Periodically, we will receive a call from a business leader seeking our help to build a more effective incentive plan. Often, it takes a while to determine whether what is being sought is a sales plan or a broader performance-based reward. The difficulty in decifering which kind of approach is needed stems from the fact that many businesses don’t yet know what outcome they are trying to influence through their incentive plan(s).
With that anecdotal evidence in mind, I assume many struggle with this issue. As a result, I offer here some general things to consider when thinking about incentives:
- Sales Incentives–Compensation programs for sales people are typically a distinct “animal.” Their purpose and form are centered solely on increasing sales. Although a sales incentive might be in the form of a commission or bonus (or both), it’s focus is strictly on rewarding a certain desired sales result. They are intended to address the following performance factor: “What the company wants sold, to whom and in what volume.”Those participating in a sales incentive could, conceivably, also receive a performance or growth incentive. However, it is less likely they will receive the former since their sales incentive rewards short-term performance results . A long-term incentive, however, creates a different focus and could more commonly be paid to those responsible for sales functions, particularly those whose stewardship it is to accelerate top-line growth. (See Growth Incentives below.)
- Performance Incentives–Companies that want to create focus on key performance indicators or profitability standards measured in increments of 12 months or less are looking for this type of reward. Performance incentives seek to communicate the following to participating employees: “This is the outcome we need you to focus on during this period of time and how it will be measured and rewarded.” Performance incentives help participants understand their role in this year’s strategy, what’s expected of them in that role and how they will be remunerated for fulfilling those expectations. The overall incentive may reward something for company performance, team or department performance, individual performance or all three. The “weighting” of those factors may be different for various “tiers” of employees. Annual, semi-annual or quarterly bonus arrangements are types of performance incentives.As with sales incentives, participants in a performance incentive plan may–and commonly do–participate in a growth incentive as well.
- Growth Incentives–Organizations that seek to align the company’s reward’s strategy with its business plan should have some kind of growth incentive. Such a plan communicates where the company is headed in the future (beyond the next 12 months) and how those that help to fuel growth will participate in that increase. Growth incentives seek to create a unified financial vision for growing the business and send the following message to participants: “You are an important partner in our growth plans and this is how we intend to have you participate in the value you help create.” Stock, stock options, phantom equity, SAR, Performance Unit Plans and Profit Pools are examples of growth incentives that companies commonly use to fulfill this part of their overall rewards strategy.
Most companies think in terms of specific types of plans instead of the kind of performance they seek to drive as they approach the design of their incentives. Instead, we recommend you isolate the performance category you are trying to address as indicated above and then begin thinking of the compensation s0lutions that will drive the outcomes you seek.
At a minimum, now if you call us, we will perhaps be speaking the same language!