Considering the structure, basis of measurement, timing of the payment of compensation, and implementation of an incentive compensation plan to drive sales behavior is an important part of business success
By J. Brad Steward, President of Pulakos CPAs PC
Considering the structure, basis of measurement, timing of the payment of compensation, and implementation of an incentive compensation plan to drive sales behavior is an important part of business success. Incentive compensation plans should be aligned with the goals and objectives of the organization and objectively measureable – and, payments of the incentives should be closely related to the performance of the incentivized behavior.
Ccompensation can be intrinsic and extrinsic. Both types of compensation can be just as motivating to the plan participant(s). Intrinsic compensation is non-dollar recognition for performance. Intrinsic compensation can be taxable for income tax purposes. For example, if a company decided to lease a Ferrari and provide it to the top salesperson as determined each month, you would need to discuss the taxability of that reward with your tax professional. However, if the top salesperson received the benefit of a personal assistant or a larger office, the reward may not be considered compensation for income tax purposes. Either one could successfully motivate desired behavior.
Extrinsic rewards are compensation for income tax purposes. The reward should be sufficient to motivate the desired behavior, but not significant enough to cause the individual to stop additional desired behaviors. We have been consulted on incentive compensation plans that were designed with great care, but were reverse in motivating additional sales. There was a point in that the salesperson considered the additional sales “to be not worth the effort.”
The important things to remember are:
- The incentive should be controllable by the salesperson;
- The incentive should be paid with dollars that you would not have collected, had the sale not occurred;
- The incentive should be paid with dollars that are collected, not when billed;
- Incentive plans should be competitive for the industry and region of the country;
- Payment should be remitted as close as possible to the desired behavior;
- Measurement should be objective and repeatable;
- Incentive rates should motivate continuing behavior;
- Intrinsic rewards can be just as motivating as extrinsic rewards; and
- A good plan implemented now is better than a perfect plan implemented 12 months from now.
If you have evaluated and considered all of these attributes in your sales incentive plan and you are not getting the desired behavior, then job redesign or a sales management plan should be considered. At a minimum, an evaluation of your plan with one of the Pulakos Team members should be considered.
For example, a company with a 40-year history had sales that were stagnant in a growing market. Management believed that the incentive was not sufficient enough to motivate the sales behavior, although the sales commission was one of the highest in the industry. Upon independent review, it was determined that the company had never had a sales meeting in its 40 year history and did not have a sales management plan. Upon implementation of both a sales meeting and a sales management plan, the company experienced over a 20% cumulative increase in sales over a two-year period. The return on the investment (ROI) for the effort was significant, repeatable and on-going – a triple win!
For more information on how your company can achieve better results, contact the team at Pulakos CPAs – where Performance Matters™!