p. 1 SESSION 4b - Incentive Plans

p. 2 SESSION 4b - Incentive Plans

p. 3 SESSION 4b - Incentive Plans

p. 4 SESSION 4b - Incentive Plans  With no gain-sharing 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  With gain-sharing Employees share with the employer the increase that results from performance improvement ref. Halsey, Rowan and the Bedeaux plans

p. 5 SESSION 4b - Incentive Plans  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. 6 SESSION 4b - Incentive Plans  Neither group performance nor organizational performance is considered  Frequently used for sales positions  However, most performance based plans are mixed rather than individual

p. 7 SESSION 4b - Incentive Plans  Base principles that drive the elements of sales compensation design? 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. 8 SESSION 4b - Incentive Plans  Base principles that drive the elements of sales compensation design? (continued) –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. 9 SESSION 4b - Incentive Plans  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…  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  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. 10 SESSION 4b - Incentive Plans  A Dynamic Concept –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  Prominence is the key concept in the design of effective sales force compensation programs

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

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

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

p. 14 SESSION 4b - Incentive Plans

p. 15 SESSION 4b - Incentive Plans

p. 16 SESSION 4b - Incentive Plans

p. 17 SESSION 4b - Incentive Plans

p. 18 SESSION 4b - Incentive Plans 4x Excellence 0% 100%150%200% 100% 500% 250% Quota 1x 1.5x 2.5x $45,000 $75,000 $30,000 Payout Available in Performance Range 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 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 3:1 5:1

p. 19 SESSION 4b - Incentive Plans

p. 20 SESSION 4b - Incentive Plans  Both public and private organizations (1990) in NA offer this type of plan to : 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. 21 SESSION 4b - Incentive Plans  May be expressed as a percentage of corporate profits above a certain threshold  Most companies have it expressed as a percentage of employee’s pay or as a percentage of Total Target Cash.  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. 22 SESSION 4b - Incentive Plans  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  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  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. 23 SESSION 4b - Incentive Plans Return on Equity Profits / Shareholder’s equity Return on Investment 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

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p. 25 SESSION 4b - Incentive Plans  Mostly appropriate for employees whose work is interdependant 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. 26 SESSION 4b - Incentive Plans  Two main categories: 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. 27 SESSION 4b - Incentive Plans

p. 28 SESSION 4b - Incentive Plans