4th Lecture

Designing Designing and Managing Incentive Compensation Programs

Creating an effective incentive compensation plan is tough. Your plan must achieve these
things: 

 Staying within the budget

 Attracting and retaining top talent

 Motivating the sales team to focus on corporate-desired behaviours

Satisfying all three, and managing the ongoing tension between them, is a difficult task. You
have to create a program that’s both sustainable and highly competitive. To do that, you’ll need
to take specific steps in the correct order. And factor in a host of variables.
The costs of a poorly designed incentive compensation plan are steep 
A poorly designed plan will wreak havoc on your organization. It will drain your profits,
encourage the wrong behaviour, and/or drive top-level talent away. For the sake of your revenue
goal, start with territory design and quota setting; then tackle the items below.

 How do we benchmark compensation for each particular role?

o Look at what your competitors are paying for similar roles. Assure responsibility
yes is definite. 

 How do we determine what fair-pay is relative to benchmarks?

o Align your budget with what you expect each particular role to produce.

 What is the best compensation plan design for each particular role?
o Simplicity is the key. Miring your team in complex plans will create confusion
and decrease employee morale.

 How do we calculate the cost implications of our proposed compensation plan?

o Assure your sales revenue is growing with your sales commissions. 

 How do we communicate these decisions to the team?

o With complete transparency, down to every detail. This will increase employee
trust and morale.

 Who should be part of the committee that approves these plans/changes?

o Your sales leader may call for mid-year comp plan changes. The HR leader
should assist the CFO in assessing the current plan and proposed changes. A
compensation analysis will help prevent knee-jerk reactions within your team.

 How do we measure the effectiveness of our compensation plans?

1
4th Lecture

o Measure payout against attainment. If you can't measure it objectively, do not pay

on it. 
Unleash Revenue Growth with an Accurate and Effective Incentive Compensation Plan
Remember that the costs of a poorly designed compensation plan are steep (abrupt). High
turnover, weak sales, and eroding profits are a result. A solid plan attracts top talent, keeps them
motivated, and maximizes profits. A thoughtful design process can bring huge revenue gains. 

An employee bonus program, or incentive compensation plan, can be one of the best ways to
reward employees for performing exceptionally. But structuring an effective plan requires
careful thought and strategy.
7 Key Components of an Incentive-Based Compensation Plan
“With an incentive compensation plan, you're trying to influence employees' behaviour, so you
have to determine which behaviours you want to encourage and make sure your plan awards
them fairly and ensures your customers still get the service they need," said Andy Coates, a
senior compensation consultant at City National Bank.
Consider these seven steps to creating an effective incentive compensation plan.
START AT THE TOP
The first step to designing — or revamping — an incentive-based compensation plan is to seek
feedback from top leaders within your organization. “Talk about what kind of behaviour you
want to reward," Coates said. “Make sure you're rewarding behaviours that will help your
business financially and that will be positive for your clients as well."
Leaders also need to discuss which employees will be eligible for incentive compensation. In
many organizations, employees involved in the sales function earn bonuses or incentives based
on their sales. But some companies also offer incentives to employees in customer service,
marketing and other functions.
For instance, at Ridester, a ride-sharing blog with 650,000 monthly visitors, marketing staff
earn a base salary along with bonuses for achieving key performance indicators (KPIs) such as
backlinks and online mentions — public relations efforts that are considered important to the
success of a digital publication.
“This results in getting the team to continue to improve, and do better each time, which results
in improved results for the company while also directly positively impacting the employees'
compensation," said Syed Irfan Ajmal, growth marketing manager at Riester. “We feel this
system is the primary reason for our rapid growth over the past year, from 253,000 visitors per
month to 650,000 visitors per month."
ALIGN MEASURABLE TASKS WITH COMPANY GOALS
When you've decided which tasks or performance indicators you want to encourage, determine
how you will measure employees' success.

2
4th Lecture

Ideally, your incentive plan should motivate employees to focus their efforts on activities that are
directed toward achieving specific company goals. An incentive is structured so that employees
perform measurable tasks that lead directly to the accomplishment of company goals —
increased sales or profitability, improved customer retention or acquisition, or the achievement
of KPIs, for example.
At Ridester, the company uses a third-party software tool to calculate both the number and
quality of links and mentions and that data is used to pay out bonuses.
“Both of these KPIs have a massive impact on helping us attain our company goals of
increasing our brand visibility online as well as our organic traffic which, in turn, increase our
revenue," Ajmal said. “We have agreed upon a clear price formula with each employee in this
regard."
Ajmal recommends paying monetary bonuses based on individual results rather than
departmental or company-wide results, as that allows employees to have more control over their
accomplishment. For broad company-wide goals, consider experiential incentives, such as
parties or retreats.
TIE INCENTIVES TO FINITE GOALS
The performance indicators you're measuring shouldn't be open-ended but should have a finite
end date — usually the end of a quarter or year. Award the employees regularly such as every
month or quarter.
Riester adds bonuses to employees' checks every month based on their achievement of KPIs.
Maple Holistics provides incentive pay awards every quarter, based on employees' productivity.
Make sure the bonuses or incentive rewards are tied to achieving performance standards that
are specific and measurable, and over which employees have some degree of influence.
SET “STRETCH" GOALS
Your company pays employees a salary for doing their basic jobs, so don't give them extra
incentives for doing what they're supposed to do. Instead, an incentive-based compensation plan
should stretch employees to go above and beyond average performance — and reward them for
doing so.
However, the measurable goals you set for employees to earn incentives should not be so
difficult that they aren't realistically achievable.
MAKE THE PLAN ADAPTABLE
Your company's strategies and goals will change over time, so your incentive plan should be
dynamic enough to change with them. However, it's important not to constantly shake up the
plan because most employees will need some time to build up success in the incentivized tasks.
“If you change your incentive tasks every quarter, it's difficult to see whether the approach was
successful," Coates said. “It takes time for a goal to take effect and to make sure you're

3
4th Lecture

incentivizing the correct behaviours. If you change it fast or change it, again and again, you'll
have a hard time determining whether the plan is working."
COMMUNICATE THE PLAN
Most employees are interested in opportunities to make more money, so take time to explain
your incentive plan to those who will be affected. An in-person meeting may be necessary to
introduce the program and explain how it works. It's also important to provide each employee
with a copy of the plan in writing so they can refer to it when needed.
Make sure each employee understands what he or she must do to realize the incentives.
Establish yourself or another company leader as the point person to answer questions about the
plan, and refer to the written plan document if there are any misunderstandings.
ESTABLISH PARAMETERS TO PROTECT THE INTEGRITY OF THE INCENTIVE
While an incentive compensation plan can help boost performance on the indicators you've set,
it's important to ensure that employees are not overly focused on the incentive to the detriment of
other important aspects of their jobs. No company wants employees engaging in unwise actions
in the pursuit of the incentive award. To help avoid such a scenario, consider these strategies.

 Establish a cap or maximum on incentive payments (e.g., two times the target or no more
than 100 per cent of salary).

 Require that a portion of the incentive payment be deferred for one or two years, with
future payout contingent upon continued employment or continued employment and
performance.

 Reserve the right of executive management to make downward adjustments to payments

based on such factors as financial and individual performance or other behaviours
inconsistent with company expectations.

 Include a “clawback" provision whereby all or a portion of the payments must be repaid
based on factors like inappropriate financials.

 Adopt strong corporate governance, including active and effective oversight by executive
management and the board of directors.

 Ensure that your company's leadership and culture support and reinforce the
appropriate and desired results and behaviours.
A well-structured incentive compensation plan can present a win-win scenario for your company
and your employees.
At Ridester, the incentive compensation plan has resulted in employees spending more time and
energy on meeting company goals, as well as increased employee engagement and retention,
Ajmal said. “Employees can directly correlate their rewards with the growth the company
experiences," he said.

4
4th Lecture

Enabling employees to reap financial rewards based on their performance will motivate many of
them to work harder and smarter and make better decisions that are not only in their best
interest but are also in the long-term best interests of your company.
Short-term Incentive Calculation

The target STI is calculated by multiplying an employee's year-end annualized base salary by
the STI target percentage associated with his/her band and exemption status. The target STI may
be modified by performance criteria and/or pro-rations.

Legal Issues
Employers must consider several legal issues when designing and managing incentive
compensation programs. For the most part, the legal issues depend on the following:

 The type of incentive (money-based, stock-based or prize based).

 The status of the employee as exempt or nonexempt under the Fair Labor Standards Act.
 Whether the incentive plan falls under the Employee Retirement Income Security Act
(ERISA) as a defined contribution or defined benefit pension or welfare benefit plan.
 Making changes to plans before their anticipated expiration.

How to Develop an Incentive Program:

#1 Set Goals & Objectives
Identify what goal/objective needs to be accomplished, for example, improved attendance,
increased sales, reduced cycle times, etc. The objectives must be simple, specific, and obtainable.
Begin with not more than 3 clear, briefly stated objectives and communicate them to all
participants.
#2 Identify the Audience
The entire employee or consumer audience is probably not your target. Identify which
individuals or teams can achieve your goals and objectives; those are your program participants.
#3 Fact-Finding & Involvement
Programs are always more effective if you can get input from representatives of the participant
audience. Inviting input on the rules, rewards and other aspects of the program will increase
ownership and engagement in the program. What steps will be necessary to achieve the goals?
Do participants have the resources they need to achieve them?
#4 Program Structure & Budget
Build the foundation of the Incentive Program carefully, expanding on the methodology to be
used. This is where you decide whether you’ll use an open-ended or closed-ended program
design and identify your fixed and variable costs. An open-ended program is harder to budget but
can be funded through incremental sales or other gains; a closed-ended program is easier to
budget and may allow for larger rewards because you’ll have a set number of winners but may

5
4th Lecture

not be as motivating for your participant audience if the rules are not carefully structured.

#5 Select the Rewards

Employee rewards and recognition should be consistent with the brand of your company and
appeal to your participant audience. Don’t make these decisions in a vacuum. The more you
invite input from your audience on the types of rewards they’ll appreciate, the more effective
your program will be. Of course, your reward vehicle will need to fit within the budget
parameters that you’ve set.
# 6 Communication & Training
Decide how you will announce and launch the program. Develop a communication strategy to
keep participants updated and engaged throughout the program. Branded programs are typically
more effective than generic programs. Training management in the execution of the program is
critically important to the success of the program or campaign.
#7 Tracking & Administration
Decide which elements you’ll track and develop the system to track them. Administration may
account for approximately 20% of the program budget. The right program dashboard or other
technology can help to reduce the time spent on administration.
#8 Fulfillment
The more immediate, the better. Technological advances allow participants to redeem rewards
online and, in some cases, the rewards may be digital. It’s also important that the reward and
fulfilment experience is consistent with your company’s brand attributes. 
#9 Evaluate & Measure
Did the Incentive Program achieve its objectives? Were the participants motivated to change
their behaviour? What outside factors contributed to the success (or not) of the program? Every
element that you measure can inform your next program parameters to ensure greater success in
the future.
#10 Celebrate Success
Communicate the employee rewards and results of the recognition program with your audience.
Share how the program impacted company performance and celebrate both individual and team
achievements. Support from top management is critical, so make sure company leaders are
involved in presentations. If you have remote workers, consider web events or other ways in
which to involve all participants in the celebration.