Who’s in charge of designing incentive plans?

There is a common theme among failed incentive programs — a lack of commitment and ownership

Most organizations use some sort of an incentive compensation program to influence the behaviour or performance of staff. Some have been spectacular in their success, others equally stellar in their dismal failure. Most have had, at best, modest success.

There is no easy answer as to why incentive programs fail because, like many other organizational initiatives, they die slow and somewhat inconspicuous deaths. Or they are replaced with the better, newer version that soon meets the same fate as the plans before it. But if one digs deep, there is a common theme among failed incentive programs — a lack of commitment and ownership.

Many individuals and groups play important roles in the design and evolution of an incentive compensation program.

A potent force or a waste of money?

If used properly, incentives can be a potent force in eliciting desired behaviour and achievement of stellar results. But if managed poorly, they can be a considerable waste of money and an exhausting source of management and employee frustration.

Incentives require clear direction, assessable performance measures, the setting of fair and realistic targets, accurate and consistent tracking and reporting, and payouts that provide an appropriate return-on-investment for the company.

Many groups should be active participants in the ownership of the incentive plan and its processes. These include:

•senior management;

•human resources;

•finance;

•administration, shared services and operations;

•information technology;

•payroll; and

•communications.

Ownership involves accountability for outcomes, deliverables, documents, communication, and the allocation of resources and budgets to achieve results and meet deadlines. Ownership has the following components:

•Vision, direction and strategy: Overall responsibility for this component belongs to management. The business goals and objectives that form the direction of a firm should be outlined clearly in the business plan, annual report or the company strategic plan.

These goals and objectives form the basis on which management creates business and sales strategies to which incentive and sales compensation must be aligned. Senior management is the ultimate owner of an incentive plan since it is one of the levers used to change behaviour and drive results.

It is, therefore, critical that the plan design be driven through this process. Failure to align incentives with business goals and strategies can produce results or behaviour that not only do not support the business, but may illicit inappropriate behaviour.

•Design process, assessment of current plan and competitiveness requirements: HR is typically the owner of the incentive compensation design process. In many organizations — particularly those mired in the ways of the past — HR is seen as the complete owners of the program.

But HR is often its own worst enemy in this situation as it fosters the illusion that it owns the incentive plan. This shouldn’t be the case. As a consultative resource to the organization, it is HR’s responsibility to co-ordinate and manage the design and development process and to ensure plans are fair and equitable, can be managed within the allocated budget and are competitive on the recruitment front.

HR, in its consultative role, may facilitate management sessions required to identify vision, direction and strategy.

Payouts must be reviewed — particularly in a new plan — to ensure they are appropriate relative to the effort required.

HR provides input to policies and practices to ensure they are consistent with employment standards. Feedback must be monitored and comes through processes such as the performance management system and employee surveys.

While HR owns the design and development process, many other functions are responsible for deadlines and deliverables. Timely decision-making is necessary to avoid delays that affect payouts and impact morale and credibility.

•Costing analysis, target setting and auditing: The financial and profitability aspects of incentive payouts, providing support and requirements for targets and auditing plan performance falls to finance.

Once the design of the program is completed, and prior to implementation, there is a costing step that must be taken to ensure payouts are appropriate. This is particularly important in sales compensation programs. Costing assists in setting and evaluating incentive budget requirements and in establishing the cost aspects of the performance equation. Costing is the due diligence component of plan approval and is part of the information provided to management when they meet to approve the plan.

After the plan is rolled out, the finance department conducts periodic audits of the crediting and calculation of payouts. These audits are performed using a standard practice to ensure comparability of results. The audit process should be decided upon and communicated at the beginning of the fiscal period to ensure everyone understands the measurement process.

Once targets are set for the year, there should be no adjustments to targets or achievement levels without a meeting and the agreement of senior management. These adjustments have created major credibility problems in organizations that have reduced the value of the program, even if done for the right reasons.

•Performance tracking and reporting: Ensuring performance results are logged appropriately, credit is given to the proper individuals and that reporting is accurate and reaches the right people is the responsibility of support groups. This may be the operations department within line functions, shared services or administration.

This group should have a complete understanding of the plan design to ensure proper credit is given and, where appropriate, split between individuals. In reporting results, support groups are responsible for the quality of data and ensuring management and participants have the reports necessary to be satisfied with plan administration.

In the design and development stages of the plan, operational staff provide performance information and assist with data needs, reports and analysis. Operation groups also have responsibility for the development and dissemination of targets and quotas.

Operations functions, particularly in a shared services environment, should also be responsible for incentive plan administration. If anomalies are found during the audit process, operations and administrative personnel should make corrections.

If 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 performance tracking and measurement more efficient.

•Communication and feedback. Communication is often a weak link. 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 HR. HR requires input from the other stakeholders and it should be a planned approach. The communications effort should start during the development phase, especially if there is input from employees.

A full communications strategy that runs from design through to when the plan is operational needs to be created. This strategy assigns responsibilities for communication content, media, frequency and expected outcomes.

Time invested in plan design is wasted if communications is not adequately addressed. Most organizations are great at intent and poor on execution when it comes to communicating with employees.

Ultimately, the success of an incentive program is a combination of people, process and technology.

Who is responsible for what

Management, HR, finance and operational and support groups all have incentive plan duties.

Management

•Development of the guiding principles for compensation design.

•Communication of business direction and compensation alignment requirements.

•Identification and commitment to resolve organization dependencies or impediments.

•Design, communication and implementation plan approvals.

•Approval of the forecast, targets.

Human resources

•Data collection on plan performance, sales results and analysis of payouts.

•Review or development of an incentive compensation framework.

•Issue identification to ensure 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.

•Plan document development and production.

Finance

•Costing of the plan designs against hypothetical or historic performance levels.

•Preparation of a costing summary to support approvals.

•Input into setting of targets and quotas based upon required corporate financials.

•Development of audit process and periodic audits for proper crediting of sales and payouts.

Operational and support groups

•Tabulating performance credit, credit splits and adjustments for incentive compensation purposes.

•Support of the forecasting and target-setting process.

•Administration of the plan including sending information to payroll for payouts.

•Support during design process.

•Assisting in plan rollout.


Dave Johnston is president of Sales Resource Group, a Toronto-based sales force effectiveness consulting firm that specializes in sales and incentive compensation plan design. He is on the faculty of WorldatWork, teaching the Total Rewards and Sales Compensation certification courses. He can be reached at (905) 845-0192 or [email protected].

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