In a recent post, I discussed the difference between commissions and bonuses. Today, we explore the design of a world class bonus incentive program. To refresh your memory, bonus programs are typically deployed in an account management model, which I will use as the backdrop for this discussion.
Here are 3 keywords to memorize when building your 2012 bonus plans:
Typically, an account manager’s revenue responsibility is a combination of defending existing revenues and growing through cross and up-sell opportunities. The term “threshold” is defined as the point where the incentive payouts of a compensation plan are triggered. In an account manager’s portfolio, a threshold may be defined when the rep hits 100% of last year’s revenue. In figure 1, this happens at 78%. If I am trending at 78% of my goal this year, I have matched last year’s revenue and have truly “defended the base.” Be careful how you calculate this, however. You will see this has taken into account both uncontrolled churn and price increases. If you want to truly pay for performance, don’t hold your sales people accountable for lost revenues they can’t control. Conversely, if you are putting through a price increase in 2012, they shouldn’t expect to benefit from those increases either.
A weight is the importance you place on the criteria in the variable sales compensation plan. For example, if you sell three different products, but one is more important to your overall revenue stream, you should weight the plan accordingly. In figure 2, the “new” product is deemed to be worth 2X the two legacy products. Therefore, 50% of the bonus is weighted towards selling this product, compared with the two legacy products at 25% each. The impact of this? Focus on all three items, but place a deliberate emphasis on performing in the new product category to drive the results you want.
A common approach to bonus models is to take the account manager’s growth objectives, divide by the four quarters of the year and call it done. If your revenue stream is categorized as “lumpy,” you are doing a disservice to yourself and your account managers. Don’t take this short cut. Model your performance objectives according to your revenue trends. In figure 3, you can see the difference in how the bonuses are calculated based on the revenue trends of the company. The Company Revenue Trend model allows the company to avoid cash flow issues, overpayments and forecast based on the actual business trends.
How can you ensure your bonus plans pay for performance in 2012? Design your 2012 sales compensation plans using thresholds, weights and quarters.
Do you want to hear more about how world class companies are redesigning their sales incentive plans for next year? Consider participating in the research tour advertised below where we review case studies of sales compensation programs in action.