SalesCompInsights

An effective mid-year incentive program evaluation should answer three key questions:

• What should we measure?
• Where do we get the data?
• How do we use the information?

But what’s the best way to construct a repeatable and objective mid-year evaluation framework for your incentive program?  As Scott covered  back on April 25th, there are four important measures of a well-functioning incentive plan:

1. Pay Distribution
2. Performance Distribution
3. Return on Compensation Investment
4. Sales Time Allocation

But is that enough?  We’ve talked a lot about the importance of articulating and documenting your incentive compensation philosophy and creating principles to facilitate the decision process.  Design principles can take many forms and cover a variety of dimensions based on your specific situation.  Sample categories include financial, operational and cultural.   Your design principles
should also play a role in evaluating the program.   Each principle should be accompanied by a set of measurement standards.  Let’s say you’ve established a principle around the motivational impact of the pay opportunity and sales goals.  The standards in support of this principle might include:

• Each performance measure contributes to >20% of the job’s targeted incentive
• Each performance measure has >70% participation rate
• At least 10% of the role’s incumbents are high performers
• High performers earn >3+ times that earned by average performers

If we’ve agreed on these standards in advance then we can identify and collect the data and then use it to evaluate how well the program is working:

Other design principles and their accompanying standards might go beyond the four key measures.  Here are some additional examples of areas that might be covered:

• Quota quality
• Correlation of credit and role influence
• Plan eligibility and participant plan assignment
• Correlation of transaction credit with actual revenue
• Use and ROI for SPIFFs and contests
• Consistency in thresholds, accelerators and other mechanics
• Payment timing and accuracy
• Number of disputes and response time

As part of the plan design process, we suggest a formal work step to define the evaluation standards.  During this step, the Design Team should review each principle and document
the corresponding standards.   The data requirements can then be identified and a process established/tool created for ongoing tracking.   There might also be a set of measures you
include from year-to-year.   As an example, you might want to track the distribution of incentive pay even if there wasn’t a specific change priority this year.

The notion of design principles and their accompanying standards might be all well and interesting, but what if you don’t want to wait until the next design cycle?  The four key measures are a good start, followed by a working session to review the beginning of year expectations.  Was senior management looking to increase teamwork?  Improve margins?  Launch a new
product?  With these expectations in hand you can then determine what metrics and data might be available for testing.

Whether the evaluation framework is established well in advance or at review time, a few metrics
used are better than a lot not used.   Be sure data used is credible.  And remember the evaluation supports both strategic and tactical decision-making.