Compensation Plan Design

Tag Archive for 'Incentive Compensation'

Casual Conversations about the Importance of Pay for Performance

Published
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Scott Barton
on August 25, 2009
in Best Practices
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I overheard a conversation today about employee pay, with the premise being, what should come first, performance or pay?

One of the gentlemen in conversation is a small business owner with about 35 employees. He was quick to answer his own question – “of course, performance should come first, but my (employees) don’t get this.”

I bit my tongue and stayed out of the conversation. But this seemingly shallow exchange got me thinking that indeed, someone could dispute this notion depending on how they view base salary and variable pay.

In the case of base salary, pay comes before performance. Sure, the employee receives a paycheck only after having performed the work. But the level of base salary is contingent on the skill this employee brings to the table. So in this sense, pay comes first. Over time the employee demonstrates a level of proficiency that either confirms or questions management’s initial expectations. Come the focal review, management may decide to place another bet by giving a merit increase to the employee. But there’s no guarantee that the employee will perform in line with management’s now higher expectations.

With variable pay, performance comes first – whether it’s the company’s performance or the employee’s against a set of objectives. Management can provide an advance or draw, but if the employee does not cover the draw, the pay becomes surrogate for base salary.

If the employee expects, or feels entitled to, a bonus, this is a problem. Similarly, there’s a problem if the employee feels entitled to a merit increase, or even continuance of his/her current base-salary rate when failing to meet management’s initial expectations of proficiency. Neither side wins in this scenario. Management feels put off that the employee doesn’t appreciate his/her compensation and the employee is disengaged, bitter, and possibly starting to think about getting another job.

Maybe I should have intervened. Then perhaps the small business owner could answer his employees’ question, and also appease them, by saying, “yes, you are right – pay does come first in the form of your base salary.” He can then rather seamlessly and without guilt or conflict, revisit the performance expectations inherent in the variable pay program.

Contact Scott Barton at scottbarton22@gmail.com

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Perspective on the Philosphy of Incentives and Can They Really Help you Achieve your Objectives

Published
by
admin
on February 26, 2009
in Research and Articles
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1 Star2 Stars3 Stars4 Stars5 Stars (3 votes, average: 3.33 out of 5)
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Immanuel Kant, an 18th century German philosopher, developed an interesting theory. His theory is based on the premise that a single moral obligation must be obeyed in all situations if our behavior is to observe the moral law. He also believed that if an action is not done with the motive of duty, then it is without moral value.

Here is an interesting article with an example of Kant’s theory:

Suppose that I, a rich Westerner, ought to make a contribution to charity to relieve poverty in the developing world, and that I am well aware of this fact. Suppose further that I would like to do so, that I care about the welfare of others and so that making such a donation will make me happy. When I make the donation, it is difficult to tell whether I am doing so out of duty (because I recognise that I ought to) or out of inclination (because I want to).

Kant holds that moral action must result from respect for the moral law. If I give money to charity because I want to, but I lack respect for the moral law and so if I didn’t want to make a donation then I wouldn’t, then in making the donation I am not acting well. My donation is at best benign, and at worst selfish; it is certainly not laudable.

If, on the other, I don’t want to give money to charity, but, because of my strong sense of duty, do so anyway, then this Kant would applaud. I may be mean, selfish, and heartless, but I respect the moral law. In conquering my inclination I have acted well.

Now, the question becomes how do you instill sense of duty? Where does it come from?  In the context of incentive compensation, even more interesting - can incentives help create/instill that sense of duty?

According to this article, that’s a pretty hopeless endeavor.

McLean Parks and Hesford conducted a study using a random sample of students who were paid for solving anagrams according to one of three different compensation plans. The plans consisted of different forms of compensation, but their expected value was identical. The students self-scored their work and in half of the cases signed a statement attesting to the veracity of their reported results.

The study resulted in very interesting findings:

  • Participants receiving a ‘flat salary’ for their work were the most honest about reporting their scores.
  • Many participants who received a performance based bonus cheated when reporting their results.
  • Participants who were penalized based on low performance not only cheated but also stole the nice pens that were to be returned at the end of the study!

So we should ask ourselves Kant’s ideas are still relevant today, and sadly, if moral obligation is an outdated concept. Also, it doesn’t look like Parks and Hesford’s study actually measured performance of each of the compensation plans, but it is clear that penalizing employees is not a good idea, and that controls should be in place to ensure the employees have no way of “gaming” the system.

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Sales Comp Administration Practices Survey

Published
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admin
on February 17, 2009
in Uncategorized
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I mentioned last week that OpenSymmetry was just about to launch their Sales Performance Management survey. I have the pleasure to announce that it was launched today! I don’t like to advertise any company (even when it’s my own firm), but I contributed to write this survey and I really believe it will provide tremendous insight into Sales Compensation trends…  And as with any survey, the more people participate, the more meaningful the results will be.

OpenSymmetry Sales Compensation Survey

You should take this survey to:

  • gain further insight into your own organization’s compensation practices
  • make valuable comparisons between your company’s compensation practices & market norms, and
  • enhance or redesign your current compensation policies and programs

So go take the survey now… it will only take about 15 minutes.

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Non-Cash Rewards Solution: IncentOne Review

Published
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admin
on January 28, 2009
in Vendor / SPM Solution Review and Info
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Once you have determined that it would be nice to offer non-cash rewards to reward a good performance, the challenge becomes to manage those incentives.

That’s where IncentOne comes in. IncentOne offers simple solutions that can help a business drive results. The concept is simple; employees earn points for completing various activities. These points could be tied to an employee evaluation, or directly to sales performance. Employees then redeem those points for a reward which they can select from IncentOne’s portal.

When the employees log in, they will have access to information about the things they need to do to earn points. And, they can see how many points they can earn for each of the pre-defined activities. More importantly, they will also see how many points in total they can Receive.

Once they are ready to redeem their points, they can visit the “Rewards” section. This section is pretty intuitive; there are many categories from which they can pick various rewards. Gift cards, merchandise, travel packages… even charity donations!

The IncentOne’s portal is customizable; the content , layout, colors and the company logo can all be changed from the administration tool.

The milestones and related award values are also configured within the administration interface.

As one could expect, IncentOne provides role-based access to the incentive program. Different “roles” are created, with various access levels for each of the roles. For example, an administrator could change everything, while the program manager could be restricted from creating new programs.

Finally, IncentOne provides many reports, both standard and customized. If you want a summary by program, an activity report by gender, by age group, etc, it’s all there “out-of-the-box”.

Many companies already have an incentive compensation system in place. I have seen many of these solutions used to calculate who deserved a certain non-cash reward. The most common incentive program I have come across is a recognition award for top performers, sometimes tied to a trip or award ceremony. However, managing more complex non-cash reward scenarios, and figuring out where the rewards are coming from while giving the employees the flexibility to choose what they want is often a big challenge.

IncentOne can integrate with sales performance management systems. The number of points could be calculated by the SPM system, and received by IncentOne for redemption. IncentOne is also an attractive solution because as with other solutions, its cost is based on the number of employees in the system per month. The standard configuration is also fairly quick and intuitive, which is different than the relatively high price-tag of an SPM solution implementation.

If you are looking at introducing non-cash rewards in your incentive strategy, I think that IncentOne is worth looking at.

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BREAKING NEWS – Xactly acquires Centive

Published
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admin
on January 22, 2009
in Industry News
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I heard this rumor earlier, but before spreading it I wanted to be sure it was true. After all, this is not the first time that I hear rumors about Centive!

And it is true…

Xactly Corporation just posted the press release about the Centive acquisition.

“In a stock-based transaction, Xactly has acquired all of Centive’s assets and its employee base. The combined companies will operate under the name Xactly… Xactly will fully support both companies’ product platforms for a minimum of 18 months to ensure the seamless transition of customers to a unified product roadmap. The company will continue to be led by Xactly’s management team, and will maintain its headquarters in San Jose, California.”

I expected something like this to happen eventually.  Xactly secured $30 million last May, putting them in a good position to acquire another company, while having enough cash to survive a recession. That 30 million dollar also made Xactly a company that would have been very expensive to acquire.

The Centive acquisition is a huge change in the SPM market! First, because both Xactly Incent and Centive Compel were leading solutions in the 100% SaaS market focused on the small to mid market segments. As we know, SaaS companies rely on a price per payee per month model… That means that to be viable, a certain number of payees is required; and Xactly just managed to significantly increase their number of payees in a snap.

Secondly, as I said before, vendor’s balance sheets are very important, especially in a tough economic environment. One of the biggest concerns of companies selecting an SPM vendor at the moment is: “will this company be around for the next several years”. And that’s a valid concern, considering that many companies have revenues MUCH larger than those of the vendor they are selecting. By increasing its size (and revenues) significantly, Xactly should be able to reassure many of those companies.

The next hurdle will be to convince everyone that in 18 months, both companies will be able to be transitioned to a unified product roadmap. And the other major hurdle will be to actually manage to do that, without having to re-implement all the Xactly and/or Centive implementations.

Re-implementation… That’s probably the biggest concern of Centive clients who received that news today. Since Xactly made the commitment to support both solutions for the next 18 months, the news probably means “business as usual” for most people… for the next year. In the meantime, Xactly engineers have 18 months to figure out a clever way to make the transition.

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How Healthy is the Incentive Compensation Industry?

Published
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admin
on January 22, 2009
in Industry News
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We have looked at many survey results, but there is another indicator which I have not talked about for some time. The financial results and the number of deals signed by the various SPM vendors can give us a picture on how well the ICM industry is doing… And it’s that time of the year when vendors are starting to report their 2008 performance.

Merced Systems:
Merced Systems, the leading provider of Sales and Service Performance Management software and solutions, announced today that the company grew rapidly in 2008, posting record sales amidst the global economic slowdown. Highlights include the signing of multiple North American Incentive Compensation Management customers and over 100% growth in Software as a Service (SaaS) revenue. Merced Systems reached $40MM in annual sales for the first time in company history.

Varicent:
The full 2008 results are not available yet, but this press release shows Varicent’s performance up to and including Q3.

Revenue results were strong for both quarters driven by a number of new customer acquisitions and significantly larger orders for Varicent SPM. Q2 revenue was up 40% over Q1 2008 and in Q3, Varicent generated record revenues and a 35% revenue increase over Q2 2008 showing evidence of a growing market demand for Varicent solutions.

Xactly Corporation:
In the 12 months ending December 31, 2008, Xactly achieved more than 140 percent increase in recurring revenue and an 87 percent year-over-year increase in total revenue. The company also added to its customer base, with a third of existing customers adding new modules or subscribers, and increased its total number of subscribers by 84 percent.

Callidus Software:
Callidus’ Q4 earnings conference call is only scheduled for next Tuesday, Jan 27 at 4:30pm Eastern. I’ll add to this story when we get the details, but I think we will see some growth from them as well.

Other Vendors
And there are all the other vendors. All of these companies (with the exception of Callidus) are private, so there is no requirement to report on their performance. Some of them will probably release some news in the next few weeks, but I just wanted to reassure that if they are not listed here at the moment, it does not mean that they are not doing well.

To answer my question…
So, how healthy is the incentive compensation industry? 2008 was a good year; even Q4 was good despite the economy. Maybe the recession will catch up with some of the vendors eventually, but so far it looks like most vendors are doing well and have many good deals in the pipeline (no pun intended Callidus). And this confirms that there is still a strong demand for sales performance management solutions, at least up to now.

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