A wage your (sales) people want to go for

A wage your (sales) people want to go for Basic principles & critical success factors on variable pay Wouter Beuckels Manager 3/06/2016

Introduction What is variable pay? Conditional and thus non-guaranteed part of pay granted for reaching individual or collective goals aiming to motivate the staff.

Basic principles & critical success factors 1. Do not underestimate nor overestimate the importance of a bonus

Do not underestimate nor overestimate the importance of a bonus Do rewards motivate people? Absolutely! It motivates them to get rewards" (Kohn, 1993)

Do not underestimate nor overestimate the importance of a bonus Which reward elements lead to employee satisfaction on the compensation plan...? NO Base salary package Bonus percentage YES Getting a raise Experiencing procedures / systems are fair Experiencing the results of the procedures / systems are correct

Do not underestimate nor overestimate the importance of a bonus Which reward elements lead to work engagement? Security Colleagues Work-life Bonus Employee benefits Non-financial rewards Salary Salary policy 0% 10% 20% 30% 40% 50% Private sector, clerical & middle management Source: Employee survey by Centre for Excellence in Strategic Rewards

Do not underestimate nor overestimate the importance of a bonus Which reward elements could stimulate the intention to leave? Security Colleagues Work-life Bonus Employee benefits Non-financial Salary Salary policy 0% 10% 20% 30% 40% 50% Private sector, clerical & middle management Source: Employee survey by Centre for Excellence in Strategic Rewards

Do not underestimate nor overestimate the importance of a bonus Do not overestimate... Jobs have many dimensions, focusing on one aspect may lead to less attention for non-compensated (but important) aspects Employees aren t overly enthusiastic about their bonuses Little impact on employee satisfaction or intention to leave Little impact on satisfaction about the compensation plan nor underestimate bonuses Bonus = strong communicator Bonus impacts the quantity of work Can we afford not to invest in bonuses?

Basic principles & critical success factors 1. Do not underestimate nor overestimate the importance of a bonus 2. Bonus as a part of Strategic reward

Bonus as a part of strategic reward Thinking about your reward strategy = 4 key questions How much do I want to pay? What do I want to pay for? Which reward elements will I use? How will I do this? Bonus is one element in a total package Answer these questions also specifically for your bonus

Bonus as a part of strategic reward Motivator (intrinsic ) non-financial Flexibility Holiday Working time arrangements/ Work-life balance Organisational culture and mentality Personal development Career planning Internal Mobility WORK & ENVIRONMENT TRAINING & DEVELOPMENT Pension plans Health and Welfare plans Insurances Company car Meal vouchers Expenses allowance Bonus Financial incentives VARIABLE PAY Profit sharing Commission Hourly wage Monthly base salary BASE SALARY (including holiday allowance,13th & 14th month) INSURED BENEFITS EXTRA-LEGAL BENEFITS TOTAL CASH TOTAL COMPENSATION TOTAL REMUNERATION TOTAL REWARD Demotivator (extrinsic) financial

Basic principles & critical success factors 1. Do not underestimate nor overestimate the importance of a bonus 2. Bonus as a part of Strategic reward 3. Create a fit with your organisation and employee population

Create a fit with your organisation and employee population Target Total Cash: payed when reaching objectives 100% 1 Base pay (no variable) 2 Base pay + premiums 3??? On top bonus 4??? Target bonus without leverage 5??? Target bonus with leverage Base pay Premiums??? Variable pay (dependent of performance)

Basic principles & critical success factors Consequences of different scenario s for bonuses... Constant on top bonuses will create a perception of guaranteed bonus Very rare on top bonuses will create suspicion among peers ( Who got one? ) Bonuses without leverage will create a (dominantly short term) responsibility, collective bonuses will work well with lower levels within the organisation, but may create a no extra mile attitude with higher levels. Bonuses with leverage create an immediate, dominantly individual link with performance, work well with higher levels, but demand fair reward systems with the right KPI s.

Basic principles & critical success factors 1. Do not underestimate nor overestimate the importance of a bonus 2. Bonus as a part of Strategic reward 3. Create a fit with your organisation and employee population 4. Correct market positioning and benchmarking

Correct market positioning and benchmarking Correct market positioning and benchmarking depends on Job Level Sector Size Account Mgr Account Mgr Industry Sales administration assistant Occurence Variable Pay 88% 67% 61% Variable Pay - Paid out 13.383 7.417 1.054 Paid Out Variable Pay (% vs Base Salary) 23% 13% 3% Source: Hudson Generic Salary Survey 2015 edition

Basic principles & critical success factors 1. Do not underestimate nor overestimate the importance of a bonus 2. Bonus as a part of Strategic reward 3. Create a fit with your organisation and employee population 4. Correct market positioning and benchmarking 5. Choose the right KPI s

Choose the right KPI s Individual, team or collective KPI s? Source: Employee survey by Centre for Excellence in Strategic Rewards

Choose the right KPI s Individual criteria Team criteria Organisational criteria Awarded behaviour will appear more often Collaboration Flexibility Info sharing People focus on a broader part of the organisation Best way to align business objectives with the individual needs Employee turnover of non-high performers Decreased social cohesion Decreased info sharing Stress Free-riding Line-of-sight

Choose the right KPI s Select a mix of bonus criteria... Jobs aren t one-dimensional Quantitative and qualitative criteria (to avoid performance fraude ) Mix individual/team/collective to balance advantages/disadvantages But limit the number of KPI s and attribute weight of at least 15% per parameter Keep in mind You want to select leading (not lagging) parameters Recreate the success of your top salesmen (find what makes them successful) Peer learning is key for salesteams (team objectives!)

Basic principles & critical success factors 1. Do not underestimate nor overestimate the importance of a bonus 2. Bonus as a part of Strategic reward 3. Create a fit with your organisation and employee population 4. Correct market positioning and benchmarking 5. Choose the right KPI s 6. and the right bonus formula

Bonus formula Sum, multiplicator or combination Impact on bonus Calculation paid out bonus Evaluation Individual Team + 30% 35% 70% + + + Collective 35%

Bonus formula Sum, multiplicator or combination Every KPI impacts the total bonus KPI s will reinforce or neutralize = Evaluation Individual x Team x Collective

Bonus formula Sum, multiplicator or combination Evaluatie Corporate BU + + 30% 70% 30% + + x = Projects + 30% + Development 10%

Bonus formula From score to bonus pay-out Create clear expectations : about the limits (min and max) on how scores are translated in pay-out about the expected spread in results (3 in 5 will reach or exceed expectations Gauss-curve) 40% 60% 10% or less 10% or less Threshold Target Excellent

Bonus formula From score to bonus pay-out Plain relation between result and reward Acceleration High Variable Remuneration Target High Variable Remuneration Target Low Low Target result High Low Low Target result High Deceleration Threshold High Variable Remuneration Target High Variable Remuneration Target Low Low Target result High Low Low Threshold Target result High

Questions? 1. Do not underestimate nor overestimate the importance of a bonus 2. Bonus as a part of Strategic reward 3. Create a fit with your organisation and employee population 4. Correct market positioning and benchmarking 5. Choose the right KPI s 6. and the right bonus formula

Contact: Wouter.Beuckels@hudson.com +32 9 242 54 44