If you search for “Compensation Plan,” “Compensation Planning,” or “How to Make a Compensation Plan” you will be met with over 40 million results for each search. Beyond that you will find that varying authors suggest that you should consider anywhere between 3 to 15 top aspects or steps.
Image courtesy of Guillaume Brialon via flickr.
From this abundance of information and range of perspectives it is a fair assumption that while putting compensation plans together is a tricky, complex science – there is no perfect solution. With no background or experience in putting such plans together I won’t prophesize the top (Insert Random Number Here) initiatives and things to consider when planning. I can, however, relay strikingly similar issues and considerations borne from different organizational teams when asked for their input on compensation plans.
9Lenses engaged with two separate teams across different US regions for a Fortune 20 organization. The purpose of the engagements was to assist planning the next financial years compensation plan. We discovered multiple trends and areas for improvement for both of these teams, but five findings were almost carbon-copied:Employee Understanding, Overall Impressions, Metrics, Comparison to Previous Plan, and Unintended Consequences. From these, we can draw some conclusions:
Communicate Plans Early to Assist Understanding
Compensation plans are inherently drawn up by management teams or individuals based on research, industry comparison or expert intuition. It is a proven fact that without consultation of those people affected by such plans, effectiveness of rollout and adherence are impacted. 9Lenses sourced data from recent engagements, which suggested poor communication of plan content, scheduling, and metrics impacting overall satisfaction. Personnel suggested that they understood the overall plan and how their pay was calculated. They often did not comprehend when they would be paid or actual payout details. More importantly large numbers did not fully understand how their compensation and performance linked with broader organizational goals.
Short Term Thinking vs. Long Term Strategy
Connecting the dots between compensation and long-term strategy appears to be a big area of focus with large organizations. Typically sales incentives and cumulative compensation plans focus on landing new clients or contracts. In an ever-growing competitive landscape, compensation plans need to have an account management focus to encourage “land & expand” thinking. It is imperative to define and communicate the long-term strategy of your organization then ensure that the appropriate incentives are put in place. Not overloading teams with conflicting incentives is vital. Just as important is incentivizing different roles and functions the right way to align with strategy (think existing growth vs. retention vs. acquiring new customers).
Once the incentives are in place in line with the strategy, correct, appropriate, and timely measurement should occur. This entire feedback loop is a proven pre-requisite of effective compensation plans.
Negative behaviors and unintended consequences from incentive plans
When the discussed model and feedback loop are not followed there are often negative behaviors and consequences reported.
|Easier accounts & workloads incentivized better.||No incentive to take complex accounts. Potential loss of customer.|
|Team integration reduces individual incentives.||Silo working and loss of customer-focus.|
|Incentives for short-term wins only.||Customer support and growth sacrificed.|
|Misuse / overload of metrics.||Confusion & impact on performance.|
|Unrealistic goals.||Low morale & drive.|
Traditional compensation plans, which pay more for short-term wins are being replaced by strategic long-term plans, encouraging growth, retention, and customer satisfaction. With this in mind, the “fine science” with no definitive solution is constantly evolving. Regardless of the exact details of such plans it is imperative to always consider team communication and buy-in, alignment to strategy and measuring performance the right way.