Incentive Plans

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• Incentive Plans

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Types of Variable-Pay-Plans
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Base vs Variable Pay
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Individual 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 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 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 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 companys
  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 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 Mix

• Prominence is a measure of the salespersons
  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 companys 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
  customers decision to walk into the store

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Prominence 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 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 hires 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 Relationships
Barriers to Entry
Low
High

• Expert/experienced rep
• Product, company, application must be sold

• Minimally trained rep
• Heavy prospecting
• Multiple suppliers

High
Prominence

• Technically skilled rep
• Complex product, need seen, few suppliers

• Minimally trained rep
• Familiar products
• Established customers

Low
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Basic Barrier/Prominence Relationships
Barriers to Entry
Total Cash Compensation
Low
High

• Expert/experienced rep
• Product, company, application must be sold

• Minimally trained rep
• Heavy prospecting
• Multiple suppliers

High
Prominence

• Technically skilled rep
• Complex product, need seen, few suppliers

• Minimally trained rep
• Familiar products
• Established customers

Low
Fixed Income
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Forms of Compensation
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Pay Mix
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Pay Mix
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Achievement Distribution
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Sales Incentive Plans
Upside and Acceleration
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• 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

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Upside and Acceleration
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Mixed 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 Amounts

• May be expressed as a percentage of corporate
  profits above a certain threshold
• Most companies have it expressed as a percentage
  of employees 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 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 Measurements

• Return on Equity
• Profits / Shareholders equity
• Return on Investment
• Profits / (Shareholders equity long-term debt)
• Return on Net Assets
• Net Profits / (Total assets - current
  liabilities)
• Other Methods
• Sales / Total assets
• or
• Profits / Sales

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Performance Measures
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Group 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 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 organizations 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 Plans
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Type of Variable-Pay Plans