Incentive Plan Failure: One Common Mistake
It is easy to figure out a common mistake in most incentive plans by asking the question: Did you do what you wanted to do when you set it up?
The chances are you will hear the answer is “no” or “some of it”. The next question to ask is, why did it fail? For most incentive plans, the reason it failed is not because of an ineffective incentive plan administration, it failed because of the plan design.
The reason your incentive plan design failed probably is because of plan levers.
Levers are behaviors or actions and are key elements or components in a plan design. Levers are important because if identified and used properly, they directly affect how you reach desired results.
Often there are too few levers in a plan. Absent effective levers, participants do things that might be unethical or dishonest – all in the hopes of attaining the coveted incentive payout.
Sales Incentive Plan Example
Let us look at a Sales incentive plan. A small company CEO approached me several years back to help them put in a sales incentive plan.
One of the first questions I asked was, “What is your compensation philosophy?” This was the first of many blank stares. The CEO paid employees what he thought they were worth and did not have a pay structure based on relative position value. It was obvious that the entrepreneurial influence was going to impact our sales compensation discussions.
In his view, we could just “slap this incentive plan together and we’ll be done”. The reality was it takes more than throwing some numbers together to have a fully functioning and performance driven sales incentive plan.
As we walked through the process of incentive plan design, I posed the question: “What is it you want to achieve?”
“Sales and profitability” he says. “I want to increase sales by 10% and profitability by %15 next year.””
“What else?” I ask.
“Nothing else, if we make that, I will be happy” he says.
So, I began working through my list of questions to help him think through other levers he might want to consider:
- Why do you want to put in a sales incentive plan?
- What do you think are the best measurements for meeting your goal?
- Do the sales people have any guidelines on what they can charge for your products?
- Given the choice between a sale and profitability – which is more important?
- Does your sales force have latitude to make sales vs. profitability trade-offs?
- At what point can sales not make independent sales decisions?
- How long does it take to make a sale in your industry?
- Do customers make decisions to buy from your sales team because of relationship or price?
Why Incentive Plan Levers are Important
As we moved through the questions, the CEO slowly understood why levers were important. There will be times when increasing revenues is not aligned with growth in profitability. Merely putting those goals in front of his sales team would send mixed messages, especially since they were not accustomed to making tradeoffs.
If the CEO placed more emphasis on sales, profitability could suffer and vice versa. Initially, he thought he could save money by shifting the sales person’s compensation to a lower base salary plus higher commission. That approach might work in a commodity based selling organization but his was a relationship based solutions environment where the sales transaction could be six months to a year. There are not too many sales people who will wait around for that length of time to receive a payout.
As you evaluate revising or creating a sales plan, take the time to understand how each sales employee’s behavior will change for every goal that you set up. Pay close attention to the inter-relationship between different levers and how you can positively influence your sales team’s actions. If you are not sure how to do it, that’s the time to ask for help because unraveling a plan will send mixed messages and destroy your credibility.