT industry as well at the moment. For example; the year 2000. People think - "my goodness, it is a bad time for the IT industry" but its a fabulous time for data storage. Just try to imagine how to sell a really large back-up system in November 1999. I think people will be wanting it rather badly, not only that is that the European Monetary Union is also going to have a significant impact on our business as well, as people will really have to double up on their accounting systems which is going to require a double amount of storage. So in terms of the projections, there is still a lot of projected growth in the data storage business. I think when that pops off, we need to look at it quite carefully. We look at it and say do we have to incentivise our people just to maintain their business as to oppose to better and better each year. However, if we do see that our sales people are earning less and less and less, they would be quite quick to show us that they are earning less and less and less, then that might be a time that we might have to put a net into place. So whilst we are not anticipating that in the future, I think that we have discussed the possibilities that when your business is shrinking as opposed to growing, what we might do on that basis, there may be a significant change in policy at that time, currently there are no predictions for that to happen.