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Overweight Incentive Plans

Overweight Incentive Compensation Plans

Goal diffusion is one of the most common problems facing sales commission plan designers. 

This means that too many incentive plans are loaded up with too many performance measures. Too many measures cause administration complexity, confuse the sales force, and worst of all – dilute the reward signals in the plan (ie. “what’s the point focusing on “measure x” if it’s only worth 10% of my at-risk component?”)

The cause of this problem is a lack of clarity on the foundation principles of the plan. Stakeholders need to be clear about a few things before they start designing their plan. Here are five questions that should be answered emphatically:

  1. What are the sales activities and behaviors that we want the incentive plan to encourage?
  2. In reference to the sales strategy – what are the activities and behaviors we need the plan to drive? – prioritize them
  3. Do we want a plan that is simple or complex? (99% of people will want the former – but do they really mean it?)
  4. How do we define simple? – what is the maximum number of measures/components that we can accommodate in the plan?
  5. What do we believe to be the minimum weighting on a performance measure (the minimum for it to be worthwhile)?

As always, the decision needs to be made that is right for YOUR business. The next questions are likely – “so, how many measures should I use and what is the minimum weighting for a measure?”. It’s not about slavishly following 'best practice' in this area – but experience and common sense would say that anything more than three measures and a weighing of less than 20% is trending towards the sub-optimal scale in these areas.

If you are working on a plan that has 4+ measures and you've got weightings of <20% on measures - then the alarm bells should be ringing. It's time to go back to your founding principles.

OK. So that’s the background. Next, I am going to write up some detail on a simple but neat process I use for working through the appropriate weightings for each measure.

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