Optimal Incentive Compensation Plan Design for Successful Implementation
February 10, 2016
Whatever the backdrop, there are some critical steps in achieving the successful implementation of the optimal incentive compensation plan design.
That said, we typically come across two scenarios involving plan design and automation.The first is just automate the existing design you already have. The second is redesign the plan before automation.
In the first scenario, the eager software sales rep wants to expedite the project start and does not want to introduce any delays in their sales pipeline. They are thinking about a potential 6-12 month delay in the sales pipeline, then delayed recognition of the software sale before the project can get underway. Often this is backed up by the in-house IT function which wants a new project to help underpin their roles for the next 2 years.
In the second scenario, the organization has a strong HR or Sales leader driving the project, and they want to look at a simplified process, or want a simplified incentives landscape before they start automating. Often a company has grown by acquisition which has created many anomalies, or the company has many business divisions and is seeking greater synergy and cross-selling through plan redesign.
As a trusted advisor to the client, it is important in the long term to provide the best advice on the right order of activity. Each organization will have unique business needs and dynamics which will determine what approach will be most optimal for the client.
Automating first might be the right answer. The organization may have been through plan redesign already or might have a simple incentives landscape which might just need minor surgery. The improved analytical capabilities provided by Incentive Compensation Management (ICM) software will help in the modeling and review of existing plans.
Sometimes, though, the old process was so manipulated by work arounds, it is better develop a complex landscape before automation, knowing that you’ll have the right tools available to execute on a more optimal plan design.
Here are a few crucial steps that must be taken when it comes to your incentive comp plan design.
1. Contrast the Typical Challenge and the Real Challenge for Plan Design
The typical challenge articulated by many companies is getting all stakeholders to agree on a design agreeable to all stakeholders rather than the best design for the business. Finance, Sales and HR all typically have different perspectives. Secondly, many organisations are struggling to achieve effective consistent processes. Finally, 70-80% of companies will have no or at best inflexible technology to support incentives.
The real challenge is to make sure plan design is driving the behaviours required to support the sales strategy. As often as companies and sales leaders state that their sales compensation plans are simple, there is rarely a plan that is truly that simple; there is always some layer of complexity. Also, it is important to not only have consistent processes, but to make sure these processes are optimised. Finally, ensuring the technology implemented is dynamic and flexible to cope with changing priorities in strategy and consequent plan design.
2. Look at the Cost Impact
Gartner, Forrester Research, other analysts, and vendors cite a number of tangible benefits consequential to sales compensation plan automation, however, the cost impact of getting the future state wrong comes in three flavors:
- Poor plan design delivers few of the behaviors you need, a demotivated salesforce, and lost performance upside.
- Administrative processes that are not optimized to support new technology means that administrative savings from reduced resourcing and process time are not realized.
- Complex, ineffective incentives that are not redesigned before automation potentially means higher than budgeted implementation costs, delayed implementation, and a high cost of subsequent change to the configuration.
3. Establish a Future Vision
So, imagine a future state where plan design aligns strategy with selling behaviors, optimized processes creates transparency of performance reporting, and seamless flexibility of technology and plan changes as strategy is reviewed. This can be achieved.
There are three steps required to achieve this future vision.
- Understand your challenge – the market, the sales organisation and the behaviours you need
- Use a principle-based design approach.
- Make sure that you align other sales performance management elements like account management, territories, quota, sales coaching and on-boarding to make sure there is no disconnect with plan design.
A principles-based approach means testing your current design and guiding the new design through a set of principles which the design needs to comply with. These can be prioritized for a more detailed approach. There are three types:
- Organizational – linked the design to company goals, ensuring the required performance is objectively measurable and that the design is flexible to adapt to future strategy developments.
- Motivational – you must pay for results, not activities; the quantum needs to be significant and payout needs to differentiate between levels of performance
- Behavioral – plan design must reflect role accountability, align the team and be simple. Of all the principles, this is the one most often prioritized by companies, largely because the current plan has drifted into unintelligible complexity!
Causes of Complexity
Plan design can create three elements that burden and cause difficulty with implementation.
- Number of plans. Often there are numerous plans for ostensibly the same role, and many times these are reflective of different divisions. For example an account manager may be incentivized very differently in division A to division B. Sometimes a different go-to-market approach means this is justified, but often this is worthy of significant review. In addition, the inclusion of Management By Objectives (MBOs) in a plan and a large number of additional SPIFF (Sales Promotion Incentive Fund Formula) opportunities can create unnecessary complexity.
- Plan complexity itself including too many metrics, some of which are difficult to measure because of the definition, lack of data, or complex rules and dependencies. An example of this would be multi-year contract based sales environment where the target is x% of contracts or contract value renewed. This creates the need for a complex annual recalculation of renewal pools and consequent payout. Then add onto that any charge backs or adjustments for territory optimization.
- Lack of future proofing is the third key area. Incentives design which requires many data sources or are inflexible create the situation where it is difficult to adapt the ICM solution in future years.
A Clear Roadmap
What is clear is that there needs to be a roadmap toward successful automation to realize the full opportunity which ICM presents. Effective incentive compensation plan design has its place on the roadmap. Also on the roadmap are the business case for investment and the future state design which includes process optimization.
The design itself may influence the SPM technology you choose, but whichever vendor solution you chose the incentive design itself needs to lead rather than follow the technology.
Learn more about great plan design and successful implementations by downloading our breakout session presentations.
Download: Great Plan Design and Successful Implementation