Incentive Compensation - Making or Breaking Your Success

Dick RylanderPresident

BioPharmaceutical Strategies LLC

Session Objectives

To get you to ask questions and

Think Out-Of-The-Box

• Understand why you want/need an IC plan• Use IC as a tool to drive success• Determining who to incentivize and why• Developing an IC planning process• Reviewing a case example

What is an Incentive?

Main Entry: in·cen·tive Pronunciation: in-'sen-tivFunction: nounEtymology: Middle English, from Late Latin incentivum, from neuter of incentivus stimulating, from Latin, setting the tune, from incentus, past participle of incinere to set the tune, from in- + canere to sing -- more at CHANT: something that incites or has a tendency to incite to determination or actionsynonym see MOTIVE

What does Motivate mean?Main Entry: mo·tive

Pronunciation: 'mO-tiv, 2 is also mO-'tEvFunction: nounEtymology: Middle English, from Middle French motif, from motif, adjective, moving, from Medieval Latin motivus, from Latin motus, past participle of movEre to move1 : something (as a need or desire) that causes a person to act2 : a recurrent phrase or figure that is developed through the course of a musical composition3 : MOTIF- mo·tive·less /-l&s/ adjective- mo·tive·less·ly adverb- mo·ti·vic /mO-'tE-vik/ adjectivesynonyms MOTIVE, IMPULSE, INCENTIVE, INDUCEMENT, SPUR, GOAD mean a stimulus to action. MOTIVE implies an emotion or desire operating on the will and causing it to act <a motive for the crime>. IMPULSE suggests a driving power arising from personal temperament or constitution <buying on impulse>. INCENTIVE applies to an external influence (as an expected reward) inciting to action <a bonus was offered as an incentive>. INDUCEMENT suggests a motive prompted by the deliberate enticements or allurements of another <offered a watch as an inducement to subscribe>. SPUR applies to a motive that stimulates the faculties or increases energy or ardor <fear was a spur to action>. GOAD suggests a motive that keeps one going against one's will or desire <thought insecurity a goad to worker efficiency>.

5 Key factors

• The decisions you make about:

– Why to incent– What to incent on– Who to incent– How to incent– When to Incent

• Will make or break your success & goals

Questions…

• Thinking through a plan– Why do you have a plan?– How do incentives motivate (or not)?– What are you seeking to achieve?– Will having an incentive plan motivate your people to do more?– Which positions/jobs should be incentivized?

• How does each of the positions impact the success parameters?

– What should the components of an IC plan be?– What should you pay on?– Who impacts results?– Individual or group and why?– Are the incentives supporting the company goals

Why have an IC Plan?

• Because everyone else does

• We need to because the marketplace requires us to (to be competitive)

• Everyone expects it

• It’s a motivational tool

• It’s a way to reduce salaries

• It rewards only if we are successful

Have an IC plan because…

It helps you achieve your goals & objectives

It produces activities or behaviors that would not otherwise occur (assuming that those are the efforts that will be productive)

It rewards those who actually are key to producing the results

It produces an ROI that meets your need

IC Plans are a tool to meet goals

• Pay incentives to help assure you will meet your company goals

• Determine what activities and behaviors you need to assure goal achievement– Define those activities/behaviors for each position

• If your incentive plan doesn’t get people to do what you need done, the way you need it done and when you need it done you hurt success and even run the risk of damaging performance

What to incent on?

• Sales?

• Meeting goals?

• Special projects?

• Activities?

• What can you measure and report on?

• How does each differently impact results?

Who to incent?

• Most companies focus on field sales– Is that the best way to go?

• Do some non-field people have a major impact on success? – Who and why?

• Should all positions receive the same plan, payout rates, etc.?

• What is success? (Meeting goals?)

How should you incent?

• Do you use cash?• Prizes?• Plaques, trophies and certificates?• An ongoing “traveling” award• Contests?• Stock options or grants?• What level?

– National?– Regional?– District?– Group?– Individual?– Combination?

When should you pay?

• Spot (finding people doing things right)?

• Monthly, quarterly, bi-annual, annual?

• Are the payout timeframes the same for all positions?

• How often do you need to pay to keep a good “line-of-sight” and motivate ongoing efforts?

Designing an IC process

Create a cross functional team that will:a) Represent all groups who impact results

b) Gather information

c) Act as a conduit for two way communication and feedback

d) Will evaluate the various options

e) Communicate with the organization to show the effort and reinforce the results

Establish objectives timeline’s

• Establish what the team is to do– Determine who should be incentivized and why

• Assign a team leader to coordinate and produce summary reports following each meeting to be sent to all members

• Define the start/completion timeframe• Create specific meeting dates with actions for

each meeting• Be prepared to organize the team members into

either individual assignments or create sub-teams with specific responsibilities

Define the questions to answer

• What should the plan accomplish?• What is the optimal outcome?• What kind of ROI are you looking for?• How will you measure success of the plan?• Does the plan support company goals?• Do department or group goals align?• Which positions should be incentivized?• Is a plan only for field sales or should it include other

parts of the organization and if so who and why?• How frequently should incentive be paid and why?• Should an IC plan be cash only or include prizes, trips,

etc.?

Assessing positions

After you define which positions you want to consider for an IC plan create a template for the team members to use to organize their thoughts:

Template

Example of results of the process

Goals:

• Develop a plan that ties each positions ability to impact results to their incentive compensation

• Align efforts of all positions to assure maximum effectiveness, cooperation and results

Example (cont’d)

Territory Managers

Assumptions:1. TM’s target earnings are $xx,xxx/yr = $x,xxx/qtr2. Quarterly payouts

3 parts: Enrollments with an *objective by region/district

• Each TM shares equally (ex: 95% = .95) Quarterly sales target for the region

• Minimum of 85% to activate up to 100%• Annual over 100% the rate is 2x for the +%

TM’s in **tiered groups (like assignments) • Performance (shipments) as a % of the average for tier

Example (cont’d)

Discussion

• Focus on enrollments because that’s what they can most impact

• Tie enrollments to sales by requiring sales performance minimums as a qualifier

• Add an individual component by “tiering” like territories to encourage individual effort in conjunction with the team

• If annual sales (by region with nation meeting the plan) exceed the plan then their earnings are multiplied at a 2x rate. – Ex: NE region = 105% of their sales objective then their earnings

are settled at 110%

RSM

Assumptions: Annual target earnings are $xx,xxx = $x,xxx/qtr80% of their time is Product 1 and 20% is Product 2Impact is their assignment + define TM’s (Super

Territory)• Payments made quarterly• Performance (for Product 1) is based on a

“Super Territory” which is comprised of their assignment + defined impact TM’s

• 2 components– S.T. enrollment goal– S.T. sales objective

BD Recommendations

AssumptionsAnnual IC = $XXk = $xx,xxx/qtrQuarterly payouts would improve effort/effectiveness

Top 3 areas they can impact:Contribution

1.Enrollments2.DC’s3.Sales

Hiring/training/developing/retaining peopleCoaching

Example (cont’d)

• This process was repeated for each position in the field organization

• Ultimately this lead to plans for reps, managers, MSL’s, NAM’s, trainers, marketing and select non-field personnel

Non-Cash Incentives

Contests Annual National Contest

TM’s (x); RSM’s(x); NAM (x); MSL (x); BD (x) Recognizes and rewards based on IC factors

Regional level contest(s)April – September & October – March

Crosses years to continue efforts beyond fiscalRecognizes and rewards activities and behaviors that

lead to success (not IC factors)

Special Recognition Programs

Purpose: To offer a non-cash method of recognizing

colleagues across the organization for efforts and are results

Method: A points program where colleagues accumulate

points to be used to purchase merchandise through an on-line catalog

Summary

• Cross functional involvement and buy-in is essential• Defined, specific and measurable goals and action steps

are critical• A well thought out and coordinated IC plan will drive

results• A poorly or half baked plan will demotivate and damage

results• You MUST have a well thought out, tested, measurable

and reported plan with sufficient frequency to keep a high visibility

• If you can’t commit to doing it right don’t do it at all

Where are you at and where should you be?