In our recurring series on the Deadly Sins of Incentive Compensation, so far we’ve focused on the sins of plan delivery – that is, the errors made when documenting, communicating, and administering comp plans. In this post, we return to the sins of plan design – errors resulting from flaws in the way we structure the plans in the first place. Here’s one of my “favorites”:
Deadly Sin #6 – Too many compensation elements...time to simplify and keep your sales people happy.
Well-meaning senior management often tries to motivate by tying compensation throughout the enterprise to the many and varied challenges the enterprise faces. These kitchen-sink comp plans are more likely to crop up in executive bonus and line manager MBO plans. But you sometimes see it in sales compensation plans as well, and especially sales manager plans. Additional comp elements for salespeople in particular might focus on profit margin, customer satisfaction, new-name business, forecast timeliness and accuracy, days sales outstanding, and many other cats-and-dogs considerations.
The approach sounds good in theory, but in practice there can be negative consequences, such as:
- Plans are too complicated. A key characteristic of an effective comp plan is that the recipients actually understand it. The more elements a comp plan has, the harder it will be to understand, especially if the elements are interrelated.
- It’s defocusing. One goal of incentive compensation is to get employees to sharpen and narrow their focus on key objectives. Having too many elements flies in the face of that goal.
- Administration can be problematic. The more moving parts in a comp plan, the more likely it is that some of the metrics will be hard to measure or overly subjective, with computation prone to errors, disputes, and delays. So if your enterprise is considering adding additional elements to your sales compensation plans, make sure you ask yourself:
Are you creating a comp plan that adds value to the Enterprise & sales people are happy?