Creative Incentives – Part II

By John A. Haas
Management Strategies Group

Most who read this newsletter are already convinced about the strategic and tactical benefits of well-designed and well-implemented performance-based incentive compensation plans.

In this second article in a series I suggest some more interesting twists in designing incentive plans, intended to help assure participant efforts reflect business priorities.

Double Counting Reinforces Importance

This can be an extremely helpful idea, especially when a new product/service or other major change is being introduced. For example, assume that a sales rep is being asked to sell a new Product X or develop a new Territory Y.

Sales reps are normally compensated based on total revenues or gross margins generated. That should continue. But, consider adding one or both of the following as additional compensable measures:

• Total revenues from sales of Product X or in Territory Y
• Number of new customers buying Product X or from Territory Y (“customer” must be defined).

Reinforcing Teamwork

Consider the example of a personal injury law practice. When litigation is called for, the process is typically managed by teams consisting of an attorney, paralegal and secretary. The performance measure is “Average monthly fees generated by each attorney team for the quarter.”

The idea is that each team will figure out how its members can best contribute to maximize both fees for the firm and individual payouts.

Use of “Disincentives”

Applicable in situations where it’s easier to pursue existing, well-known paths than to forge new ones. In this example, assume it’s much easier to sell “same olds” than “gee whiz” new stuff; and “new stuff” will generate higher margins, but prospective customers must first be educated about its features and benefits.

In this situation, incentive compensation should increase with increasing gross margins generated, perhaps offering higher incentives for “gee whiz” than “same old” sales. The useful twist here would be to limit incentives from “same old” sales to <4X incentives earned from “gee whiz” sales. This would prevent sales reps from just pursuing the easier sale to maximize incentive earnings.

These are examples only, and would normally be part of a more comprehensive incentive plan. But they do suggest ways of changing behavior, benefiting the business and reinforcing the need through compensation that participants can control through their own efforts.

Fall 2006 -Volume 16, Number 4

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