May 30, 2024

Boneheaded Comp Plan Idea #1


Randall Bolten and Bob Berry

Tying Comp to Overly Subjective or Downright Unmeasurable Criteria

In my last post, I introduced the concept of boneheaded compensation plan ideas. These are plan design mistakes that at best reduce the value of these extremely expensive plans, and at worst motivate behavior that is the opposite of what you want.

For BCPI #1, I have selected a well-intentioned but ineffective idea: Tying incentive compensation to overly subjective or downright unmeasurable criteria. One of the things that makes comp plans work well is that they are objective that is, the performance measures are (a) understand able by all, (b) hard to argue about, and (c) verifiable by an independent third party like the accounting department. Amounts invoiced to or collected from customers are good examples. This feature is especially important when incentive compensation represents a significant corporate expense and a significant portion of each participants total compensation.

More subjective compensation elements have their place, but on a much smaller scale. For example, MBO schemes, typically for employees less directly involved in revenue production and involving much less money, are ineffective if littered with incentives related to behavior like showing up on time for and participating actively in meetings, being a team player, and delivering timely, accurate reports.

And these approaches make even less sense for sales people, except in situations where there is little or no prospect of earning commissions in the near-term. For example, when transitioning sales people into a new territory where sales cycles are extremely long, you may want to provide early rewards for territory-building achievements like getting a meeting with the business unit executive who makes budgetary decisions.

But most of the time, these incentives rarely make sense in highly structured commission incentive plans for sales and support people, for the following reasons:

  • They arent necessary. In a sales setting in particular, if all of these little objectives are met, the result should be a deal that closes. Why reward specific actions whose whole point was to generate revenue, to sales people directly compensated on that revenue?
  • The amounts are usually too small. Offering, say, $5,000 to an employee for achieving a specific task may be highly effective when that amount is one-half or one-third of the employees total target variable compensation, but may be nothing more than a distraction for sales people with variable comp targets that are ten times as high.

Its tempting to load up incentive compensation plans with all kinds of off-the-beaten-path incentives that at first glance have real corporate meaning. And to load them up on the people who seem most responsive to incentive compensation schemes. But that sort of thinking usually ends up being much more trouble than its worth, and robs incentive compensation of its most valuable characteristics.