Original content shared by Partner, Glen Katlein
Short term incentives can be very effective, however, too often result in unintended consequences. Can you relate to the following scenario? The President of a business that provided cafeteria style options for outsourcing services wanted to improve penetration of one of the services. The sales exec drafted an incentive plan addendum to promote that service. After validating the profitability of that service, I asked the President if he realized the plan paid the sales reps 50% of ‘expected’ incremental profits. Also, if increased activity resulted in a 12% cost overrun, the company would realize no (ZERO) incremental profit from the higher sales. Furthermore, I posed the question as to whether some clients outsourced selected services based on their capacity to handle certain activities internally. The consequence would be that sales of the “incented” service would substitute for existing sales. This would result in low profit sales replacing fair profit margin sales. These unintended consequences could have been higher sales with no incremental profits or worse, no sales growth and reduced profits.
Does your compensation structure achieve parallel rewards for the employee and the company? Could the following happen to you? A company decided to engage a sales consultant to enter a new market segment. They agreed on the sales target range with the low end being the break even point for the company. The consultant proposed a commission rate alleging industry norm. The proposed rate seemed acceptable to the company considering their expected profit margin. However, the proposed incentive compensation offered the sales consultant potential to double his previous compensation level at the low end of the target with the company only at its break even point. Also, if the consultant achieved the high end of the agreed target, the proposed rate offered compensation that would be double what the consultant had acknowledged was expected by the best sales reps in the industry. After realizing that the sales target and compensation requested were not in sync, the sales consultant was offered and accepted a commission rate essentially half of the proposed rate and the company was positioned to save between $100 thousand and $450 thousand dollars annually.
Does your compensation structure reward performance and continuous sales growth? An effective balance of base comp and performance comp will reward high performing employees and avoids excessive payroll cost if employee and company performance are below expectation. A simple incentive amount for a sales range may inadvertently be an incentive for an employee to stop selling if unlikely to reach next level. Does the incentive plan offer a higher rate for more challenging sales goals? An employee may consider an incentive amount too low to merit the needed effort. Also, does the plan effectively provide balanced incentive for new sales and retaining sales with existing customers.