The Art of Crafting Effective Incentive Plans

Today, let’s delve into the often underestimated yet pivotal aspect of organizational success – incentive plans. These behind-the-scenes motivators play a profound role in shaping an organization’s performance, often quietly working their magic. In this post, we’ll explore the critical importance of incentive plans, the perils of neglecting them, and the essential elements in crafting a truly effective incentive plan.

First and foremost, let’s acknowledge the undeniable truth that people are the lifeblood of any organization. While they seek an environment where they can thrive, a supportive culture, and promising career prospects, financial remuneration undeniably holds significant sway.

However, it’s disheartening to witness that many organizations opt for a simplistic approach, offering a standard 10-15% annual bonus linked solely to the achievement of sales targets. It’s a one-size-fits-all strategy that overlooks the nuanced dynamics of motivation and rewards.

The repercussions of such oversight are far-reaching:

  1. Top-performing individuals often seek opportunities elsewhere, leaving a noticeable talent drain.
  2. Conversely, the underachievers may flourish, basking in their comfortable fixed salaries or exploiting existing accounts with minimal effort.
  3. Meanwhile, the average employee loses the enthusiasm to go above and beyond their duties.

So, why do well-structured incentive plans matter so profoundly? Let’s dissect the reasons:

  1. Motivation and Performance: Incentive plans act as powerful motivators by directly linking effort to rewards, driving employees to elevate their performance and productivity.
  2. Goal Alignment: These plans align individual objectives with the broader organizational mission, ensuring that every employee contributes to the company’s success.
  3. Retention and Engagement: Recognizing and rewarding high performers enhances employee retention. It fosters a sense of value and engagement, leading to a more fulfilling work environment.
  4. Recruitment Advantage: An appealing incentive package can be a game-changer in attracting top-tier talent, setting your organization apart from competitors and attracting the best in the industry.
  5. Morale and Culture: Incentive plans cultivate a culture of fairness and recognition, making employees feel appreciated, empowered, and driven to excel.
  6. Focus on Key Objectives: By emphasizing specific goals, these plans keep the workforce concentrated on critical organizational priorities.
  7. Performance Measurement and Feedback: Clear metrics and performance evaluation provide valuable feedback on individual and team accomplishments, facilitating continuous improvement.

Now, let’s review how we approach an Incentives Plan Redesign at Eendigo:

  1. Establishing the right quota for each Account executive. This is the hardest part and is often overlooked. If the quota is too low, sales people can attain it too quickly during the year, if it’s too hard they might stop working against it as soon as they consider it unattainable. When quotas are enforced aggressively they can also generate unethical behaviors (remember Wells Fargo whose tellers were forced to open accounts to their family members in order to hit their daily quota?). It’s not an easy exercise, since in order to do this, we need to have a preliminary analysis on each Account Executive client portfolio. What is the potential sales that can be realized for each client? The sum of the potential for each client gives an indication of Account Executive portfolio potential. This is a good starting reference to define the annual/quarterly target. The effective quota has then to be be scheduled over quarters depending on the sales cycle length and level of maturity with each client. Hence here the key methodological steps:- Assess the potential of each client, – Spread the aspirational incremental sales over time depending on the maturity of the relation and the sales cycles duration- Run an analysis on historical data- Ensure that quotas are balanced across the team and are progressing smoothly vs past data
  2. Defining Clear Objectives and metrics: Identifying and defining clear and measurable objectives that align with the company’s overall goals can be challenging. The objectives should be specific, attainable, and directly linked to the desired outcomes. This must refer as well to the commercial Strategy. – Do we want to grow in share of wallet? – Do we need to increase growth with a virgin market (e.g. clients/channels/segments)? – What is the relevance of profitability in our growth? If we forget to consider it the risk is that the salesforce will invest on the low hanging fruits or large volume/low margin business. -Are we planning to launch a new product/service? We need to account for each strategic objective and create a metric that is simple to explain and to calculate. Determining the right performance metrics should follow these steps:- Start by reviewing (or creating) the Commercial Strategy, have very precise objectives defined and agreed- Accurately reflect employee contributions and align with the company’s goals – Find metrics that are fair, quantifiable, and applicable across different role- Strike a balance between short-term performance incentives and long-term strategic objectives can be challenging. Ensure that incentives don’t lead to short-sighted behavior but instead encourage sustained success
  3. Designing an effective Pay-out curve. What is the ideal ratio of variable vs fixed remuneration? When should the variable kick-in? at 90% or 70% or as soon as we see some sales? What is the right level of the accelerators, when should they kick in and what should they represent in relative terms? It all depends on the nature of business, the proportion of hunting vs farming for instance, or the share of recurrent business we can expect. Allocating the right budget for incentive payouts while ensuring the financial sustainability of the organization can pose a challenge. Balancing the cost of incentives with the return on investment (ROI) and overall budget constraints is crucial. A good question to ask is: what is impact of paying out a higher variable or the effect of paying a lower variable? A watchpoint is also the total variable vs fixed remuneration. It depends on the industry (it can be very high in call centers for instance) on the geography (usually higher in markets as US and China vs Europe), on the tenure, the role etc. We need to be careful as a high ratio can create severe compliance issues. eg. in the pharma industry it can lead to inappropriate promotion to HCP. The curve should be designed considering therefore:i) qualitative factorsii) the industry benchmarks (as Account Executives compare to other options they have and usually have a good overview of the market)iii) the Return on investment (ROI) of each dollar spent on variable. Designing an incentive plan that is perceived as fair and equitable across different job roles, departments, and levels of the organization is challenging. Avoiding biases and ensuring that rewards are distributed fairly is crucial for employee buy-in and morale. So in conclusion, the technical design of the plan should consider:
  • Strike right balance fixed vs variable
  • Decide on the shape of the payout curve
  • Run ROI simulations (based on incremental gross margin and not revenues)
  • Ensure its fairness (across teams and tenures) and competitiveness vs benchmark
  • Ensure that it fosters collaboration and not a conflict between teams (eg. Business development vs the Farming teams)
  • Avoid compliance risks

4. Communicating Effectively: Communicating the incentive plan effectively to employees is critical but can be challenging. Ensuring that employees understand the plan, its objectives, criteria for rewards, and the connection to company goals is essential for its success. We have seen often plans that were not understood. Some Account Executives were not even aware of the existence of a plan as they never received nor communication neither a payment.

5. Tracking and Measuring Performance: Setting up a reliable system for accurately tracking and measuring performance against established metrics can be a multifaceted task. It entails the implementation of robust systems for data collection, analysis, and evaluation, all of which are indispensable for determining incentive eligibility in a fair and transparent manner.

Taking it a step further, the aim should be to make this tracking process as seamless as possible, minimizing the risk of errors. Ideally, it should be effortlessly executed in real time by everyone, using readily accessible data.

Furthermore, it’s essential to maintain an ongoing commitment to assessing the effectiveness of the incentive plan. This entails continuously evaluating its performance and being prepared to make necessary adjustments. In an ever-changing landscape of business conditions, evolving employee feedback, and dynamic market dynamics, adapting the plan requires thoughtful consideration and agility.

The ability to adapt and fine-tune the incentive plan ensures that it remains aligned with the evolving needs and goals of the organization, ultimately driving long-term success.

What are your experiences with incentive plans? We’d love to hear your thoughts and anecdotes in the comments below. Let’s keep this conversation alive!

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