Why Incentive Compensation Plan Important?

July 20, 2021
An incentive plan is a great asset for a company as it details the required performance metrics, for a specific period, for sellers within the organization. It is designed to provide seller clarity on what is expected of them to fully realize their compensation.  A compensation plan is a complete package that details employees’ wages, salaries, benefits, and terms of payment. An incentive compensation plan can include bonuses, incentives and commissions that may be paid to employees. When done correctly, incentive plans can be aligned to company’s corporate objectives and drive the right seller behaviours.

In addition to providing clarity to the seller, mature companies are able identify and build a framework to track the plan metrics and seller performance. This visibility is a great step forward as it can be used to motivate sellers, enhance seller productivity, manage seller churn and increase seller retention. For the management, it provides insight to areas of improvement where the organization can step in to support the seller. For example, some of these areas of improvement that can be realigned are better customer experience, enhanced seller enablement, accelerated seller pipeline conversion, and optimization on revenue realization.

Align Corporate Objectives to Revenue Targets

An organization’s corporate objective may be growth, retention or stabilization. Based on the planned objective for that period, an organization can plan its revenue realization and customer strategy for that period. When the organization builds incentive plans aligned with the corporate strategy, sellers have clarity on what they need to deliver to meet the corporate objectives. For example, if the corporate strategy is focused on customer retention, one component of the incentive plan could be designed to track seller’s book of business for year-over-year customer retention.

However, if the corporate strategy is focused on growth, the incentive metric could be focused on new business versus retention.   The approach of aligning compensation strategy to corporate objectives is a top-down approach and seen in more mature organizations.

Higher Sales

Incentive plans can be established using a hybrid strategy that includes both top down and bottom-up inputs. From the bottom-up perspective, an organization can engage with their sellers to understand the market’s past performance. From a top-down approach, the management teams from different departments like sales, marketing, finance, product and human resources, collaborate to identify the required revenue target for the organization. The overall target would then be allocated and disseminated appropriately to the various sellers within the organization by setting quotas within the compensation plans. This strategy allows the organization to achieve “What can be” versus “What was”. It allows companies to realize higher sales and optimize return on investment versus just base sales targets on past performance baselines.

Additionally, building frameworks to proactively track current performance against established targets, provides visibility to high performing and low performing areas. Lessons from high performing markets can be applied to enhance sales in low performing areas. This helps organizations achieve greater sales and sellers realize their compensation plans. This visibility can also help also identify a required realignments for seller targets and incentive compensation plans. This type of analysis also allows for collaboration between sellers and organizations to improve performance with additional support where needed whether it is help manage seller capacity and workload, shorten seller time to productivity or enable seller to provide better customer experience.

Increase Employee Motivation

An organization’s corporate objective may be growth, retention or stabilization. Based on the planned objective for that period, an organization can plan its revenue realization and customer strategy for that period. When the organization builds incentive plans aligned with the corporate strategy, sellers have clarity on what they need to deliver to meet the corporate objectives. For example, if the corporate strategy is focused on customer retention, one component of the incentive plan could be designed to track seller’s book of business for year-over-year customer retention. 

However, if the corporate strategy is focused on growth, the incentive metric could be focused on new business versus retention. The approach of aligning compensation strategy to corporate objectives is a top-down approach and seen in more mature organizations. Most organization’s establish incentive compensation plans and then share those with their sellers. Sellers are then required to accept and acknowledge them to confirm their understanding of expected performance. This collaboration allows clarity on expected seller behaviour.

Boost Employee Loyalty

When sellers have clarity on their required performance thresholds and metrics, there is no ambiguity on what is expected of them. This clarity and internal support leads to happier and more motivated sellers. As companies mature, they create enhanced visibility to seller performance. When organizations take a proactive approach to tracking seller or market performance, they can identify areas to assist the seller with their workload balancing and capacity management. Additionally, organizations can provide additional assets, collateral and resource support that helps accelerate seller pipeline conversion and assist with improving seller conversion ratio.

Sellers who can realize their compensation with the support of their organization are less likely to churn and more likely to be loyal to the organization. Lower turnover and better retention help organization reduce seller hiring and on-boarding costs. It helps build seller loyalty to the organization.

Better Customer Experience

Sellers interaction with customers is impacted by the seller’s longevity with the company as well. Over a period of time, sellers build trust with customers. Customers who trust their sellers are more likely to share greater information with their sellers. Sellers also develop a greater understanding of the customer and the benefits they are trying to realize. This allows for better customer and seller interaction. With the organization support for realizing their compensation plan, sellers are able to enhance customer experience and customer journey.

Increased Productivity and Profitability

As discussed in earlier benefits, when there is lower seller churn, there is accelerated pipeline conversion and higher customer conversion, the cost of sales is reduced and there is increase in seller productivity and company revenue realization. Creating visibility and analytics can keep the seller and management informed of plan versus performance. This provides a good opportunity to assess and re-align for full revenue realization as needed.

In Summary

Here are some key takeaways for good incentive compensation plan strategy.
• Establish incentive plans in collaboration with your sellers and organization management.
• Ensure these plans align with corporate objectives.
• Build incentive plans metrics that are measurable.
• Ensure the incentive plans are clearly communicated to the specific seller base they are applicable.
• Get the seller buy-in by securing the sellers acknowledgement and acceptance of the incentive plan.
• Implement and track performance against the plans.
• Align, evolve and update as needed based on performance against plans.

About Author:

Nayan MeherSonia Rathi
Sonia Rathi is an ICM Consultant at Smart Tech Inc. with 12+ years of experience in Information Technology. She is a technical person with an Incentive Compensation Management specialization.

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