All tagged Incentive Plans

Creating a great incentive plan is not as easy as many people initially think. With the guidance of compensation expert, Beth Carroll, this 4 part guide will walk you through best practices for creating a great incentive plan while avoiding many of the common pitfalls.

There are many different ways to compensate and reward employees: commissions, goal-based incentives, bounties, MBOs, time-off, pizza parties, etc.  In some organizations a pure commission model works the best, whereas in others, a goal-based incentive model works best.  What makes the difference?  How can one be “right” for one organization and another right for a different organization?

In recent years there has been a steady increase in the number of companies that offer software solutions which can handle your payroll, incentive plan calculations and reporting. Among them are many web-based solutions as well. These solutions tend to come with dashboards that deliver the results to your employees with frequent updates, or even live data feeds. If you have more complicated plans or a small pool of participants, then you may need to do some shopping to find the right fit, take on an in house project, or stick to Excel.

Now, since we have a pretty good idea of how much to pay, we need to consider what it is you are paying for. It is not, or should not be, as simple as just paying for gross profit (net revenue), as you probably need different types of gross profit to run your business.   You need gross profit from existing customers, and you need gross profit from new customers. You need gross profit that maximizes your network, and minimizes your cost to serve. If you only pay your employees for any gross profit dollar that walk in the door, you may find you are getting gross profit dollars that are pretty wrinkly and worn out, when you’d really rather get some nice new crisp bills in hand. So, how to decide what to use in your incentive plan?

Upside is the amount of pay that a top performer can earn, and downside…well…you can guess that one…it’s how much risk there is on the downside for a poor performer.  Leverage refers to the plan design ratio of the top 10 percent (decile) performer relative the median performer, and dispersion refers to the amount of leverage that a plan actually achieves.  So let’s unpack these one at a time.

Incentive plan measures must be both objective and quantifiable but performance plan measures can be subjective and qualitative. Because so many elements differentiate a successful sales representative from an unsuccessful one, it is critical to create two sets of performance measures: one for the incentive plan and one for the performance management plan.

Most organizations use some kind of pay for performance program for their employees. There are cash incentive plans and non-cash incentive plans. The non-cash incentives include trips and recognition programs.

Whenever you implement or change your incentive plan, you should use the best performance measures possible.  A “performance measure” is the metric by which you are gauging an employee’s results, such as revenue, profit dollars, profit percentage, net income, EBITDA, number of new customers, number of customer calls, number of invoices processed, etc.

…you need to be very careful how you design your incentive plan or you just might end up dealing with some unexpected consequences, and possibly paying out more than you intended, or worse, getting no measurable return (or negative return!) for dollars you are spending.

The risks of having poorly documented incentive compensation plans range from your employees not understanding the plan and therefore not being motivated by it (leaving your sales director scratching his head as to the lack of results, and possibly his lack of job!), to legal battles with former employees who are claiming they are owed back incentive pay due to vague, inaccurate, or misleading wording in the plan document. At a minimum, well-written incentive plans must have the following components