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SIP Design Process summary

M
Malcolm Bond

This document provides a summary of the sales incentive plan design process. It outlines four key steps: 1) Defining the sales platform by product strategy, sales type, complexity, and level of persuasion required. 2) Determining the appropriate mix of base pay and incentive pay based on the sales platform and market practices. Common mixes range from 100% base pay to 100% incentive pay. 3) Setting the on-target earnings and defining leverage to reward performance above target, typically 3x target pay at an excellence level. 4) Choosing a payment formula such as commission, salary plus bonus, or a matrix to determine payouts.

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SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 1 of 7 1. SALES PLATFORM Sales Incentive Plans should support the strategic direction of the business and be aligned with the type of sales being performed. The first step in the process is the identification of the Sales Platform. A. Define the Product Sales Strategy Matrix Prospective/Current Customers / Existing/New Products & Services B. Define the Sales Type Missionary / Direct Sales / Contract Sales / Distributor / Order-taker / Pre-/post-sales support C. Define the Complexity of the sales event (High, Moderate, Low) D. Define the level of Persuasion / Influence the sales person must have in order to make the sale (High, Moderate, Low). 2. SALES DESIGN TEMPLATE Specifically for larger teams, a matrix of: o Sales Platform factors (Strategy, Type, Complexity and Persuasion) and o Job type (Sales Situations) 3. ON-TARGET EARNINGS (OTE) / TARGET TOTAL CASH (TTC) - MIX OTE or TTC is the desired total amount of cash payment that will be delivered at the targeted performance level. OTE/TTC is comprised of two elements: o fixed Base Salary and o variable Sales Bonus or Commission. Most sales incentive plans will deliver OTE / TTC earnings at pay market median or average. An organisation will therefore need access to market pay data information in order to establish this comparison. Stretch goals, and overachievement, will then allow sales team members to potentially achieve actual total cash earnings well in excess of market median or average, i.e., at 75 th %ile, 90 th %ile, or even higher. Using the Sales Design Template, record the Sales Platform and OTE/TTC details for each role. 4. BASE PAY / INCENTIVE PAY MIX AND TARGET INCENTIVES The decision on the incentive mix should take three factors into consideration: A. The Sales Platform for which the plan is being designed. B. The Mix that is seen in the market place. Market pay survey data is key here. Ideally need to look at both the market sector generally, and the competitors specifically. C. Sales management philosophy. Aggressive/risk takers v. conservative.
SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 2 of 7 Mix examples: Mix Equal To: Target as % of Base Incentive Impact: 100 / 0 Straight Salary n/a All Base Pay None 90 / 10 90% base / 10% incentive 11% Performance Reminder 75 / 25 75% base / 25% incentive 33% Directional (affects daily behaviour) 60 / 40 60% base / 40% incentive 67% Highly Directional 50 / 50 50% base / 50% incentive 100% Highly Directional 0 / 100 Straight Commission Commission Rate Independent Action Determining the Mix - Factors to Consider: FACTORS DEGREE OF MIX 0 / 100 ALL INCENTIVE 70 / 30 100 / 0 ALL BASE COMPANY Objectives Volume only < ---------------------------------- > Many objectives Company Expertise Limited < ---------------------------------- > Extensive Supervision Absent < ---------------------------------- > Proactive Product Type Commodity < ---------------------------------- > Specialty Sales Focus Price < ---------------------------------- > Value-added SALESPERSON Customer Contact Salesperson only < ---------------------------------- > Many company employees Buy Decision Seller-driven < ---------------------------------- > Many reasons Sales Calls Single < ---------------------------------- > Multiple
SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 3 of 7 1. Define mix by Sales Platform items a. Product Sales Strategy - use the matrix below to identify appropriate mix range. Prospective Customers 1. Conversion Selling 70/30 (Medium) 3. New Concept Selling 50/50 (High) Combination Current Customers 6. Retention Selling 80/20 (Low) 8. Penetration Selling 70/30 (Medium) Existing Products Combination New Products b. Define mix by Sales Type - use the matrix below to identify appropriate mix ranges. Sales Type Mix Direct Seller 60/40 to 70/30 (Medium) Contract Seller 60/40 to 70/30 (Medium) Distributor Servicer 60/40 to 70/30 (Medium) Missionary Seller 50/50 to 60/40 (High) Order Taker 75/25 to 80/20 (Low) Pre- and Post-Sale 75/25 to 80/20 (Low) c. Define mix by Sales Complexity Although this is one of the four items included in defining the Sales Platform, Complexity is not a primary factor in determining mix. Mix levels do not directly correlate to complexity.
SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 4 of 7 d. Define mix by Persuasion For each Sales Type, use the matrix below to identify appropriate mix ranges. Persuasion Mix High 50/50 to 60/40 (High) Moderate 60/40 to 70/30 (Medium) Low 75/25 to 80/20 (Low) MIX GUIDELINE SUMMARY Summarise the guidelines for each criterion and propose a recommended mix. List for each plan. Product Sales Strategy Sales Type Complexity Persuasion Market Practice Mgmt. Philosophy Design Recommendation ABC Regional Account Manager Retention Selling 70/30 to 80/20 Contract Seller 60/40 to 70/30 (Medium) High (No Mix guidelines from this) High 50/50 to 60/40 (High) 60/40 Based on market data Aggressive 60/40
SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 5 of 7 4.5 Payment Mechanics There are several factors to consider when designing payment mechanics. The approach to leverage, thresholds, and payment caps will be key in defining payment mechanics. In addition, the various types of payment formula approaches are a primary consideration. This section of the Practice Guide will review each of the components that influence plan payment mechanics. 4.5.1 Types of Payment Formulas Type Choices Commission Only Flat Commission (fixed rate) Ramped Commission (rate changes at a designated performance level) Variable Commission (is a function of products being sold) Adjusted Value (rate is adjusted for value of product) Typically used to: Reward individual effort drive results Focus on volume Tie payout directly to sales success Ensure variability of costs Advantages: Helps focus efforts Drives overall production Ensures variability of cost Makes sales personnel accountable Promotes fairness, understanding Disadvantages: Encourages self-serving behaviour May dilute customer service Makes territory and account changes difficult May over or under pay Increases potential for turnover Combination Salary Plus Commission: TTC and mix are set at appropriate level. Commission is used for the variable piece. Typically used to: Improve control over payouts as compared to commission only Retain motivation characteristics of commission-only plan Salary Plus Bonus: Typically used to: Manage payout to a preferred market rate Accommodate quota-based measurement Advantages: Permits more management control Stabilises earnings (more than commission only) Recognises contributions better than salary only Provides realistic balance between risk and reward Disadvantages: Reduces variability of straight commission costs Lowers motivational impact of commission only plans Increases administrative burden Can be confusing if too complex Linked Hurdles, Multipliers, Matrices - Typically a two-dimensional matrix using two performance metrics. One on the x-axis and the other on the y-axis. Typically used to balance two conflicting measurements when focus should be on maximising each. Penalises the participant if he/she Maximises performance in one area at the expense of the other.
SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 6 of 7 4.5.2 Leverage Definition Leverage is the amount of incentive that can be earned, relative to target incentive, for outstanding sales performance. Excellence is the performance level that approximately 10% of plan participants should achieve. Leverage is used for volume-based metrics where there is intent to reward above target performance. Leverage does not apply to strategic objectives or related metrics. Organisation Position Leverage should be defined as the amount of incentive payment that will be paid at excellence level of performance. Organisation Standards Organisation sales incentive plans should generally have a payment equal to 3x target at the excellence level. This level of leverage is a very common practice among sales incentive plan design. Refer to the Organisation Sales Incentive Leverage Guideline matrix on the following page for suggested leverage levels. Mix and Leverage Example: TTC: 贈35,000 Base: 贈24,500 Mix: 70 / 30 Incentive Target: 贈10,500 Leverage: 3 : 1 TTC: 贈35,000 Excellence Pay Total Incentive is 3x Target Incentive TTC Midpoint Base Incentive Pay Excellence Pay Upside Potential 贈21,000 Base Salary 贈24,500 Base Salary 贈24,500 Base Salary 贈24,500 Target Incentive 贈10,500 Target Incentive 贈10,500
SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 7 of 7 Organisation Sales Incentive Leverage Guideline Leverage Guideline for application 1.0 x to 2.0x This approach may be used in the following situations: The business is trying to slow down the results above target. It may be very important that the business not exceed their forecast by significant levels and therefore, it would not be wise to have significant upside on the plan. Manage the cost of the incentive plan. Sales force has limited impact (low persuasion) over results. Likely a lower incentive mix also. Historical data is not reliable and the business wants to limit cost on upside performance. Historical data is erratic or volatile. As a result, it may be difficult to set the appropriate excellence level at which to define leverage. Again, in this situation, the business its risk of overpayment if leverage is set at a lower level. 3.0x This is the most common approach to setting leverage. A 3.0x leverage should be the starting point when designing sales incentive plans. A 3.0x leverage should be used in the following situations: Historical performance and payment data is reliable and Performance from year to year is fairly consistent and predictable. Higher than 3.0x Leverage higher than 3.0x should almost never be necessary.

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SIP Design Process summary

  • 1. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 1 of 7 1. SALES PLATFORM Sales Incentive Plans should support the strategic direction of the business and be aligned with the type of sales being performed. The first step in the process is the identification of the Sales Platform. A. Define the Product Sales Strategy Matrix Prospective/Current Customers / Existing/New Products & Services B. Define the Sales Type Missionary / Direct Sales / Contract Sales / Distributor / Order-taker / Pre-/post-sales support C. Define the Complexity of the sales event (High, Moderate, Low) D. Define the level of Persuasion / Influence the sales person must have in order to make the sale (High, Moderate, Low). 2. SALES DESIGN TEMPLATE Specifically for larger teams, a matrix of: o Sales Platform factors (Strategy, Type, Complexity and Persuasion) and o Job type (Sales Situations) 3. ON-TARGET EARNINGS (OTE) / TARGET TOTAL CASH (TTC) - MIX OTE or TTC is the desired total amount of cash payment that will be delivered at the targeted performance level. OTE/TTC is comprised of two elements: o fixed Base Salary and o variable Sales Bonus or Commission. Most sales incentive plans will deliver OTE / TTC earnings at pay market median or average. An organisation will therefore need access to market pay data information in order to establish this comparison. Stretch goals, and overachievement, will then allow sales team members to potentially achieve actual total cash earnings well in excess of market median or average, i.e., at 75 th %ile, 90 th %ile, or even higher. Using the Sales Design Template, record the Sales Platform and OTE/TTC details for each role. 4. BASE PAY / INCENTIVE PAY MIX AND TARGET INCENTIVES The decision on the incentive mix should take three factors into consideration: A. The Sales Platform for which the plan is being designed. B. The Mix that is seen in the market place. Market pay survey data is key here. Ideally need to look at both the market sector generally, and the competitors specifically. C. Sales management philosophy. Aggressive/risk takers v. conservative.
  • 2. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 2 of 7 Mix examples: Mix Equal To: Target as % of Base Incentive Impact: 100 / 0 Straight Salary n/a All Base Pay None 90 / 10 90% base / 10% incentive 11% Performance Reminder 75 / 25 75% base / 25% incentive 33% Directional (affects daily behaviour) 60 / 40 60% base / 40% incentive 67% Highly Directional 50 / 50 50% base / 50% incentive 100% Highly Directional 0 / 100 Straight Commission Commission Rate Independent Action Determining the Mix - Factors to Consider: FACTORS DEGREE OF MIX 0 / 100 ALL INCENTIVE 70 / 30 100 / 0 ALL BASE COMPANY Objectives Volume only < ---------------------------------- > Many objectives Company Expertise Limited < ---------------------------------- > Extensive Supervision Absent < ---------------------------------- > Proactive Product Type Commodity < ---------------------------------- > Specialty Sales Focus Price < ---------------------------------- > Value-added SALESPERSON Customer Contact Salesperson only < ---------------------------------- > Many company employees Buy Decision Seller-driven < ---------------------------------- > Many reasons Sales Calls Single < ---------------------------------- > Multiple
  • 3. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 3 of 7 1. Define mix by Sales Platform items a. Product Sales Strategy - use the matrix below to identify appropriate mix range. Prospective Customers 1. Conversion Selling 70/30 (Medium) 3. New Concept Selling 50/50 (High) Combination Current Customers 6. Retention Selling 80/20 (Low) 8. Penetration Selling 70/30 (Medium) Existing Products Combination New Products b. Define mix by Sales Type - use the matrix below to identify appropriate mix ranges. Sales Type Mix Direct Seller 60/40 to 70/30 (Medium) Contract Seller 60/40 to 70/30 (Medium) Distributor Servicer 60/40 to 70/30 (Medium) Missionary Seller 50/50 to 60/40 (High) Order Taker 75/25 to 80/20 (Low) Pre- and Post-Sale 75/25 to 80/20 (Low) c. Define mix by Sales Complexity Although this is one of the four items included in defining the Sales Platform, Complexity is not a primary factor in determining mix. Mix levels do not directly correlate to complexity.
  • 4. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 4 of 7 d. Define mix by Persuasion For each Sales Type, use the matrix below to identify appropriate mix ranges. Persuasion Mix High 50/50 to 60/40 (High) Moderate 60/40 to 70/30 (Medium) Low 75/25 to 80/20 (Low) MIX GUIDELINE SUMMARY Summarise the guidelines for each criterion and propose a recommended mix. List for each plan. Product Sales Strategy Sales Type Complexity Persuasion Market Practice Mgmt. Philosophy Design Recommendation ABC Regional Account Manager Retention Selling 70/30 to 80/20 Contract Seller 60/40 to 70/30 (Medium) High (No Mix guidelines from this) High 50/50 to 60/40 (High) 60/40 Based on market data Aggressive 60/40
  • 5. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 5 of 7 4.5 Payment Mechanics There are several factors to consider when designing payment mechanics. The approach to leverage, thresholds, and payment caps will be key in defining payment mechanics. In addition, the various types of payment formula approaches are a primary consideration. This section of the Practice Guide will review each of the components that influence plan payment mechanics. 4.5.1 Types of Payment Formulas Type Choices Commission Only Flat Commission (fixed rate) Ramped Commission (rate changes at a designated performance level) Variable Commission (is a function of products being sold) Adjusted Value (rate is adjusted for value of product) Typically used to: Reward individual effort drive results Focus on volume Tie payout directly to sales success Ensure variability of costs Advantages: Helps focus efforts Drives overall production Ensures variability of cost Makes sales personnel accountable Promotes fairness, understanding Disadvantages: Encourages self-serving behaviour May dilute customer service Makes territory and account changes difficult May over or under pay Increases potential for turnover Combination Salary Plus Commission: TTC and mix are set at appropriate level. Commission is used for the variable piece. Typically used to: Improve control over payouts as compared to commission only Retain motivation characteristics of commission-only plan Salary Plus Bonus: Typically used to: Manage payout to a preferred market rate Accommodate quota-based measurement Advantages: Permits more management control Stabilises earnings (more than commission only) Recognises contributions better than salary only Provides realistic balance between risk and reward Disadvantages: Reduces variability of straight commission costs Lowers motivational impact of commission only plans Increases administrative burden Can be confusing if too complex Linked Hurdles, Multipliers, Matrices - Typically a two-dimensional matrix using two performance metrics. One on the x-axis and the other on the y-axis. Typically used to balance two conflicting measurements when focus should be on maximising each. Penalises the participant if he/she Maximises performance in one area at the expense of the other.
  • 6. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 6 of 7 4.5.2 Leverage Definition Leverage is the amount of incentive that can be earned, relative to target incentive, for outstanding sales performance. Excellence is the performance level that approximately 10% of plan participants should achieve. Leverage is used for volume-based metrics where there is intent to reward above target performance. Leverage does not apply to strategic objectives or related metrics. Organisation Position Leverage should be defined as the amount of incentive payment that will be paid at excellence level of performance. Organisation Standards Organisation sales incentive plans should generally have a payment equal to 3x target at the excellence level. This level of leverage is a very common practice among sales incentive plan design. Refer to the Organisation Sales Incentive Leverage Guideline matrix on the following page for suggested leverage levels. Mix and Leverage Example: TTC: 贈35,000 Base: 贈24,500 Mix: 70 / 30 Incentive Target: 贈10,500 Leverage: 3 : 1 TTC: 贈35,000 Excellence Pay Total Incentive is 3x Target Incentive TTC Midpoint Base Incentive Pay Excellence Pay Upside Potential 贈21,000 Base Salary 贈24,500 Base Salary 贈24,500 Base Salary 贈24,500 Target Incentive 贈10,500 Target Incentive 贈10,500
  • 7. SALES INCENTIVE PLAN DESIGN PROCESS SUMMARY MB Reward & HR Solutions Page 7 of 7 Organisation Sales Incentive Leverage Guideline Leverage Guideline for application 1.0 x to 2.0x This approach may be used in the following situations: The business is trying to slow down the results above target. It may be very important that the business not exceed their forecast by significant levels and therefore, it would not be wise to have significant upside on the plan. Manage the cost of the incentive plan. Sales force has limited impact (low persuasion) over results. Likely a lower incentive mix also. Historical data is not reliable and the business wants to limit cost on upside performance. Historical data is erratic or volatile. As a result, it may be difficult to set the appropriate excellence level at which to define leverage. Again, in this situation, the business its risk of overpayment if leverage is set at a lower level. 3.0x This is the most common approach to setting leverage. A 3.0x leverage should be the starting point when designing sales incentive plans. A 3.0x leverage should be used in the following situations: Historical performance and payment data is reliable and Performance from year to year is fairly consistent and predictable. Higher than 3.0x Leverage higher than 3.0x should almost never be necessary.