analyze how individual behavior, personality traits, and interpersonal skills influence organizational culture, decision-making, and performance in a startup environment.

9-120-008 A U G U S T 8 , 2 0 1 9

HBS Professor Susanna Gallani and Professors Jan Bouwens and Peter Kroos (University of Amsterdam) prepared this case. This case is not based on a single individual or company but is a composite based on the author’s general knowledge and experience. Funding for the development of this case was provided by Harvard Business School. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

S U S A N N A G A L L A N I

J A N B O U W E N S

P E T E R K R O O S

Bark Gift Shop Ltd.

Myriam Beatty, CFO of Bark Gift Shop Ltd. (BGS), was disappointed in her shop managers. Looking straight across the table at CEO Herman Dearden, she said, “They are holding back. On purpose! They could be selling more, but they don’t, and so we miss our targets. It’s like they are playing a game, but what I don’t like is that they are playing against the company. I just can’t believe it." Dearden looked at the evidence that Beatty had produced and asked, “What are our options? What do we need to differently so that this does not happen again?”

Beatty and Dearden had always believed that hiring the right people in key roles was a critical success factor. Therefore, they invested heavily in the selection and retention of shop managers. For example, on the day of the interview, a driver hired by the company would pick up job applicants at their home to take them to the interview location. The chauffeur was subsequently interviewed and asked to report on how the applicant treated them. Their report was carefully considered when evaluating the candidate’s overall performance. Any negative assessment would diminish the applicant’s chance of being hired as a shop manager. Beatty and Dearden worked hard to maintain an organizational culture where values such as respect, collaboration, and hard work were truly embedded in every aspect of the operations. To support collegiality and foster their employees’ engagement with the firm, Beatty and Dearden threw a party for the entire staff every year and surprised the staff with unexpected gifts on a regular basis. They would personally visit the best shop manager of the year to recognize their performance, but they would also visit shop managers whose performance might be struggling to help them improve. After all that they were trying to do to support their staff, the realization that some shop managers were gaming the system at the expense of the company was all the more hurtful.

Company Background Bark Gift Shop ltd. was a leading gift shop chain in the UK. Founded in the late 1960’s, the company

began by selling discounted products, a strategy that proved to be successful until 2005, after which they had moved toward higher end products. BGS had enjoyed rapid growth.

After earning her CPA license, Beatty worked for many years as an auditor in a public accounting firm, after which she worked for one of the major department store chains in the US in a senior finance

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role. She became CFO of BGS in 2012. Together with Dearden, Beatty had been a key contributor to the firm’s huge success UK-wide. They had been opening company-owned shops at a rapid pace - about 20 new shops per year.

By 2017, the firm operated 400 retail shops, employed 2,950 people, and generated 338 million in revenue (see Exhibit 1 for information on the company’s financial performance over time). In 2017, the firm was primarily active in England and Wales. Their markets were subdivided into regions (England comprised of three regions, while Wales constituted a region by itself). Each region was further organized into clusters, each counting seven to nine shops. The firm’s strategy was two-fold: to maintain its market leadership within the UK and to export the store formula to North-Western Europe. Increasing competition from e-commerce retailers, however, started to threaten the sustainability of the company. Survival, let alone growth, hinged on the firm’s ability to create value for customers in a way that e-shops could not. Bark shops’ staff strived to help and advise customers so that they could find exactly the present they would love to give to a relative or a friend. Superior customer service was the focus of BGS' strategy and its competitive advantage.

Roles and Responsibilities At BGS, decisions regarding product mix, pricing, marketing, and advertising rested with the top

management team. Shop managers were responsible for the day-to-day operations of the stores. New product offerings arrived in shops with instructions on how to sell them. A document developed by top management and titled "How to approach the market" included a detailed set of directives for the shop managers, such as providing timely and clear feedback to sales assistants, focusing on customer needs without engaging in hard-selling, and improving shop appearance. Shop managers were expected to comply with these directives.

Shop managers were encouraged to create an atmosphere such that shoppers would want to enter a Bark Gift Shop. Shop cleanliness and friendly personnel represented the minimum requirements. Management strongly believed that sales could be favorably impacted by shop managers who themselves demonstrated to be ‘fans’ of the products they sold, and that exhibited genuine interest in helping their clients. Shop managers needed to be good at asking questions to help customers find the right present. Shop managers did their best to acquire as much product information as possible, and participated in skills training where they would learn, for example, how to identify what kind of present customers might be looking for in an effective but respectful manner, or advise clients on how to best surprise a friend with a gift.

Regional managers oversaw clusters of stores. Their role was mainly to provide advice and support to individual shops. They visited individual shops frequently to monitor shops' performance and to ensure that shop managers adhered to corporate directives on how to sell their products and how to treat their customers.

Shop Managers' Compensation

The firm’s incentive system was based on two main components: a quarterly bonus and salary increases. Shop managers earned a quarterly bonus if they exceeded their sales target. The bonus was determined based on the following calculation:

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵(𝐺𝐺𝐵𝐵𝐺𝐺) = 130 ∗ (𝑄𝑄𝐵𝐵𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵 − 𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵 𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄)

𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵 𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄 + 1% ∗ (𝑄𝑄𝐵𝐵𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵 − 𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵 𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄)

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Bark Gift Shop Ltd. 120-008

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However, since labor costs represented the second largest expense after the cost of goods sold (see Exhibit 1) and shop managers had discretion over the deployment of their sales teams (e.g., number of sales associates assigned to each shift, overtime, etc.), management had included in the bonus calculation a provision to protect profitability. In fact, if the shop exceeded its budgeted labor hours, the bonus would be reduced by an amount calculated based on the following formula:

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐷𝐷𝑄𝑄𝐷𝐷𝐵𝐵𝐷𝐷𝑄𝑄𝐷𝐷𝐵𝐵𝐵𝐵 (𝐺𝐺𝐵𝐵𝐺𝐺) = 70 ∗ (𝑄𝑄𝐷𝐷𝑄𝑄𝐵𝐵𝑄𝑄𝑆𝑆 ℎ𝐵𝐵𝐵𝐵𝑄𝑄𝐵𝐵 − 𝑏𝑏𝐵𝐵𝐷𝐷𝑇𝑇𝑄𝑄𝑄𝑄𝑄𝑄𝐷𝐷 ℎ𝐵𝐵𝐵𝐵𝑄𝑄𝐵𝐵)

𝑏𝑏𝐵𝐵𝐷𝐷𝑇𝑇𝑄𝑄𝑄𝑄𝑄𝑄𝐷𝐷 ℎ𝐵𝐵𝐵𝐵𝑄𝑄𝐵𝐵

In extreme cases, if the labor hours overrun was severe, the bonus could go all the way to zero. There was no discretionary component on the bonus calculation. That is, the amount paid out to the shop manager would always correspond to what was calculated using the above formulas. Because of the strict adherence to the formulas, there was significant variation in the bonus paid out to shop managers (see Exhibit 2). On average, bonuses represented about 10% of the shop manager’s total compensation.

Performance Appraisals and Salary Decisions

In addition to quarterly bonuses, management rewarded shop managers with annual pay raises. These increases in salary were based on performance appraisals by regional manager, to whom shop managers reported, at the end of each fiscal year.1 The assessment was largely subjective and focused on two dimensions of performance: whether the shop manager had met or exceeded their sales targets throughout the year and the extent to which she had complied with firm directives relative to how to attract and deal with customers. For each dimension, the regional manager would classify the shop manager's performance as favorable, sufficient, or unfavorable. Of the resulting nine-block framework (Exhibit 3), two assessment combinations were deemed to be inapplicable ex-ante. Management did not believe that a shop manager could significantly exceed targets without following the directives. Similarly, high compliance with the directives could not lead a shop manager to underperform to the level of an unfavorable sales performance evaluation. The assessment determined whether the manager received an increase in salary and, if so, how large the increase would be. On average, shop managers whose performance was assessed as "outstanding” would receive a 5% raise, those whose performance was assessed as "good" would obtain a raise of approximately 3.5%, those with “standard” performance would see their fixed salary increase by approximately 2%, while shop managers reporting “substandard” performance would get no salary increase at all. Exhibit 4 reports the distribution of appraisal scores, bonus payoffs, and salary increases for 2017.

Target Setting

Beatty was responsible for setting targets. During her years at the retail chain, Beatty had learned that it was not a good idea to set targets in a way that individual managers would always achieve them, but neither to set targets that a manager could never achieve. The concern was that managers who met targets in more than one consecutive year could become confident that they will also achieve the next target, and would soon become complacent and bored with their job (see Exhibits 5a and 5b). On the other hand, however, managers who never met their target could begin to hate their job and leave the firm disgruntled. “One could think that underperforming managers leaving the company might not be a bad thing. Good riddance, right?” she said, “We want to keep our best employees and make it worth their while. If they perform well, we reward them well. If good shop managers are happy with their

1 As for many retail companies, the fiscal year for Bark Gift Shops Ltd. Went from October 1 to September 30. Therefore, the annual performance appraisal took place in the month of September of each year.

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pay, they are more likely to keep working for us." Yet, she also knew that finding the right balance along the continuum between complacency and giving up was difficult. Targets needed to be set appropriately so that they would encourage shop managers to work hard.

To set next year's targets, Beatty used prior year performance as the starting point. Next year targets were almost always set at a higher level than prior year ones. In meetings with regional managers, Beatty had often stated that targets should be achievable, but challenging. "On average, our shops are working at 80% of their capacity. Therefore, I want to push them to do more, because they can. If I set their targets at the same level as last year, we would all become complacent and the company would stop growing. I want my shop managers to be creative, and figure out ways to sell more. They have the skills and we will always support them. But we also expect them to deliver," she stated.

The calculation started with assessing the shop manager's deviation from targets in the prior year. For example, if in the prior year a shop manager exceeded a target of 100, her target for the upcoming year would be raised to 120. If the shop manager had not reached her target in the prior year, her new target would remain at 100. Beatty would evaluate the reasons for underperformance using the regional managers annual assessments as input. If it appeared that there were no exogenous reasons for the shop manager to miss a target, the target for the following year could very well increase. However, if there were apparent reasons suggesting that such a target would be unattainable (e.g., a competing store just opened in the same neighborhood), Beatty would lower the target, for example, to 95. Shop managers had some very limited room for negotiation.

Once the annual targets were set, Beatty would convert them into monthly sales targets considering seasonal patterns, for example the holiday season. Since bonuses were awarded on a quarterly basis, monthly sales targets were then aggregated into quarterly targets.

In response to some complaints from the shop managers, claiming that the targets were too aggressive, Beatty analyzed the relation between shop performance and target difficulty. She measured target difficulty as

𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄𝐷𝐷𝐷𝐷𝑇𝑇𝑇𝑇𝐷𝐷𝐷𝐷𝐵𝐵𝑆𝑆𝑄𝑄𝑇𝑇(𝑡𝑡) = 𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄𝑡𝑡 − 𝐴𝐴𝐷𝐷𝑄𝑄𝐵𝐵𝑄𝑄𝑆𝑆𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵(𝑡𝑡−1)

𝐴𝐴𝐷𝐷𝑄𝑄𝐵𝐵𝑄𝑄𝑆𝑆𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵(𝑡𝑡−1)

Shop performance, was calculated as follows:

𝐺𝐺𝑄𝑄𝑄𝑄𝑇𝑇𝐵𝐵𝑄𝑄𝑃𝑃𝑄𝑄𝐵𝐵𝐷𝐷𝑄𝑄(𝑡𝑡) = 𝐴𝐴𝐷𝐷𝑄𝑄𝐵𝐵𝑄𝑄𝑆𝑆𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵𝑡𝑡 − 𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵𝑡𝑡

𝑇𝑇𝑄𝑄𝑄𝑄𝑇𝑇𝑄𝑄𝑄𝑄𝑆𝑆𝑄𝑄𝑆𝑆𝑄𝑄𝐵𝐵𝑡𝑡

She then compared, for each shop, target difficulty and annual performance. The results of her analyses showed that, in the majority of the cases, shops that were assigned more aggressive targets would perform better than those that were assigned easier targets (see Exhibit 6). Beatty was pleased. Her shop managers were rising to the challenge and her targets were not really as hard to attain as the complaints were portraying.

The Sales Management Issue In early 2018, Beatty had decided to look deeper into her shop managers’ performance. As expected,

there was variation across stores and regions. However, in some cases, she started to notice some unusual patterns. In particular, in certain stores, performance would be high for the most part of the year, and then it would suddenly fall in the summer months. Some stores outperformed others by 10% on average in the first three quarters, but then their performance would become indistinguishable in

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Bark Gift Shop Ltd. 120-008

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the last quarter of the year. While their business was certainly subject to seasonality, it just did not make sense to her that certain stores would suffer in the summer more than others, especially when they had exceeded their targets by a wide margin for the rest of the year.

Looking more closely into the data, Beatty noticed that his pattern seemed to be more common among those stores that performed the best overall in the year. In other words, her top 40 stores were those that exhibited this weird pattern. Interestingly, even when performance deteriorated in the last quarter, these stores would rarely miss their quarterly target. This did not seem to be a random event. She was convinced that these outcomes were the result of deliberate actions by shop managers, and she was not happy about it. This needed to be addressed and fixed soon, as the company was leaving money on the table. She turned to Dearden and suggested, "Let me look into this. I will get back to you with some recommendations in the next couple of days.”

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Exhibit 1 Bark Gift Shop Ltd. - Income Statement 2011-2017

2011 2012 2013 2014 2015 2016 2017

Sales 236,572 253,470 270,368 287,266 304,164 321,062 337,960 Cost of goods sold 113,555 139,409 145,999 140,760 164,249 163,742 165,600 Gross Margin 123,017 114,062 124,369 146,506 139,915 157,320 172,360 Wages 82,800 88,715 94,629 100,543 106,457 112,372 118,286 Rent 16,800 17,400 17,600 18,360 19,080 19,000 18,000 Advertising 3,567 3,745 3,933 4,129 4,336 4,552 4,780 Administration 1,371 1,439 1,511 1,587 1,666 1,749 1,837 Interest 2,602 2,788 2,974 3,160 3,346 3,532 3,718 Depreciation 180 198 218 240 264 290 319 Training 329 362 398 438 482 530 583 Total expenses 107,649 114,647 121,262 128,456 135,630 142,025 147,522 Profit Before tax 15,368 (586) 3,107 18,049 4,285 15,295 24,837

Source: Casewriters.

Note: All values are in GBP ‘000.

Exhibit 2 Quarterly Bonus Pay-Out Information

Quarter Percentage of managers earning a bonus in the specific quarter

1st 58% 2nd 50% 3rd 48% 4th 35%

Number of quarters in which a bonus was earned Percentage of managers earning a bonus in the indicated number of quarters in one year

1 21% 2 20% 3 17% 4 20%

Source: Casewriters.

Note: This table reports bonus payouts to shop managers over 24 consecutive quarters (six years). The top half reports the percentage of managers who attained the quarterly target and earned a bonus in the first, second, third, and fourth quarters, respectively. The bottom section reports the percentage of managers who earned a bonus in one, two, three, or four quarters in the same year.

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Exhibit 3 Annual Assessment Criteria - 9-blocker

Source: Casewriters.

Note: The evaluation along each dimension would be represented as follows. Compliance with Directives: A = favorable; B = sufficient; C = unfavorable; Sales Performance: 1 = favorable; 2 = sufficient; 3 = unfavorable. The percentages indicated in each cell represent the expected increase in salary associated with corresponding combined evaluations. Management did not classify any shop manager in the A3 or C1 cells.

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Exhibit 4 Shop Manager Achievements and Appraisal Distribution in 2017

Financial Score Directive Compliance Score A B C

1

Combined appraisal scores (% Managers) 7.0 8.5 N.A. Bonus pay outs (% Managers) 8.6 10.2 Sales target deviation (Mean %) 9.71 4.74 Sales change (Mean %) 14.89 10.84 Labor hours target deviation (Mean %) -6.39 -7.07 Bonus (Mean % salary) 17.20 11.06 Salary increase (Mean %) 5.1 3.4 Sales target update (Mean %) 15.90 11

2

Combined appraisal scores (% Managers) 17.4 52.4 3.7 Bonus pay outs (% Managers) 19.9 50.4 2.3 Sales target deviation (Mean %) 3.52 11.88 -9.71 Sales change (Mean %) 8.07 5.83 -3.42 Labor hours target deviation (Mean %) -2.65 -3.40 -1.76 Bonus (Mean % salary) 10.46 9.30 0.83 Salary increase (Mean %) 3.4 1.7 0 Sales target update (Mean %) 10.01 8.72 -4.11

3

Combined appraisal scores (% Managers) N.A. 7.0 4.0 Bonus pay outs (% Managers) 5.9 2.7 Sales target deviation (Mean %) -1.08 -6.27 Sales change (Mean %) 4.27 -22.13 Labor hours target deviation (Mean %) 2.03 -7.99 Bonus (Mean % salary) 8.62 5.74 Salary increase (Mean %) 0 0 Sales target update (Mean %) 7.31 3.15

Source: Casewriters.

Note: Performance appraisal scores on financial performance (vertical) and directive compliance (horizontal) result in a combined appraisal score in the table. Each cell provides information on the percentage of shop managers with their respective performance appraisal score (Combined appraisal scores (% Managers)), the percentage of shop managers with a bonus pay-out > 0 (Bonus pay outs (% Managers)), the sales target deviation defined as actual sales minus target sales (mean %), the sales change (mean %) defined as actual sales in period t minus actual sales in period t-1, labor hours target deviation (mean %) defined as actual labor hours minus target labor hours, bonus (mean % of annual salary) denotes the average bonus expressed as percentage of yearly salary (excl. bonus), salary rise (mean %) denotes the career specific salary increase, and sales target update (mean %) denotes sales target in period t+1 minus sales target in period t. C1 (bottom compliance score and top financial) and A3 (top compliance score and bottom financial score) appraisal scores were generally not awarded.

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Exhibit 5a Target Achievement Patterns: Number (Percentage) of Shop Managers

Target achievement over two consecutive years Target not achieved in 2017 Target achieved in 2017

Target not achieved in 2016 86 122

(41.35%) (58.65%)

Target achieved in 2016 127 162

(43.94%) (56.06%)

Target achievement over three consecutive years Target not achieved in 2017 Target achieved in 2017

Target not achieved in 2015 and 2016 14 24

(36.84%) (63.16%)

Target achieved in 2015 and 2016 55 59

(48.25%) (51.75%)

Source: Casewriters.

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Exhibit 5b Shop-level Patterns of Performance over Three Years - Examples

Shop ID Year Sales/Targets

5

2015 Sales: £510,770 Target: £ 521,848

2016 Sales: £ 547,549 Target: £ 555,000

2017 Sales: £ 525,969 Target: £ 570,000

33

2015 Sales: £ 834,332 Target: £ 764,620

2016 Sales: £ 946,252 Target: £ 885,000

2017 Sales: £ 919,261 Target: £ 1,004,000

66

2015 Sales: £ 962,037 Target: £ 950,670

2016 Sales: £ 1,091,064 Target: £ 970,000

2017 Sales: £ 1,060,713 Target: £ 1,124,000

76

2015 Sales: £ 817,766 Target: £ 816,805

2016 Sales: £ 876,967 Target: £ 870,000

2017 Sales: £ 836,346 Target: £ 913,000

Source: Casewriters.

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Exhibit 6 Target Difficulty and Shop Performance

Source: Casewriters.

Note: The x-axis refers to target difficulty, while the y-axis relates to shop performance levels.

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