SESSION 4b - Incentive Plans
Incentive Plans
p. 1
Types of Variable-Pay-Plans
SESSION 4b - Incentive Plans
Type of Plan
Percent of Companies with Plan
1996
1999
2002
2007
Special-recognition plans
44
59
34
Stock option plans
21
43
40
Individual incentive plans
17
39
38
Cash profit sharing
22
23
18
Gain-sharing plans
16
18
11
Team awards
13
15
8
p. 2
Base vs Variable Pay
SESSION 4b - Incentive Plans
Employee Group
Non exempt
Exempt
Executive
Percent of Total Compensation
Today
Expected in 3 yrs
Base
Variable
Base
Variable
98
92
76
2
8
24
95
85
70
5
15
30
p. 3
Individual Piecework Plans
 With no gain-sharing
SESSION 4b - Incentive Plans
• Based on employee performance by means of observable,
concrete, objective performance evaluations
– Measurable rather than evaluating performance
– Mostly used for production workers
– Based on performance rates
ref . Taylor, Gantt and the Merrick plans
 With gain-sharing
• Employees share with the employer the increase that
results from performance improvement
ref . Halsey, Rowan and the Bedeaux plans
p. 4
Effectiveness of Piecework Plans
SESSION 4b - Incentive Plans
 Piecework plans generally share a number of characteristics
•
•
The work is simple , repetitive and easy to measure
Little if any interchange employees is required
•
Performance standards are clearly set
•
They are accepted by both concerned employees and the management
•
Easy to adjust standards when necessary
•
Cash incentive between 25 to 35% over standard rate generally well
accepted
p. 5
Individual Performance Incentive Plan
 Neither group performance nor organizational
performance is considered
SESSION 4b - Incentive Plans
 Frequently used for sales positions
 However, most performance based plans are mixed
rather than individual
p. 6
Sales Compensation
 Base principles that drive the elements of sales
compensation design?
SESSION 4b - Incentive Plans
• Application of the general principles listed below will
increase the effectiveness of your sales compensation plan
designs.
– Plan designs should support the company’s business
objectives and strategy.
– Target compensation should be market competitive to be
externally attractive for recruiting, retaining and motivating
employees.
– Pay should be managed to target; each individual should
have a fair and equitable opportunity to achieve his or her
target compensation.
p. 7
Sales Compensation
 Base principles that drive the elements of sales
compensation design? (continued)
SESSION 4b - Incentive Plans
– Ratio of base salary and incentive compensation (Mix) should
consistently reflect the level of persuasion of each job.
– Selection of performance measures for each job should be
limited to no more than three results-oriented components.
– Incentive earnings should accelerate above expected levels of
performance to encourage exceptional levels of performance.
– Contests and recognition programs should complement the
base salary and incentive compensation system, not
undermine them.
p. 8
Prominence in the Marketing Mix
 Prominence is a measure of the salesperson’s influence on the
buying decision
– It captures the relative influence of the salesperson compared to the
influence of pricing, advertising, product quality, customer services,
etc…
SESSION 4b - Incentive Plans
 High prominence
– Salesperson heavily involved in differentiating his/her company’s offer
from offers presented by other companies
i.e. a door to door or telemarketing salesperson who seeks to sell
unadvertised and unknown product
 Low prominence
– Salesperson unable to exert much positive influence on the prospect
of business
i.e. a department store or sales counter clerk, pricing practices play a larger
role in the customer’s decision to walk into the store
p. 9
Prominence varies
 A Dynamic Concept
SESSION 4b - Incentive Plans
– Prominence varies as the point of customer contact, product
mix, the sales role and type of customer vary
– Prominence of a given sales job will usually change over time
as well
 Prominence is the key concept in the design of
effective sales force compensation programs
p. 10
Barriers to Entry
 A barrier to entry is a qualification the candidate
must meet to be considered for the job.
SESSION 4b - Incentive Plans
– The greater the number, specificity, and value of these
qualifications, the greater the barriers to entry
 As barriers to entry increase, the available labor
pool decreases and the new hire’s minimum
economic value increases
 Skills and experience required for high-barrier sales
rep probably command some kind of guaranteed
income due to a high demand market environment
p. 11
Basic Barrier/Prominence Relationships
Barriers to Entry
High
High
 Minimally trained rep
 Heavy prospecting
 Multiple suppliers
 Expert/experienced rep
 Product, company,
application must be sold
Low
Prominence
SESSION 4b - Incentive Plans
Low
 Minimally trained rep
 Familiar products
 Established customers
 Technically skilled rep
 Complex product, need
seen, few suppliers
p. 12
Basic Barrier/Prominence Relationships
Barriers to Entry
High
High
 Minimally trained rep
 Heavy prospecting
 Multiple suppliers
 Expert/experienced rep
 Product, company,
application must be sold
Low
Prominence
SESSION 4b - Incentive Plans
Low
 Minimally trained rep
 Familiar products
 Established customers
 Technically skilled rep
 Complex product, need
seen, few suppliers
Fixed
Income
Total Cash
Compensation
p. 13
SESSION 4b - Incentive Plans
Forms of Compensation
Recognition
Intrinsic Rewards
Contests
Focused Efforts
Overtarget
Incentive
Pay
Outstanding
Pay
Target
Incentive
Pay
At Risk Pay
Salary
Retention/
Non-Sales Pay
Benefits
Sales
Expenses
Special
Compensation
Performance-Based
Compensation
Sales
Compensation
Fixed
Compensation
Security
Needs
Reimbursement
p. 14
Pay Mix
How Much Target Pay Should Be At Risk?
Target Compensation
SESSION 4b - Incentive Plans
Target
100%
10
30
50
90
70
50
0%
Low
High
Extent of Mix
Influence of
Salesperson
p. 15
Pay Mix
How Much Upside Earnings Should Be
Available for Outstanding Performance?
Upside
Upsideofof2x
2xisisdepicted
depictedininthe
theexample
examplebelow.
below.
Total Compensation
SESSION 4b - Incentive Plans
Excellence
Upside
60
20
100%
10
OTE
100
2x
2x
2x
30
50
90
70
50
0%
Low
Influence of
Salesperson
High
Extent of Upside Potential
p. 16
Achievement Distribution
What Percent Of Sales Personnel Should
Achieve Target Pay?
60-70%
of Sellers
30-40%
of Sellers
SESSION 4b - Incentive Plans
Number of
Salespeople
Bottom
10% of
Sellers
Top
10% of
Sellers
Threshold
100%
Excellence
Quota Performance

60 to 70 percent achieve or exceed quota

Top 10 percent of sellers earn or exceed excellence pay

Bottom 5 to 10 percent enter performance improvement program
p. 17
Sales Incentive Plans
Upside and Acceleration
Payout Available in
Performance Range
500%
$75,000
2.5x
5:1
Exam ple Target Incentive:
30,000
SESSION 4b - Incentive Plans
4x
250%
$45,000
1.5x
Perform ance
Range
Upside
Com paq
Accel.
0%-100%
1x
1:1
$300
$30,000
100%-150%
1.5x
3:1
$900
$45,000
150%-200%
2.5x
5:1
$1,500
$75,000
200% +
1x
1:1
$300
N/A
Payout
Payout in
Range
3:1
100%
$30,000
1x
0%
0%
100%
Quota
150%
200%
Excellence
• Note: This example is illustrative. Accelerators may vary by region and by role.
• The example shows two acceleration ranges with a decelerator at a given level of
excellence
p. 18
Upside and Acceleration
2002 COMPENSATION SALES PLAN
(with individual goal overachievement accelerators)
Goalsheet
initial $ budgets
budgets
Weighting applied on the
various goals linked to
margins defined by the local
Business Plan with a
multiplier to emphasis BU's
weighting.
SESSION 4b - Incentive Plans
Goals
Variable compensation split by %
resulting from the weighted
margins. A minimum of 10% of
variable should be attributed to a
goal.
Weighting
Volume
The minimum floor
all goals should
attain prior any
overachievement
accelerators be
applied .
The performance
achieved, volume wise,
and the corresponding
weighted performance.
(volume & GM)
Results
BU/Account
Multi
% Variable
GM
pliers
Comp.
%
X
$ mio
Volume
$ mio
Gate
Variable
compensation
paid up to 100%
performance
achievement.
Variable Payout
paid up to 100%
over 100%
100 to 110%
above 110%
Accel. 1
(Goal gating
not attained)
Accel. 2
Accel. 3
10.6%
4.0%
10.6%
4.0%
TOTAL PAYOUT :
109.2% of incentive
%
100
9%
1.0
16%
86
86
13%
70%
13.5%
80
38%
1.0
53%
90
113
60%
70%
53.0%
CSG
50
30%
1.2
31%
45
90
28%
70%
28.2%
Total
xyz
221
Variable
when all gate levels attained
Variable
Variable
Perf.
%
X
Overachievement accelerators
Variable
EBG
100%
100%
Additional variable compensation paid for
overachievement should the minimum
goal achievement been attained.
Weighted
ABG
3
230
Additional variable compensation paid
above 100% performance achievement
should the minimum floor for each goal
not attained (linear accel. of 1 applied).
=
96.1%
101.3%
94.7%
= modifiable field
p. 19
Mixed Performance Based Plans
 Both public and private organizations (1990) in NA
offer this type of plan to :
SESSION 4b - Incentive Plans
• 80% of the companies have one or more performance
bonus plans
• 78% all their managers
• 20% to non-management employees
• 90% to senior executives
p. 20
Incentive Amounts
 May be expressed as a percentage of corporate
profits above a certain threshold
SESSION 4b - Incentive Plans
 Most companies have it expressed as a percentage
of employee’s pay or as a percentage of Total Target
Cash.
 There are different formulas for awarding incentives
that are based on both individual and organizational
performance.
– The split award method
– The multiplier method
– The matrix method
p. 21
Different Formulas Awarding Incentives
 The split award method
– Bonuses depend equally on individual and organizational
performance
– Individual performance may be cancelled out by a poor
organizational performance, and vice versa
SESSION 4b - Incentive Plans
 The multiplier method
– Individual performance score is multiplied by the
organizational performance score
– When individual and organizational both above 100%, it
triggers higher incentives than the split award approach
 The matrix method
– The most widely used method
– Based on employee category and different performance basis
– The higher the position, the higher the impact on the overall
organizational performance on total results
– e.g. CEO 100% on Corporate results
p. 22
Organizational Performance Measurements
• Return on Equity
Profits / Shareholder’s equity
• Return on Investment
SESSION 4b - Incentive Plans
Profits / (Shareholder’s equity + long-term debt)
• Return on Net Assets
Net Profits / (Total assets - current liabilities)
• Other Methods
Sales / Total assets
or
Profits / Sales
p. 23
SESSION 4b - Incentive Plans
Performance Measures
p. 24
Group Performance Bonus Plans
 Mostly appropriate for employees whose work is
interdependant
SESSION 4b - Incentive Plans
• Most effective with small, stable groups of employees
• Less popular than individual ones
• Expected to become increasingly more common in the
years ahead as job structure are shifting toward more
interdependant tasks
p. 25
Types of Group Performance Bonus Plans
 Two main categories:
SESSION 4b - Incentive Plans
• Gain-sharing
– Generally applied to non managerial employees
– Employee must have a direct impact on productivity or costs
to be entitled to a bonus
– Main issue : organizations may be forced to pay bonuses
despite poor financial results
• Profit sharing
– Bonuses based on the organization’s overall performance
– Generally employees receive an automatic fix percentage on
their bases salary when total profits or when a certain
threshold is met.
– Becoming more popular (+/- 25% of cpies having such plan)
p. 26
SESSION 4b - Incentive Plans
Type of Variable-Pay Plans
p. 27
SESSION 4b - Incentive Plans
Type of Variable-Pay Plans
p. 28