Most organizations have implemented some sort of incentive compensation program in the past decade in an effort to influence the behavior or performance of employees. While some have been spectacular in creating the type of focus and results driven orientation that they were intended to foster, most have had at best, modest success, with many being downright failures.
There is no easy answer as to why these incentive programs have failed to meet expectations, because like many other organizational initiatives, they die a slow and somewhat inconspicuous death, or they are replaced with the better, newer version that soon meets the same fate as the plans before it. As with most failed organizational initiatives, if you investigate hard enough you will find that they all begin with a lack of commitment and ownership by the executives. Yes, this is one more case of where the buck stops at the top.
Ownership of the incentive compensation plan is a critical issue for any organization. The use of incentives in compensation requires clear direction, assessable performance measures, the setting of fair and realistic targets, accurate and consistent tracking and reporting and payouts that are material and provide an appropriate return-on-investment for the company. Many individuals and groups play an important role in the design and evolution of the incentive compensation program within a company. Each must take accountability for their part in creating an effective incentive plan. If used properly, incentives can be a potent force in eliciting desired behavior and achievement of stellar results. If not managed well however, they can become a considerable waste of company money and an exhausting source of management and employee frustration.
Many functional groups in an organization should be active participants in the ownership of the incentive plan and its processes. These include:
- Senior Management
- Administration/Shared Services/Operations
- Human Resources
Ownership involves the accountability for outcomes, deliverables, documents, presentation and expected results. Ownership also has responsibility for allocation of resources and budget to achieve the results and meeting of pre-set deadlines…without fail.
The ownership equation is broken down into the following components:
Vision, Direction & Strategy
Overall responsibility for the vision, direction and strategy related to incentive compensation belongs to management. The business goals and objectives that form the direction of the company should be outlined clearly in the business plan, annual report or in the company strategic plan. These goals and objectives form the basis on which senior management then creates the business and sales strategies to which incentive and sales compensation must be aligned. Senior Management is the ultimate owner of all the incentive compensation plans, since it is one of the levers that they will use to change behavior and drive company results. It is key that the plan design be driven through this process, as failure to align incentive compensation with the business goals and strategies can produce results or behavior that not only do not support the business, but also may in fact illicit inappropriate behavior. The main requirements of ownership in this area are:
- Development of the guiding principles for sales compensation design
- Communicating business direction and compensation alignment requirements
- Identification of “Key” business performance measures and targets
- Identification and commitment to resolve organization dependencies or impediments
- Plan design, document, communication and implementation plan approvals
- Approval of the forecasts & targets
Design Process, Assessment of Current Plan & Competitiveness Requirements
Human Resources (HR) are typically the owners of the incentive compensation design process. In many organizations (particularly those that are mired in the ways of the past) they are seen as the complete owners of the program. Many HR groups are their own worst enemies in this situation as they foster the illusion that they own the incentive plan. Such should not be the case. As a consultative resource to the organization, it is their responsibility to coordinate and manage the design and development process and to ensure that the plans that are implemented are fair and equitable, can be managed within the allocated reward budget, and are competitive with other comparable organizations, in markets where the company competes for talent. HR, in their consultative role, may also facilitate the management sessions required to identify vision, direction and strategy.
The payouts for achievement must also be reviewed (particularly in a new plan) to ensure that they are material relative to the effort that was required to deliver the expected result. HR will participate and provide input to corporate policies and practices to ensure that they are consistent with employment standards and will engage in measurement and feedback systems development (e.g.: performance management, employee attitude surveys etc.) to ensure that employees are heard and their opinions are considered in input to the design process. Elements of the ownership component for Human Resources include:
- Data collection on plan performance, sales results & analysis of payouts
- Review or development of an Incentive Compensation Framework
- Issue identification to ensure proper resolution of plan design problems
- Organizational input/feedback to the design process
- Market data collection, survey participation and competitive market assessment
- Evaluation of performance measures
- Development of design alternatives
- Review and selection of preferred alternatives
- Plan document development and production
While HR owns the design and development process, many other functions have responsibility for deadlines and deliverables Commitments in this regard must be made with consideration of the impact that lateness will have on plan delivery, morale and credibility.
Costing Analysis, Target Setting & Program Audit
The financial and profitability aspects of the incentive plan design payouts, providing support and company requirements for targets and the audit of plan performance once implemented (to ensure that it is being administered properly and that payouts are correct) are owned by Finance.
Once the design of the incentive compensation program is completed, and prior to implementation, there is a costing step that must be undertaken to ensure that the plan payouts are appropriate. This is particularly important in sales compensation programs. The costing will also assist in the setting/evaluating of incentive budget requirements and in establishing the cost aspects of the performance equation. The costing analysis is the due diligence component of the plan approvals and will form part of the information provided to management when they meet to approve the plan design.
After the plan has been rolled-out, the Finance department will conduct periodic audits of the crediting and calculation of incentive and payouts under the plan. These audits will be performed using a standard practice to ensure comparability of the results. The audit process should be decided upon and communicated at the beginning of the fiscal period to ensure that everyone understands the measurement process. Responsibilities will include:
- Costing of the plan designs against hypothetical or historic performance levels
- Preparation of a costing summary to support approvals
- Input into setting of targets/quotas based upon required corporate financials
- Development of an audit process and conduct of periodic audits to ensure proper crediting of sales and payouts
Once the targets have been set for the year, there should be no adjustments to the targets or achievement levels without a meeting and agreement of the senior management team. These adjustments in the past have created major credibility problems in organizations (even if they have been done for the “right” reasons) and reduced the incentive value of the program.
Performance Tracking and Reporting
Ensuring that performance results are logged appropriately, that credit for the result(s) is given to the individual(s) that are entitled under the plan and that the reporting is accurate and reaches the recipient is under the ownership of support groups within the organization. This may be the operations department within line functions, shared services or administration. This group should have a complete understanding of the plan design(s) to ensure that proper credit is assigned and where appropriate, split between individuals (e.g.: salespeople). They will also ensure that credit is given at each of the appropriate departments and teams. In reporting results, they are responsible for the quality of the data and ensuring that management and participants have the reports necessary to be satisfied with the plan administration.
In the design and development stages of the plan, operational staff will participate through providing performance information, assisting with data needs, reports, analysis and participation in meetings. Operations groups also have the responsibility for development and dissemination of targets/quotas for incentive compensation purposes.
Operations functions, particularly in a shared services environment should also be responsible for the incentive compensation plan administration and should make any adjustments as required to performance transactions. If anomalies are found during the audit process, once resolved, operations/administrative personnel should make the changes to the data. In the event that conditions in the organization environment require changes to either the targets or achievement levels, this group should make changes. In this way, there is only one caretaker of the information systems and one group handles questions regarding the rationale.
New technology to support incentive compensation administration makes the performance tracking and measurement much more efficient. Operational responsibilities will include:
- Performance credit, credit splits and adjustments to credit for incentive compensation purposes
- Support of the forecasting and target setting process
- Administration of the incentive compensation plan including sending information to payroll for payment of incentives
- Support of the incentive compensation design process
- Assist in the rollout of the incentive compensation plan to the organization.
Communication and Feedback
Communication is currently the most inadequate area of corporate performance in business today, but that is for another column. Suffice to say that an average program well communicated will do better than an outstanding program poorly communicated. Ownership for communication is a joint responsibility. Accountability for creation of communication materials and distribution, in the absence of a corporate communications group, rests with Human Resources. They require input from all of the other stakeholders for it to be effective and it must be a planned approach. The communications effort must start during the development phase (particularly if there is input from employees through interviews or focus groups). A full communications strategy that runs from design through to on-going communications when the incentive plan is operational needs to be created. This strategy will assign responsibility to various groups for communication content, media, frequency and expected outcomes. The time invested in the creation of the incentive program will be wasted if this component is not adequately address. Most organizations are great at intent and poor on the execution…. communications is one area that particularly suffers from this.
The success of your incentive program is a combination of people, process and technology. To be successful however, it requires that all groups within an organization accept their responsibility for ownership of the design, development, administration, communication, reporting and evaluation of the plan.