We seem to love to get granular with incentive plans. So many compensation professionals are tasked with not missing anything, they include darn near everything in their incentive plans. Increase revenue? CHECK! Manage safety? CHECK! Grow new clients? CHECK! Maintain old clients? CHECK! Focus on the newest product? CHECK! Sell through the old inventory? CHECK? Improve your Net Promoter Score? CHECK! Keep aligned with long-term objectives? CHECK? Meet this month’s sales goal? CHECK! Dang! What was that first one again?
With so many objectives it can be hard for people to focus on what is important. If they focus on the highest priority, they must keep track of everything else out of the corner of their eye. Peripheral vision is a great evolutionary trait in people. It is not a great evolutionary trait in incentive plans.
Most of the multi-measurement plans include steep scaling of the incentives involved. The main metric may account for 50% or more of the potential payout. The next metric may be 25-30%. The smallest level goals may account for less than a single-digit percentage of the total payout. I have seen plans with 9 or more metrics, each with specific goals and payouts. Are we asking too much?
Imagine Mary has a $50,000 base pay. This person may have 15-20% available in potential annual incentive pay. We’ll be generous, so let’s give her $10,000. Of that 50% ($5,000) is dedicated to the most important metric. 25% ($2,500) is dedicated to the next most important metric. Combined, the next three metrics eat up another 20% ($2,000). The final metric covers the remaining 5% ($500). This means the final metric adds about 41 bucks a month to Mary’s pay. I am pretty sure that this isn’t creating the “incentive” intended.
I try to use the “rule of three.” No more than three incentive plans for any individual. No more than three metrics for any plan. It’s not always feasible, but this clear objective helps weed out the metrics that are nice to have, but are unlikely to have any impact.
There are rearview and side mirrors on every car for a reason. Our peripheral vision does not allow us to see everything ahead of us and beside us at the same time. We have evolved for millions of years, and this is still not something we do very well. Incentive plans may be something entirely new or unfamiliar for your staff. Asking them to focus on everything at once is kind of like asking them to focus on nothing at all. Use great communication, recognition and occasional spot awards to perform the role of the mirrors on your car.
What is your limit for metrics? How many incentive plans do you feel are effective for a given individual? What is your experience with these programs breaking? More importantly, what is your experience in seeing the best level of success? I’d love to hear from as many readers as possible. With enough results, I will write a follow-up article providing some of your best practices.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Vice President for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.
No more than three metrics, and no single digit percentage goals strike me as obvious best practices.
Posted by: Tony Bergmann-Porter | 10/21/2022 at 08:42 AM