Bonus Plan Simplification

Bonus Plan Simplification

Compensation plans are one of the most effective forms of communication ever invented. Generally, if you clearly tell someone what you want accomplished—and tie a reward or recognition to the outcome—they will understand what you are asking them to do.

While this seems obvious, we have found that companies often fail to use or design their compensation/bonus plans to be sharp communication tools. This is usually true because bonus plans may not be clear as to what is expected, or the key message or priority gets lost in a forest of less-important messages. To help avoid these common problems, let me outline a few principles we have learned for designing simple and on-message pay plans.

Be brutally direct in stating your expectations—if you want your sales executive to grow revenue by 20% over last year, tell them that (and only that) and pay them accordingly if those results are achieved or exceeded.

Be concise and focus only upon priority outcomes—realistically, there are only a few key things that you can expect a sales professional or executive to accomplish in a year. For example, you may want an executive to successfully introduce a new product line in their business unit and grow unit profit by $250,000 over last year.

While there may be many other things you want to happen during the coming year, do not fall into the trap of trying to put them all into the executive’s pay plan. The extra 2-3 goals that often get added will become confusing to the participant and cloud the real priorities you have in mind. We often call overly-complex plans a “partridge-in-a-pear-tree” (PIAPT) design.

Avoid micro-managing with your incentive plan—tryto avoid the school of thinking that suggests that you must pay a sales representative or a key manager a bonus for everything you expect them to do or attempt (extreme version of the PIAPT design). I have seen as many as 6-8 small bonuses contained in an annual bonus plan with predictable results. The argument is that if you do not pay them to do something they will not do it. Examples of typical “non-bonus able” basic tasks or milestones would include: making sales calls, expense control, business planning, hitting deadlines or collaborating (well) with their peers.

For those considering a micro-management incentive plan, remember that there are at least three protections in place that obviate the need for such “coin-operated” pay techniques—

  1. You pay them a salary to do all of this routine and daily stuff, in the first place;
  2. If they are successful doing all of these underlying (and common-sense) tasks well, the proof should be in the end results; say improvement of sales or profits or the achievement of other strategic milestones; and
  3. You have executives and managers to oversee that overall performance and activity of sales professionals or other key employees. There is no need to make the bonus plan a manager.

If all else fails, document your annual incentive or bonus plan in a single-page document (only allowing a second page for an example of payouts). This technique usually provides the desired bonus plan simplicity and clarity.

So follow the above principles and take the opportunity to make your bonus and incentive plan a highly-effective communication tool.

And, plant that pear tree somewhere else.

Wilkening & Company has assisted clients for near 25 years in the design of effective sales-force, manager and executive compensation arrangements. Over 100 plans have been implemented. Are you having a problem with your incentive or bonus plans? Give us a call, we likely have a solution.

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