A member of Chief Executive Boards International brought this issue up in a Local Board meeting. He saw that the people selling his services were "farming" existing customers and not finding new ones. They were so comfortable with what they were making, they just didn't see a need to do the harder work of finding new customers. Yet he knew his business would die over time if this behavior continued.
Another member asked, "So, why don't you make it less comfortable to do what you don't want, and more attractive to do what you do want?" Good idea. Well, the member with the problem came back to his next CEBI meeting and reported that he had this problem fixed.
The solution? A slight twist to the compensation program. He set a quota of monthly sales to new customers. Sales people who didn't make their quota had their commission on all sales (existing and new) reduced by 20%. Those who made their quota got paid for both existing and new sales, and those who exceeded their new customer quota by a given amount got a 20% kicker on all sales (existing and new).
As we say in the South, "Nobody ever 'splained it to me that way before." Amazingly, everyone is making their new-customer sales quota now. Amazing -- get the rewards and penalties aligned with the business goals, and everything starts working better.
Here are 8 steps to designing an effective incentive compensation system:
- Decide
what
"big
result"
you
want
--
sales,
project
outcome,
etc.
- Find
a
measure
of
that
outcome
that's
closely
related
to
the
job
--
something
that
the
employee
can
actually
control,
and
can
see
a
way
to
impact.
This
is
important
--
plans
based
on
"overall
company
profitability"
rarely
work
--
the
employees
can't
find
the
"lever"
they're
supposed
to
pull
to
affect
a
giant
measure
like
that.
Break
it
down
into
a
measure
they
can
understand
and
see
how
they
can
make
a
difference
in.
- Pick
a
"par"
value
for
what
"good"
looks
like
--
a
reachable
level
of
performance
that
you'd
be
satisfied
with
on
average.
This
should
be
something
the
typical
person
can
accomplish
--
not
superstar
territory.
- Above
"par",
determine
what
you
can
pay
for
higher
performance
--
it
should
favor
the
"house".
For
example,
if
your
gross
margin
on
an
additional
revenue
dollar
is
40%,
you
might
be
willing
to
pay
a
sales
person
10%
(the
house
keeps
3
times
what
it
pays
out).
- Consider
"modifiers"
that
boost
the
employee's
calculated
bonus,
based
on
other
behaviors
you
want
to
reward.
For
example,
new
business
vs.
existing
customers.
Modifiers
should
be
meaningful
--
typically
10%
to
50%
of
the
base
calculation.
- Consider
"demerits"
that
reduce
the
employee's
calculated
bonus,
based
on
behaviors
you
want
to
eradicate
--
for
example,
if
sales
reports
aren't
turned
in
on
time
or
order
entry
information
is
incomplete.
Or
whatever
else
just
"bugs
you"
about
employee
behavior.
Again,
meaningful
percentages.
- After
you've
designed
(or
redesigned)
the
plan,
then
turn
your
hat
around
and
ask,
"If
I
were
the
employee,
how
would
I
"game"
this
system?"
Then
go
back
to
steps
5
and
6
and
put
in
safeguards
to
prevent
those
abuses.
- Lather, rinse, repeat -- if they think of games you didn't, adjust the plan as needed. This "modifier" idea is really powerful -- you can play with the modifiers at least annually. The base objective may not change, but you have the prerogative to tweak the modifiers to suit yourself or the company's current (and changing) strategies.
Important Note: Step #4 above is critical -- make the plan sensitive enough by starting at "par" rather than zero on the performance metric. Plans that pay from the very first unit of measure cannot possibly be sensitive enough to get an employee's attention -- it's simply not worth the effort to go the extra mile. Here's an article that describes that important strategy in detail: http://www.chiefexecutiveblog.com/2008/02/1-incentive-compensation-plan-design.html
