It’s a New Year – What Should You Do with Your Incentive Compensation Plans?

Beth Carroll | Prosperio Group

Your first option is, of course, nothing. You may be under the impression that if you didn’t change your incentive compensation plans before January 1 you’re pretty much stuck with them for the full year, right?

ID: 903736668; ©ISTOCK.COM/CarlaNichiataWrong. There is no “magic” to January 1, though any compensation consultant will tell you their busiest season is always Q4 as companies want to get new plans in place for the new year. But, if your plans pay less frequently than annually (and most incentive plans pay at least quarterly), then you really can change them any time during the year. So, what are some considerations if you decide you  do want to make a change for Q2 (or sooner)?

First, consider if your pay levels are “at market.” Are you paying total compensation (salary + incentive – in whatever combination you use) that is in line with what other companies are paying? Note that you don’t have to be the highest payer out there, but you certainly don’t want to be the lowest either.

Compensation professionals use a term called “market median” or “market 50th” as the best place to be to ensure you are competitive. This means that you are smack in the middle of the pack. Half of the pay instances are above you and half are below you. A good way to find the current market median is to purchase or participate in a compensation survey. You want to look for one that uses incumbent data (person level) rather than company averages and has a reasonable sample size.

Also, be aware of the impact of geography. For some jobs that are considered nationally mobile (e.g., executives and most outside sales roles), geography doesn’t really matter as the people in these jobs can (and often do) change location regularly. For internal sales, call center or operations type roles that are less geographically mobile you need to consider the cost of compensation in the geographic area where the person will be working. Consider this as a test for defining a job as either national market or geographic-specific: “Would you pay to relocate a person to take the job?” If the answer is “no,” then it’s a geographic specific job. If the answer is “yes” then it’s a national market job. When using a salary survey, you will often only get national market pay levels. For geographic-specific jobs, you will then need to apply a geographic differential to the national figure to understand what the pay is for your area.

Once you have determined if you need to change anything about your total pay levels, then you need to think about your pay mix (portion of salary or hourly pay versus incentive pay). Do you have enough salary to attract talent? Is the pay mix appropriate for the role? Not all positions should have 100 percent commission, and in fact, most sales compensation experts would caution against 100 percent variable plans for nearly all sales roles. Consider that salary is what is looked at by banks to determine viability for car loans and mortgages. Yes, they look at incentive pay too, but since that is never guaranteed one year to the next, they take it much less seriously than they do salary. People on 100 percent commission plans can find it difficult to get loans until they have several years of very high and consistent earnings.

You put a lot of effort into your plan (or you should have), so make sure you are reinforcing it every chance you get.

Usually it’s pretty easy to raise a salary, even if this means reducing an incentive, and people generally prefer more guaranteed pay (of course there are always exceptions). Going the other direction is tough. So, if you decide you are overpaying in salary and need to put more money into the incentive, you will need to do some careful planning of how the transition will affect your employees’ cash flow. Consider payouts that will come from their old plan after the new plan goes into effect and how long they will have to wait for the new incentive payouts to start coming.

Now you need to look at how the incentive is being calculated and if it is achieving a couple of key objectives. First, do your people understand how the calculations work? If they don’t, but you feel like the plan design is strong, you may need to put some extra effort into communication and tracking. Make sure people know how they can increase their earnings. Give employees reports, dashboards, and scorecards. Put up TVs to track results and showcase top performers. You put a lot of effort into your plan (or you should have), so be sure you are reinforcing it every chance you get.

Second, are the plans driving the right results? Are the top earners the ones who are doing the best overall job? Are they bringing in the most new customers? Are they doing the best negotiation to get the best rates when closing deals? Are they champions and penetrating existing accounts? If you are uncertain of the answers or if the response is a resounding no, then you need to change your compensation plan. Your plan should be rewarding the right behavior in a very holistic fashion, and not simply just giving big payouts to those with the most sales volume. It may not be good sales volume, or the right kind of customers. Most commission plans (paying a percentage of GM$ or revenue) tend to go a little off kilter in this regard.

Third, is your cost of compensation reducing overtime? If you have a straight commission plan and you never reduce the rate, the answer is “no.” You need to include a mechanism that allows the business to recoup investments that make the job easier. Improved business processes, more automation, increased marketing or a redesigned website – all of these things cost money and make the job of the workers easier.

Lastly, do your plans drive your people toward goal attainment, and do the goals align with the overall company objectives? Too many plans out there let the employee determine what “good” looks like. Unfortunately, for most of them the answer will be less than what management sees as “good.” You need to make it clear what is expected of them and tie their pay to goal attainment. Something has to change (in a good way) when the goal is reached, and lack of goal attainment needs to hurt a lot. You also need to be sure that they all understand how their goals intertwine to support the overall objective of the company. Operations, sales and marketing and all other functions all play a part in company success. Help them understand their part, and be sure their incentive plans reward for the parts they have control over.

Beth Carroll is owner of Prosperio Group, a compensation consulting firm located in New Lenox, IL. She can be reached at beth.carroll@prosperiogroup.com or 815-534-9204.