SESSION 4 b Incentive Plans p 1 SESSION

SESSION 4 b - Incentive Plans p. 1

SESSION 4 b - Incentive Plans Types of Variable-Pay-Plans p. 2

SESSION 4 b - Incentive Plans Base vs Variable Pay p. 3

Individual Piecework Plans Ø With no gain-sharing SESSION 4 b - Incentive Plans • Based on employee performance by means of observable, concrete, objective performance evaluations – Measurable rather than evaluating performance – Mostly used for production workers – Based on performance rates ref. Taylor, Gantt and the Merrick plans Ø With gain-sharing • Employees share with the employer the increase that results from performance improvement ref. Halsey, Rowan and the Bedeaux plans p. 4

Effectiveness of Piecework Plans SESSION 4 b - Incentive Plans Ø Piecework plans generally share a number of characteristics • • The work is simple , repetitive and easy to measure Little if any interchange employees is required • Performance standards are clearly set • They are accepted by both concerned employees and the management • Easy to adjust standards when necessary • Cash incentive between 25 to 35% over standard rate generally well accepted p. 5

Individual Performance Incentive Plan Ø Neither group performance nor organizational performance is considered SESSION 4 b - Incentive Plans Ø Frequently used for sales positions Ø However, most performance based plans are mixed rather than individual p. 6

Sales Compensation Ø Base principles that drive the elements of sales compensation design? SESSION 4 b - Incentive Plans • Application of the general principles listed below will increase the effectiveness of your sales compensation plan designs. – Plan designs should support the company’s business objectives and strategy. – Target compensation should be market competitive to be externally attractive for recruiting, retaining and motivating employees. – Pay should be managed to target; each individual should have a fair and equitable opportunity to achieve his or her target compensation. p. 7

Sales Compensation Ø Base principles that drive the elements of sales compensation design? (continued) SESSION 4 b - Incentive Plans – Ratio of base salary and incentive compensation (Mix) should consistently reflect the level of persuasion of each job. – Selection of performance measures for each job should be limited to no more than three results-oriented components. – Incentive earnings should accelerate above expected levels of performance to encourage exceptional levels of performance. – Contests and recognition programs should complement the base salary and incentive compensation system, not undermine them. p. 8

Prominence in the Marketing Mix Ø Prominence is a measure of the salesperson’s influence on the buying decision – It captures the relative influence of the salesperson compared to the influence of pricing, advertising, product quality, customer services, etc… SESSION 4 b - Incentive Plans Ø High prominence – Salesperson heavily involved in differentiating his/her company’s offer from offers presented by other companies i. e. a door to door or telemarketing salesperson who seeks to sell unadvertised and unknown product Ø Low prominence – Salesperson unable to exert much positive influence on the prospect of business i. e. a department store or sales counter clerk, pricing practices play a larger role in the customer’s decision to walk into the store p. 9

Prominence varies Ø A Dynamic Concept SESSION 4 b - Incentive Plans – Prominence varies as the point of customer contact, product mix, the sales role and type of customer vary – Prominence of a given sales job will usually change over time as well Ø Prominence is the key concept in the design of effective sales force compensation programs p. 10

Barriers to Entry Ø A barrier to entry is a qualification the candidate must meet to be considered for the job. SESSION 4 b - Incentive Plans – The greater the number, specificity, and value of these qualifications, the greater the barriers to entry Ø As barriers to entry increase, the available labor pool decreases and the new hire’s minimum economic value increases Ø Skills and experience required for high-barrier sales rep probably command some kind of guaranteed income due to a high demand market environment p. 11

Basic Barrier/Prominence Relationships Barriers to Entry High ü Minimally trained rep ü Heavy prospecting ü Multiple suppliers ü Expert/experienced rep ü Product, company, application must be sold Low Prominence SESSION 4 b - Incentive Plans Low ü Minimally trained rep ü Familiar products ü Established customers ü Technically skilled rep ü Complex product, need seen, few suppliers p. 12

Basic Barrier/Prominence Relationships Barriers to Entry High ü Minimally trained rep ü Heavy prospecting ü Multiple suppliers ü Expert/experienced rep ü Product, company, application must be sold Low Prominence SESSION 4 b - Incentive Plans Low ü Minimally trained rep ü Familiar products ü Established customers ü Technically skilled rep ü Complex product, need seen, few suppliers Fixed Income Total Cash Compensation p. 13

SESSION 4 b - Incentive Plans Forms of Compensation p. 14

SESSION 4 b - Incentive Plans Pay Mix p. 15

SESSION 4 b - Incentive Plans Pay Mix p. 16

SESSION 4 b - Incentive Plans Achievement Distribution p. 17

Sales Incentive Plans Upside and Acceleration Payout Available in Performance Range 500% $75, 000 2. 5 x 5: 1 SESSION 4 b - Incentive Plans 4 x 250% $45, 000 1. 5 x 3: 1 100% $30, 000 1 x 0% 0% 100% Quota 150% 200% Excellence • Note: This example is illustrative. Accelerators may vary by region and by role. • The example shows two acceleration ranges with a decelerator at a given level of excellence p. 18

SESSION 4 b - Incentive Plans Upside and Acceleration p. 19

Mixed Performance Based Plans Ø Both public and private organizations (1990) in NA offer this type of plan to : SESSION 4 b - Incentive Plans • 80% of the companies have one or more performance bonus plans • 78% all their managers • 20% to non-management employees • 90% to senior executives p. 20

Incentive Amounts Ø May be expressed as a percentage of corporate profits above a certain threshold SESSION 4 b - Incentive Plans Ø Most companies have it expressed as a percentage of employee’s pay or as a percentage of Total Target Cash. Ø There are different formulas for awarding incentives that are based on both individual and organizational performance. – The split award method – The multiplier method – The matrix method p. 21

Different Formulas Awarding Incentives Ø The split award method – Bonuses depend equally on individual and organizational performance – Individual performance may be cancelled out by a poor organizational performance, and vice versa SESSION 4 b - Incentive Plans Ø The multiplier method – Individual performance score is multiplied by the organizational performance score – When individual and organizational both above 100%, it triggers higher incentives than the split award approach Ø The matrix method – The most widely used method – Based on employee category and different performance basis – The higher the position, the higher the impact on the overall organizational performance on total results – e. g. CEO 100% on Corporate results p. 22

Organizational Performance Measurements • Return on Equity Profits / Shareholder’s equity • Return on Investment SESSION 4 b - Incentive Plans Profits / (Shareholder’s equity + long-term debt) • Return on Net Assets Net Profits / (Total assets - current liabilities) • Other Methods Sales / Total assets or Profits / Sales p. 23

SESSION 4 b - Incentive Plans Performance Measures p. 24

Group Performance Bonus Plans Ø Mostly appropriate for employees whose work is interdependant SESSION 4 b - Incentive Plans • Most effective with small, stable groups of employees • Less popular than individual ones • Expected to become increasingly more common in the years ahead as job structure are shifting toward more interdependant tasks p. 25

Types of Group Performance Bonus Plans Ø Two main categories: SESSION 4 b - Incentive Plans • Gain-sharing – Generally applied to non managerial employees – Employee must have a direct impact on productivity or costs to be entitled to a bonus – Main issue : organizations may be forced to pay bonuses despite poor financial results • Profit sharing – Bonuses based on the organization’s overall performance – Generally employees receive an automatic fix percentage on their bases salary when total profits or when a certain threshold is met. – Becoming more popular (+/- 25% of cpies having such plan) p. 26

SESSION 4 b - Incentive Plans Type of Variable-Pay Plans p. 27

SESSION 4 b - Incentive Plans Type of Variable-Pay Plans p. 28