Find the Right Mix between Salary and an Employee Incentive Plan

by on June 19, 2009 · 0 Comment POSTED IN: HR Info Center

Set Sales Thresholds and Quotas for your Employee Incentive Plan

You will have to make this decision between what the proper mix for your organization between salary and an employee incentive plan. Bear in mind that the more you put at risk for somebody or the more you put in the incentive area, you get certain types of behavior associated with that.

More aggressive risk taking for example, if you put a lot at risk for your sales people and that may be just the type of people that you want for certain jobs. And each job will have a different mix. So think about the type of people that you really want to attract and retain, and again, the employee incentive plan you come up with could be different for each type of job. And you really want to ask a question of what do we really want these people to do.

And it’s a simple question not as easily answered as asked. But you do need to ask that question. It’ll help you determine exactly how you want to pay each of the people in the sales department. And again, put everything in writing. Make sure everybody’s got a copy of it and that they understand exactly how their pay is going to be determined.

Most companies don’t have a threshold for incentive payouts. They pay out on virtually the first sale. But it seems to be something companies are thinking about a lot. Now, if you’re in a group kind of employee incentive plan, the more group measures you have for an incentive program whether it’s the sales compensation or companywide employee incentive plan, the higher these thresholds should be. If you have a company-wide employee incentive plan, you may want to start funding it at 80% level for example.

But you can set maximums for a salesperson in a couple of ways. One, you can set up a system like this that says if you achieve a certain level of performance against your quota, we’re going to max you out at a certain percent of your target pay and where you set that point is critical.

You’ll notice also that the payouts as percent of target incentive changed through this process. And this is called an accelerator. Instead of having a straight line payout scheme which essentially says you do 110% of your quota and we’ll pay you 110% of your target, we actually start to increase it above the target level of performance and it actually decreases below target. It’s an exponential or a curved kind of a payout and more and more companies actually use this kind of system-accelerators.

Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri

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