In either case, however, adding working capital metrics to compensation formulas makes the whole area more visible. As part of its working capital overhaul, The New York Times Co. added DSO, among other items, into the benchmarks that it uses in the annual bonus computation for certain executives. The result, says Stoller, is “focus and visibility. People need to know why they’re doing something, what it means to the company, and what it means to them.”
Keane has added a DSO target alongside the revenue target in its compensation formula for business unit executives — and particularly for its salespeople, who are now expected to help accounts receivable address the problem when customers become late payers. Eastman Chemical has DSO targets for the heads of its divisions and business units that are a component of their performance evaluations. Hall, the treasurer, says these targets are essential for translating corporate-level goals for working capital improvement into sustainable, everyday practices.
Some companies use more tailored metrics. For example, fragrance company Coty Inc. uses management cash flow, which measures cash flow capability at the local level using only those variables the local business unit is able to control. Kellogg Co. uses percentage of net sales — the 12-month average of receivables and inventories, less the 12-month average for payables, divided by the last 12 months of sales performance.
Either way, the incentives have to be linked to every individual who touches the working capital process, some executives say. At Merillat Industries LLC, a manufacturer of kitchen and bathroom cabinetry, “it’s top to bottom,” says CFO W. Jay Potter. “Even our accounts payable clerks’ compensation includes days purchases in payable metrics, because a lot of what they do affects how quickly you issue the check.”
This article is excerpted and adapted from Excellence in Working Capital Management, a report that summarizes the findings of a mail survey of executives at 196 companies and in-depth interviews with executives at 16 companies. CFO Research Services and GE Commercial Finance developed the hypotheses for the research jointly. GE funded the research and the publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.