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The Deadly Sins of Incentive Compensation

From time to time, I’ve written about incentive compensation. I’m a huge fan of commissions, bonuses, and other incentive comp schemes, when done properly. They reward outstanding work and enable people to share in their enterprise’s success. But incentive comp gets a lot of bad press when it’s done in a boneheaded way – press that makes the practice appear self-serving, unfair, and even dishonest. Some of that bad press comes from me – see my posts on realtor commissions, the Veterans Administration, AIG, and Paul Krugman’s view of bankers.

I write about this subject because not only does designing a really good comp plan require some actual math skill, it also must be an exercise in good quantation – after all, a plan just can’t be effective if it’s communicated so poorly that the recipients aren’t able to understand how it works, not to mention that it will be incomprehensible to those who might otherwise be able to point out its flaws.

If you’ve seen my book, Painting with Numbers, you’re aware that sprinkled throughout it are the Deadly Sins of Quantation. These are mistakes made in the course of presenting numbers that are not just ordinary, harmless mistakes, but ones that affect your relationship with your audience in ways you don’t want. (Send me a Proformative Private Message if you’d like a list of them all.)

In that spirit I offer the Deadly Sins of Incentive Compensation. And I’m looking for your input: What are your “favorite” incentive compensation mistakes? The ones most likely to cause a plan to fail to achieve its purposes? Here are a few already on my list, about either how a plan is designed, or how it’s delivered:

  • Tying compensation to metrics that the recipient doesn’t or can’t control
  • Too much in “all-or-nothing” bonuses
  • Changing the plan significantly every year, or even more frequently
  • Communicating next year’s comp plan details before the current year is over

The timing is ideal for this effort, since this is the time of year when December 31 companies are preparing their plans for the upcoming year. So don’t be shy – share your favorite(s) by adding a Comment to this post, and let’s have some yearend fun!

“Painting with Numbers” is my effort to get people to focus on making numbers understandable.  I welcome your feedback and your favorite examples.  Follow me on twitter at @RandallBolten. And click here to see all of my blog posts. 

Comments

Gary A. Pokorn
Title: Sales Enablement Manager
Company: Oracle I NetSuite
(Sales Enablement Manager, Oracle I NetSuite) |

Excellent discussion Randall - thank you for bringing it up. As a career sales professional, permit me to add my 2 cents regarding sales-incentive (aka commission) plans. I believe it is most important that the structure of the commission plan be thought through as a 3-5 year plan; maybe longer. The amounts can and probably should change each fiscal year; but the underlying structure should be consistent. Consistency takes the sales reps' minds off of, "Is my company going to screw me?" And positions them to take a longer-term, career-oriented view of their employment with this firm. IMHO - tenure (of the "right reps") is a key to consistent sales success. Thx, GAP

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

Gary, thanks for your thoughts.

Regarding your comment about a 3-5 year time horizon on incentive comp, that’s a terrific idea if you can make the metrics fair and workable. One place where you can make that work is subscription software businesses – like NetSuite :-) – by striking a proper balance between rewarding new customer acquisitions and license renewals.

Anonymous
(CEO/President) |

Please add the "built-in discount" to the list. This was done for accounting staff. The management reduced fair salaries by a percentage to come up with base and "bonus". No control was given to employees over variables affecting their ability to receive their full pay.

Ernie Humphrey CTP
Title: CEO & COO
Company: Treasury Webinars
LinkedIn Profile
(CEO & COO, Treasury Webinars) |

Here is a related blog of mine on Proformative,
Incentive Compensation: The Anatomy of Competitive Advantage, https://www.proformative.com/blogs/ernie-humphrey/2014/12/05/incentive-compensation-plan

Ernie Humphrey CTP
Title: CEO & COO
Company: Treasury Webinars
LinkedIn Profile
(CEO & COO, Treasury Webinars) |

Also, according to a recent study by the CGMA, "The Digital Finance Imperative: Measure and Manage What Matters Next". The top value drivers reported by company leaders are :

1. Customer satisfaction
2. Quality of business processes
3. Customer relationships
4. Quality of people (human capital)
5. Reputation of the company brand

Incentives need to "tweaked" to measure the impacts of actions on key drivers of company value in the digital age.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

One word I did NOT see........"clawbacks"

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

Emerson--
Please clarify -- what do you mean by "clawbacks" as they relate to incentive compensation?

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

yes...when NOT done right, the basis for the computation of incentive compensation is flawed or erroneous. Not having clawback provisions IMO is a sin.

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

I'm still not sure what you mean. Can you give me an example of a clawback provision?

Sandra Ehn
Title: Sr. Revenue Accountant
Company: VersionOne
(Sr. Revenue Accountant, VersionOne) |

My company uses clawback provisions in IC for sales that have been written off to bad debt (not collectible or multi-year deal cancelled mid-term) or for services that were never invoiced or delivered after x amount of time.

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