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Incentive Plans

Incentive Plans. Types of Variable-Pay-Plans. Base vs Variable Pay. Individual Piecework Plans. With no gain-sharing Based on employee performance by means of observable, concrete, objective performance evaluations Measurable rather than evaluating performance

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Incentive Plans

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  1. Incentive Plans SESSION 4b - Incentive Plans

  2. Types of Variable-Pay-Plans SESSION 4b - Incentive Plans

  3. Base vs Variable Pay SESSION 4b - Incentive Plans

  4. Individual Piecework Plans • With no gain-sharing • Based on employee performance by means of observable, concrete, objective performance evaluations • Measurable rather than evaluating performance • Mostly used for production workers • Based on performance rates ref . Taylor, Gantt and the Merrick plans • With gain-sharing • Employees share with the employer the increase that results from performance improvement ref . Halsey, Rowan and the Bedeaux plans SESSION 4b - Incentive Plans

  5. Effectiveness of Piecework Plans • Piecework plans generally share a number of characteristics • The work is simple , repetitive and easy to measure • Little if any interchange employees is required • Performance standards are clearly set • They are accepted by both concerned employees and the management • Easy to adjust standards when necessary • Cash incentive between 25 to 35% over standard rate generally well accepted SESSION 4b - Incentive Plans

  6. Individual Performance Incentive Plan • Neither group performance nor organizational performance is considered • Frequently used for sales positions • However, most performance based plans are mixed rather than individual SESSION 4b - Incentive Plans

  7. Sales Compensation • Base principles that drive the elements of sales compensation design? • Application of the general principles listed below will increase the effectiveness of your sales compensation plan designs. • Plan designs should support the company’s business objectives and strategy. • Target compensation should be market competitive to be externally attractive for recruiting, retaining and motivating employees. • Pay should be managed to target; each individual should have a fair and equitable opportunity to achieve his or her target compensation. SESSION 4b - Incentive Plans

  8. Sales Compensation • Base principles that drive the elements of sales compensation design? (continued) • Ratio of base salary and incentive compensation (Mix) should consistently reflect the level of persuasion of each job. • Selection of performance measures for each job should be limited to no more than three results-oriented components. • Incentive earnings should accelerate above expected levels of performance to encourage exceptional levels of performance. • Contests and recognition programs should complement the base salary and incentive compensation system, not undermine them. SESSION 4b - Incentive Plans

  9. Prominence in the Marketing Mix • Prominence is a measure of the salesperson’s influence on the buying decision • It captures the relative influence of the salesperson compared to the influence of pricing, advertising, product quality, customer services, etc… • High prominence • Salesperson heavily involved in differentiating his/her company’s offer from offers presented by other companies i.e. a door to door or telemarketing salesperson who seeks to sell unadvertised and unknown product • Low prominence • Salesperson unable to exert much positive influence on the prospect of business i.e. a department store or sales counter clerk, pricing practices play a larger role in the customer’s decision to walk into the store SESSION 4b - Incentive Plans

  10. Prominence varies • A Dynamic Concept • Prominence varies as the point of customer contact, product mix, the sales role and type of customer vary • Prominence of a given sales job will usually change over time as well • Prominence is the key concept in the design of effective sales force compensation programs SESSION 4b - Incentive Plans

  11. Barriers to Entry • A barrier to entry is a qualification the candidate must meet to be considered for the job. • The greater the number, specificity, and value of these qualifications, the greater the barriers to entry • As barriers to entry increase, the available labor pool decreases and the new hire’s minimum economic value increases • Skills and experience required for high-barrier sales rep probably command some kind of guaranteed income due to a high demand market environment SESSION 4b - Incentive Plans

  12. Basic Barrier/Prominence Relationships • Expert/experienced rep • Product, company, application must be sold Barriers to Entry Low High • Minimally trained rep • Heavy prospecting • Multiple suppliers High Prominence SESSION 4b - Incentive Plans • Minimally trained rep • Familiar products • Established customers • Technically skilled rep • Complex product, need seen, few suppliers Low

  13. Basic Barrier/Prominence Relationships • Expert/experienced rep • Product, company, application must be sold Barriers to Entry Total Cash Compensation Low High • Minimally trained rep • Heavy prospecting • Multiple suppliers High Prominence SESSION 4b - Incentive Plans • Minimally trained rep • Familiar products • Established customers • Technically skilled rep • Complex product, need seen, few suppliers Low Fixed Income

  14. Forms of Compensation SESSION 4b - Incentive Plans

  15. Pay Mix SESSION 4b - Incentive Plans

  16. Pay Mix SESSION 4b - Incentive Plans

  17. Achievement Distribution SESSION 4b - Incentive Plans

  18. Payout Available in Performance Range 500% $75,000 2.5x 4x 250% $45,000 1.5x 100% $30,000 1x 0% 0% 100% 150% 200% Quota Excellence Sales Incentive Plans Upside and Acceleration 5:1 SESSION 4b - Incentive Plans 3:1 • Note: This example is illustrative. Accelerators may vary by region and by role. • The example shows two acceleration ranges with a decelerator at a given level of excellence

  19. Upside and Acceleration SESSION 4b - Incentive Plans

  20. Mixed Performance Based Plans • Both public and private organizations (1990) in NA offer this type of plan to : • 80% of the companies have one or more performance bonus plans • 78% all their managers • 20% to non-management employees • 90% to senior executives SESSION 4b - Incentive Plans

  21. Incentive Amounts • May be expressed as a percentage of corporate profits above a certain threshold • Most companies have it expressed as a percentage of employee’s pay or as a percentage of Total Target Cash. • There are different formulas for awarding incentives that are based on both individual and organizational performance. • The split award method • The multiplier method • The matrix method SESSION 4b - Incentive Plans

  22. Different Formulas Awarding Incentives • The split award method • Bonuses depend equally on individual and organizational performance • Individual performance may be cancelled out by a poor organizational performance, and vice versa • The multiplier method • Individual performance score is multiplied by the organizational performance score • When individual and organizational both above 100%, it triggers higher incentives than the split award approach • The matrix method • The most widely used method • Based on employee category and different performance basis • The higher the position, the higher the impact on the overall organizational performance on total results • e.g. CEO 100% on Corporate results SESSION 4b - Incentive Plans

  23. Organizational Performance Measurements • Return on Equity Profits / Shareholder’s equity • Return on Investment Profits / (Shareholder’s equity + long-term debt) • Return on Net Assets Net Profits / (Total assets - current liabilities) • Other Methods Sales / Total assets or Profits / Sales SESSION 4b - Incentive Plans

  24. Performance Measures SESSION 4b - Incentive Plans

  25. Group Performance Bonus Plans • Mostly appropriate for employees whose work is interdependant • Most effective with small, stable groups of employees • Less popular than individual ones • Expected to become increasingly more common in the years ahead as job structure are shifting toward more interdependant tasks SESSION 4b - Incentive Plans

  26. Types of Group Performance Bonus Plans • Two main categories: • Gain-sharing • Generally applied to non managerial employees • Employee must have a direct impact on productivity or costs to be entitled to a bonus • Main issue : organizations may be forced to pay bonuses despite poor financial results • Profit sharing • Bonuses based on the organization’s overall performance • Generally employees receive an automatic fix percentage on their bases salary when total profits or when a certain threshold is met. • Becoming more popular (+/- 25% of cpies having such plan) SESSION 4b - Incentive Plans

  27. Type of Variable-Pay Plans SESSION 4b - Incentive Plans

  28. Type of Variable-Pay Plans SESSION 4b - Incentive Plans

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