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Incentive PlansIncentive Plans

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Types of Variable-Pay-PlansTypes of Variable-Pay-Plans

Type of 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

Percent of Companies with Plan

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Base vs Variable PayBase vs Variable Pay

Employee Group Base Variable Base Variable

Non exempt 98 2 95 5Exempt 92 8 85 15Executive 76 24 70 30

Today Expected in 3 yrsPercent of Total Compensation

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Individual Piecework PlansIndividual Piecework Plans

With no gain-sharing

• 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

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Effectiveness of Piecework PlansEffectiveness of Piecework 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

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Individual Performance Incentive PlanIndividual Performance Incentive Plan

Neither group performance nor organizational performance is considered

Frequently used for sales positions

However, most performance based plans are mixed rather than individual

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Sales CompensationSales Compensation

Base principles that drive the elements of sales compensation design?

• 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.

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Sales CompensationSales Compensation

Base principles that drive the elements of sales compensation design? (continued)

– 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.

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Prominence in the Marketing MixProminence 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…

High prominence– Salesperson heavily involved in differentiating his/her

company’s offer from offers presented by other companiesi.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 businessi.e. a department store or sales counter clerk, pricing practices play a larger role in the customer’s decision to walk into the store

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Prominence variesProminence varies

A Dynamic Concept

– 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

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Barriers to EntryBarriers to Entry

A barrier to entry is a qualification the candidate must meet to be considered for the job.

– 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

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Basic Barrier/Prominence RelationshipsBasic Barrier/Prominence Relationships

Expert/experienced rep Product, company,

application must be sold

Minimally trained rep Heavy prospecting Multiple suppliers

Technically skilled rep Complex product,

need seen, few suppliers

Minimally trained rep Familiar products Established customers

Barriers to Entry

Pro

min

en

ce

Low High

High

Low

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Basic Barrier/Prominence RelationshipsBasic Barrier/Prominence Relationships

Expert/experienced rep Product, company,

application must be sold

Minimally trained rep Heavy prospecting Multiple suppliers

Technically skilled rep Complex product,

need seen, few suppliers

Minimally trained rep Familiar products Established customers

Barriers to Entry

Pro

min

en

ce

Low High

High

Low

Total CashCompensatio

n

FixedIncome

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Forms of CompensationForms of Compensation

OvertargetIncentive

Pay

Recognition

Contests

TargetIncentive

Pay

Salary

Benefits

Sales Expenses

Intrinsic Rewards

Outstanding Pay

At Risk Pay

Retention/Non-Sales Pay

SecurityNeeds

Reimbursement

SpecialCompensation

SalesCompensation

FixedCompensation

Performance-BasedCompensation

Focused Efforts

OvertargetIncentive

Pay

Recognition

Contests

TargetIncentive

Pay

Salary

Benefits

Sales Expenses

Intrinsic Rewards

Outstanding Pay

At Risk Pay

Retention/Non-Sales Pay

SecurityNeeds

Reimbursement

SpecialCompensation

SalesCompensation

FixedCompensation

Performance-BasedCompensation

Focused Efforts

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Pay MixPay Mix

Influence ofSalesperson

Target Compensation

0%

100%

70

30

50

50

90

10

Low High

Extent of Mix

Target

How Much Target Pay Should Be At Risk?How Much Target Pay Should Be At Risk?

Influence ofSalesperson

Target Compensation

0%

100%

70

30

50

50

90

10

Low High

Extent of Mix

Target

How Much Target Pay Should Be At Risk?How Much Target Pay Should Be At Risk?

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Pay MixPay Mix

0%

100%

70

30

60

50

50

100

90

10

20

Low High

Extent of Upside PotentialInfluence ofSalesperson

Total Compensation

How Much Upside Earnings Should BeAvailable for Outstanding Performance?

OTE

Upside

Excellence

Upside of 2x is depicted in the example below.Upside of 2x is depicted in the example below.

2x2x

2x

0%

100%

70

30

60

50

50

100

90

10

20

Low High

Extent of Upside PotentialInfluence ofSalesperson

Total Compensation

How Much Upside Earnings Should BeAvailable for Outstanding Performance?

OTE

Upside

Excellence

Upside of 2x is depicted in the example below.Upside of 2x is depicted in the example below.

2x2x

2x

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Achievement DistributionAchievement Distribution

Threshold 100%

Number ofSalespeople

30-40%of Sellers

60-70%of Sellers

Excellence

Top10% ofSellers

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

Bottom10% ofSellers

What Percent Of Sales Personnel ShouldAchieve Target Pay?

Threshold 100%

Number ofSalespeople

30-40%of Sellers

60-70%of Sellers

Excellence

Top10% ofSellers

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

Bottom10% ofSellers

What Percent Of Sales Personnel ShouldAchieve Target Pay?

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Sales Incentive PlansSales Incentive Plans

Upside and AccelerationUpside and Acceleration

4x

Excellence

0%0% 100% 150% 200%

100%

500%

250%

Quota

1x

1.5x

2.5x

$45,000

$75,000

$30,000

Payout Available in Performance Range

• 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

• 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

Example Target Incentive: 30,000

Performance Range Upside

Compaq Accel. Payout

Payout in Range

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

3:1

5:1

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Upside and AccelerationUpside and Acceleration

2002 COMPENSATION SALES PLAN (with individual goal overachievement accelerators)

Goals Weighting Results Gate Variable Payout Overachievement accelerators

Volume BU/Account Multi % Variable Volume Weighted Variable Variable Variable Variable

GM pliers Comp. Perf. paid up to 100% over 100% 100 to 110% above 110%

% X Accel. 1 (Goal gating Accel. 2 Accel. 3$ mio $ mio % % not attained)

ABG 100 9% 1.0 16% 86 86 13% 70% 13.5%

EBG 80 38% 1.0 53% 90 113 60% 70% 53.0% 10.6% 4.0%

CSG 50 30% 1.2 31% 45 90 28% 70% 28.2%

3 100%Total 230 100% 221 96.1% 101.3% 94.7% 10.6% 4.0%

TOTAL PAYOUT : 109.2% of incentivexyz = modifiable field

when all gate levels attained

Variable compensation split by % resulting from the weighted margins. A minimum of 10% of variable should be attributed to a goal.

Weighting applied on the various goals linked to margins defined by the local Business Plan with a multiplier to emphasis BU's weighting.

Variable compensation paid up to 100% performance achievement.

Additional variable compensation paid above 100% performance achievement should the minimum floor for each goal not attained (linear accel. of 1 applied).

Additional variable compensation paid for overachievement should the minimum goal achievement been attained.

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)

Goalsheet initial $ budgets budgets

X =

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Mixed Performance Based PlansMixed Performance Based Plans

Both public and private organizations (1990) in NA offer this type of plan to :

• 80% of the companies have one or more performance bonus plans

• 78% all their managers

• 20% to non-management employees

• 90% to senior executives

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Incentive AmountsIncentive Amounts

May be expressed as a percentage of corporate profits above a certain threshold

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

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Different Formulas Awarding IncentivesDifferent 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

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

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Organizational Performance Organizational Performance MeasurementsMeasurements

• Return on EquityProfits / Shareholder’s equity

• Return on InvestmentProfits / (Shareholder’s equity + long-term debt)

• Return on Net AssetsNet Profits / (Total assets - current liabilities)

• Other MethodsSales / Total assets

orProfits / Sales

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Performance MeasuresPerformance Measures

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Group Performance Bonus PlansGroup Performance Bonus Plans

Mostly appropriate for employees whose work is interdependant

• 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

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Types of Group Performance Bonus PlansTypes of Group Performance Bonus Plans

Two main categories:• 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)

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Type of Variable-Pay PlansType of Variable-Pay Plans

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Type of Variable-Pay PlansType of Variable-Pay Plans