7 steps to compensation programme design – the basics

7 steps to compensation programme design – the basics

I am often asked how to go about a new plan design, or a total revamp of an existing one. How should one approach it ? Is there a methodology ?

In my mind there are 7 basic steps to take in order to design a good plan in Compensation & Benefits. They apply whether you are designing a retention scheme, reviewing a sales incentive plan, or are planning a new pension offering.

1 – Understand the background

You have to sit not only with the party requesting the new plan from you, but with all stakeholders. What is working currently ? What are their favorite parts of the existing plan ? What do they want to achieve ? What would they like to change or improve, add or remove ?

For example in the case of a sales incentive , maybe top management has asked you to review the current scheme to make sure your company is not over-spending. So the aim of management is clear : ensure good return on the cost of the programme. But the sales population will have its own view on what’s working or not. Marketing may want to take this opportunity to expand the focus on a specific product line. Finance may want to ensure that the sales population remains engaged until the customer has paid because there are some chronic customer late payments.

So make sure to understand the interests and concerns of all stakeholders.

2 – Don’t work in silo

It is not enough to ask other stakeholders for a “state of the situation” before you launch your project. You need to work with them all throughout the whole project. Establish a working committee led by you, and comprising of Finance, IT, representatives of management and maybe even representatives of employees. This is a minimum, more people may get involved depending on your company size, complexity and culture, as well as the nature of the project. So for example, for a Sales Incentive you should have Sales and Marketing represented as functions.

Having such a working committee has multiple advantages, the two most important one being that your design will eventually reflect, at least, a consensus on the interests and needs of all parties even if they may be conflicting at times. This kind of approach also facilitates buy-in from the organisation when the time comes to deploy and implement.

3 – The simpler, the better

Try to keep your design as simple as possible. You must always design with the intention that an 8 year-old should be able to understand and explain the scheme. The more rules, caveats, and exceptions you include, the more complex it becomes.

For every new rule you add, you lose 50% of the interest and comprehension of the audience. Remember that your plan should focus on the most important objectives and cannot cover every single situation or desire from all the stakeholders. So be strong and resist the urge to add multiple sub-categories, conditions, accelerators, special payments, hurdles….

4 – Keep room for the unexpected

In complement to the previous rule, you have to give yourself some flexibility and be prepared for the situations and exceptions that you may have to face. You can’t anticipate everything ! So make sure that you have included a way to manage exceptions.

This does not mean making your plan discretionary (ie results are decided purely by management without any rules or provisions for calculations). This takes away all the motivational impact intended by the plan. But you should have a provision for cases of conflicts of interpretation, and unexpected situations.

Try to keep it simple as well, and request as a first step that the manager and employee should try to find a solution and inform or involve you/HR. But sometimes that doesn’t work, or a situation has not been planned. For example, a new product is launched in the middle of the year and this was not anticipated in your sales incentive.

In that case, have a committee either make a decision as an exception, or amend the rules if necessary. Save time and effort and make the committee the same as the one that participated to the design of the scheme. This way you won’t have to bring members up-to-speed on the intention and previous decisions regarding the plan features.

5 – Think beyond plan design

Don’t forget to include operational aspects if your programme. Don’t just design the incentive, make sure you put in place the processes and policies, as well as the tools, required for a successful plan implementation. Establish who is responsible for what (manager, employee, finance, HR, any other function). Produce the forms needed, organise the workflow, prepare the templates, think about the Delegation of Authority…

Imagine if you design a brand new employee referral scheme. But you don’t prepare the form for employees to submit resumes, have not thought who will track who submitted who and when, which candidate has been effectively recruited, who informs payroll for the implementation…. Then your shiny new program will either fail, or send you in a flurry of rushed activity once the first candidate is submitted by one of your employees. Too much last minute stress for anyone !

6 – Test and/or pilot

As a complement to the previous rule, you will be happy you took the time to test your program, or piloted it in a small part of the company, before the Big Launch. There are always things that go wrong, things that were forgotten, ideas that seemed right but are in fact not adding value, or too long to process or too complicated…

Finding out in the test or pilot phase gives you time to adjust your plan, and have a fully functional product to launch to your full organisation.

7 – Communicate and educate

Finally, take the time to establish a full-fledged communication and education plan. If you have a Corporate Communications team, now is the right time to involve them as they will be able to support in fining the most effective ways to reach your targeted employee audience.

Always remember that you need multiple touch points, as well as reminders, for a new incentive or compensation programme to be fully understood and used in the organisation.

Set up, for yourself, a post-launch tracking mechanism. See which communication methods worked best and worst, with which audience. Did people ask for presentations at team meetings, while you had planned an all-employee presentation in the main meeting room of your company ? Did people actually watch the demo video that you so carefully prepared, or did they ask for a paper version with screen shots ? You will then be able to incorporate this feedback into the launch plan of your next compensation scheme.

When you have to revamp or design a compensation scheme, always follow these 7 steps : understand the expectations of all the parties involved, don’t work in silo, keep your plan simple, set rules to manage the unexpected, prepare tools and processes as well as your programme design, test or pilot your new scheme, and have complete communication and training plan. These tips will help you produce the most adapted compensation plan for your organisation.

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  1. Savio Anthony says

    I had certain queries related to compensation redesign. With regards to the current market situation our sales team is not reaching their targets , though we have certain commissions if target achieved do we need to revise the targets. And as businesses are based on location and customers as per the location so how can you have the same commission structure. Thirdly due to reduction in business, reduction in profit margins, competitive market, company is on a cost cutting mode then how do you motivate your sales team.

    • Thanks for your questions Savio. It looks like you need a full consulting session ! Please feel free to contact me to organise a meeting with your management if needed.
      Very quickly though :
      1 – If the majority of your sales team is not reaching targets, you have a problem. Assuming they are competent enough to do the job, you should reset objectives in a more realistic manner. For a sales incentive plan to be motivating and effective, you should have at least 60 to 70% of all sales people reaching at least 100% quota.
      2 – You can have the same incentive plan structure (ie the same types of quotas, accounting for the same proportion of the total sales incentives) across territories. However the right way to set incentive targets would be that each sales person has a different quota to achieve, based on the territory size, and quantity/quality of potential clients on that zone. So 2 sales people may have very different quotas (one, big quotas for a big territory with many easy or repeat clients, the other, smaller quota for a smaller territory with fewer clients) but be on the same incentive, for example, 30% of (basic + allowances).
      3 – A lot of companies in the GCC are facing tough times given the current economic climate. However, the last thing the company should cut is the sales incentive plan. If your sales people are not motivated, then how will reach their targets and then how will the company survive ? A well designed SIP is self-funded, meaning the more the sales people sell, the more you pay them, but the more profit the company also makes. In that case, it shouldn’t be a problem to keep the SIP in place. To keep the sales force motivated, you may want to consider SPIFFs/temporary “sales challenges” to help push certain products throughout the year. You may also want to focus on non-financial recognition for the sales people who reach their quotas. Not everything can be achieved through the sales incentive though. Sales managers play a huge role in keeping the sales team motivated, so the company should focus on helping them be even better people managers than before the crisis.
      All the best Savio !

  2. Excellent tips.. Thank you Sandrine..

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