Incentive Compensation Plan Design

Service Icon: 

Smart Tech Inc. has experience with support clients compensation plan design for:     

  1.  Review of compensation plans for potential areas of standardization, automation and process efficiencies
  2.  Modeling plans to calculate potential pay outs and the impact of changes in compensation variables;
  3.  Evaluation of compensation plan processes for operational simplification and improved analytics and dashboards. 

  Incentive compensation is a major investment for companies and salespeople.  US Companies spend $200 Billion annually on incentive compensation, approximately the same amount as their expenditure on advertising.  The average salesperson earns 40% of their cash compensation from variable based incentive compensation. As a result, incentive compensation plans are critical to drive the right sales force behavior, retain or attract salespeople and ensure appropriate return on investment for the company.  Moreover, variable incentive compensation plans are expanding beyond the sales force to other areas of the company, such as sales operation, human capital management and customer service.

From Smart Tech Inc.’s perspective, developing an appropriate incentive compensation plan relies on four concepts:

  1. Appropriate to the Role – Different sales (or other roles) may require different compensation plans, which should be tailored to role activities.  For example, a “hunter” (e.g., business development or outside sales) may require a different sales compensation plan than a “farmer” (e.g., account management or inside sales).  Additional variances in incentive plans may exist for external distribution channels like agents, brokers or re-sellers.
  2. Aligned to Corporate Objectives and Culture – As part of plan compensation design, companies must make several key determinations, such as compensation relative to market, differentiated compensation between highest and lowest performers and minimum and maximum compensation levels (e.g., entry level and caps, respectively). Critical corporate objectives, such as increased cross-selling, also need to be incorporated into the compensation plans. For example a bank may build plan components, such as referral incentives, to help drive the corporate objective of further integrating wealth management with their retail business.
  3. Visibility to SMART targets – Effective incentive compensation programs provide highly visible links between measurable outcome and compensation payout.  Measureable outcomes are typically based on Specific, Measurable, Attainable, Realistic and Timely (SMART) targets.
  4. Streamlined Plan Administration –  A holistic understanding of the plans and plan components is key to review for areas of standardization that lead to minimized overheads and required behaviors. Moreover, limited reporting regarding plans may allow plans to become cumbersome to manage, with inefficiencies that may compound over time.  As a result, sales teams spend an inordinate amount of time in shadow accounting while compensation administration is bogged down with manual adjustments, dispute resolution and inefficient manual processes leading to payment errors.  Ideally this can be managed through data integration automation, real time visibility to data, better end user reporting or business analytics dashboards.

​​Based on the numerous proven clients case studies, we can provide our insight and support for best practices to fit required client and industry specific scenario.