Why Good Incentive Plans Fail. And, How to Keep your Great IC Plans out of the LOSER Category

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Mitchell Fleming
6 years ago
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1 Why Good Incentive Plans Fail And, How to Keep your Great IC Plans out of the LOSER Category

2 Presented by Bob Davenport, Vice President & Managing Director Sales Force Effectiveness Consulting Hay Group

3 Agenda Myth of a Well-Designed Plan Research Findings What s Gone Wrong? How to ACT

4 The Myth of a Well Designed Plan Good IC design thinking says. IC Design Team Benchmark Competitors S.M.A.R.T. Goals Timely Documented

5 The Myth of a Well Designed Plan So what s wrong with that? Could be plenty!

6 Good Design is Often not Enough Lots of people follow good design practice -- but end up with loser plans

7 Let s look at some research Good news Bad news

8 The Good News IC plans can have an excellent ROI Additional Profit Expection -- with a "Good" IC Plan Additional Profit ($M) $16 $14 $12 $10 $8 $6 $4 $2 $0 $0 $200 $400 $600 $800 $1,000 Company Revenue ($M) * Source: Accenture Study, 2001

9 The Good News Most people believe that they can have an impact Does your job provide an opportunity to accomplish results? 80% %age favorable 60% 40% 20% 0% Management Professional Employee Group Clerical * Source: Hay Insight Surveys, 2003

10 The Bad News... Employees do not see the linkage between pay & performance Do you agree that the better your performance, the better your pay will be? 80% %age favorable 60% 40% 20% 0% Management Professional Employee Group Clerical * Source: Hay Insight Surveys, 2003

11 The Bad News... Most IC plans are too complex to be effective Management Evaluation of unit's Capabilities Organization Structure People Compensation Desired State Current State Process Tools Basic Sophisticated Source: Gartner Group (2001)

12 The Bad News... Stars leave for comp reasons! Reasons for Voluntary Attrition Immediate Supervisor Family /Personal Compensation Management in General Limited Career Adv Oppty High Performers Overall Attractive Oppty 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% * Source: Hay Insight Surveys, 2003

13 So, what goes wrong?

14 Deviants We often do not get close enough to Deviants

15 Deviants We often do not get close enough to Standard Deviations They are your IC design friends Standard Deviation ~ 5% More, later... 40% 55% 70% 85% 100% 115% 130% 145% 160%

16 Fashion Models What s in fashion may not be what is best for your plan Leisure suit designs This is what everyone is wearing today

17 Fashion Models Foolish consistency is the hobgoblin of little minds. Ralph Waldo Emerson

18 Conspirators Those trying to manipulate the plan for their own good The Plant Manager tying the plan to shipped goods The sales manager manipulating the crediting database The warehouse with inventory goals The unit head with low ball goals The manager with the competitive survey (done by recruiters) or worse, the anecdotal story

19 Torpedoes Subverting the plan Examples: Changing rules mid-stream Changing eligibility Triggers

20 Good Intentions The Highway to Hell Some examples: We treat everyone equally We don t want to hurt anyone s feelings We can t let them earn too much We can t pay them too little

21 The 3 Strategies -- ACT Ask Chant Test

22 Ask Feedback is essential Must occur before, during, and after plan implementation All stakeholders must be considered The eligibles The plan owners The metric police

23 Best ways to Ask Some Best Practices Surveys (well designed ones) Town Hall meetings Focus Group meetings 1 on 1 s (key stakeholders)

24 Ask Surveys that work Don t ask questions you do not plan to address Are not too long, or vague Examine all the responses Means are nice, but the extremes show where the passion is Benchmark internally -- and externally

25 Ask Good Survey Reporting Sales Goals are Fair Incentive Plan is Fair Incentive Reflects my Performance Favorable Neutral Unfavorable Sales Contests are Fair 0% 20% 40% 60% 80% 100% Poor Survey Reporting Sales Goals are Fair Incentive Plan is Fair Mean Incentive Reflects my Performance Sales Contests are Fair

26 Ask Town Hall meetings Are best chaired by someone in authority Are a managed dialogue Well prepared, or get back -- to everyone -- with the answers to questions you could not answer directly

27 Ask Focus group meetings Allow you to go in-depth Should be comprised of peers Need meaningful sample of demographics

28 Ask Key Stakeholders the usual suspects + the one s with special powers

29 Chant Buy-in and understanding are critical

30 Best ways to Chant Some Best Practices A Communications Plan FAQ s on your intranet Personalized scorecards

31 Chant Communications plans that work Use multiple: Communicators Venues Vehicles/Methodologies Make it personal

32 Chant FAQ s -- Anticipate the questions Must have easily accessible answers Best: live FAQ s opportunity to post clarification questions

33 Chant Personalized Scorecards What s in it for me? Pictures worth 1,000 words (dashboards)

34 Test Modeling and Testing have largest payback Bank One Corp. slashed bonuses promised to employees as an incentive to make more loans and gather deposits because it overestimated profit from the drive head of retail banking, told employees they would get "significantly less" than originally calculated... "The payments are 'way out of whack' and do not correspond to the actual revenues and profits which will result from the campaign,".."the mistake in proper modeling and incentive design is entirely the fault of me and my senior team," he wrote.

35 Best ways to Test Some Best Practices Understand and apply concept of Standard Deviation Learn from previous plan Thoroughly model new plan

36 Test Standard Deviation Knowing who is < and > 1 Standard Deviation Ensure that stars are taken care of and the poor performers are not!

37 Test Standard Deviation -- Example Rule of One Standard Deviation: 70-75% of sales force should be paid within 1 standard deviation of performance reflect goal-setting precision Example: General Industrial Goods Standard Deviation ~9% Standard Deviation ~ 5% Example: Consumer Packaged Goods 40% 55% 70% 85% 100% 115% 130% 145% 160% 40% 55% 70% 85% 100% 115% 130% 145% 160%

38 Test Previous plan Step #1 is to dissect the old plan Are winners the real winners? ROI analysis At all levels of performance -- individual and collective Star/dog analysis

39 Test New plan 3 key tests 1) Past performance vs. new IC plan 2) 3 levels of projected performance Conservative Target Wow 3) Standard Deviation Good distribution

40 In Conclusion IC plan success is as much about execution as it is about strategy You will win if you A.C.T. correctly

41 Questions

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