In our daily lives, we recognize the value of regular checkups with our doctor and our dentist and, if we own a car, our mechanic. Nobody wants to suffer an avoidable illness, cavity or mechanical breakdown. So why do so many sales leaders—nearly two in five, in fact—fail to check in on their incentive compensation plan performance?
Incentive compensation plays an important role in motivating and retaining top performers. Just as we assess how incentive plans measure up to quarterly and annual sales targets, we also need to gauge whether they sustain short- and long-term business goals. Absent a midyear audit, we risk losing good sales reps and taking financial hits.
Midyear audits, in a nutshell, allow managers to assess the quality of the plan and, when needed, to make mid-course corrections. An incentive compensation plan that works well today can fail tomorrow, as these plans vary in their ability to adapt to corporate and market changes.
Summertime happens to be a good time to take stock. Ask yourself: Are you up for a midyear incentive compensation plan audit?
While an audit may feel unpleasant, proactively reviewing your incentive compensation plan—rather than reactively—is essential to sales success. According to the ZS Associates “2021 Incentive Practices Research Study: Pharmaceutical and Biotechnology Industries,” only 57% of companies perform plan audits.
Midyear audit findings equip managers with timely feedback to measure whether the plan is working as expected and to keep undesirable side effects such as performance biases, low motivation and plan complexity in check. If the sales team is the engine for your organization, incentive compensation is the accelerator for growth. Midyear plan audit results allow you to steer clear of obstacles or hit the brakes to avoid an accident.
In writing this column, we were reminded of an episode of the popular TV show “The Big Bang Theory.” Penny, one of the main characters, ignores the check engine light in her car because the vehicle has been running fine since it lit up a month earlier. The light must be broken, she says, prompting friend Sheldon to ask, “Is there a ‘check the engine light’ light?”
If you manage an incentive compensation plan, this article is your “check engine” message to conduct a midyear audit.
A midyear audit reviews an incentive compensation plan against industry best practices. Effective plans align with business strategy. They are fair, providing equal opportunity for success, easy to communicate and simple to understand. Paying for performance must be both motivational and fiscally responsible, with guides in place so total payouts stay within budget.
A sales force field survey, along with an audit report, provides essential insights related to incentive compensation guiding principles.
Checks and analyses that should be considered while performing an incentive compensation plan audit include:
Attainment distribution. Evaluate current sales territory performance against how many reps across the country received incentive-based compensation. An ideal attainment distribution curve should represent a normal distribution and suggests a good quota-setting process.
Payout statistics and benchmarks. Compare payout statistics against industry benchmarks to evaluate the plan’s payout mechanism. Payout statistics within the benchmark will ensure fiscal responsibility and appropriate pay-for-performance motivation within the sales force.
Fairness analysis. Successful plans are equitable. For each fairness metric, we want to verify that all reps have an equal earning opportunity, regardless of the metric. Reps should be divided into buckets, and each bucket should have similar attainment distributions.
Pay for performance. This analysis aims to ensure that the strongest performers receive the highest payout. Reps should be divided into buckets, and the buckets should be stair-stepped.
Top- and bottom-performing reps. Keep track of top- and bottom-performing reps to identify team members who perform well and who struggle. Conduct regular immersion interviews and field surveys to understand how to help your sales force succeed.
A Fortune 500 client in the nephrology market decided to use an uncapped commission plan. Although managers were confident in their forecasts, product uptake was significantly higher than planned. Most reps exceeded their sales goals by more than 50%.
At the end of the semester, a midyear plan audit showed the company had paid 1,800% of the target incentive. The current plan was dropped, and a ranked plan was put in place for the remainder of the year to mitigate the damage.
Another Fortune 500 client in the oncology market decided to keep the plan simple, basing it only on historic sales.
A midyear incentive compensation plan audit showed that the plan favored a smaller set of territories and wasn’t equally available to the sales force nationwide. Motivation suffered.
Territory characteristics were re-evaluated. The oncology client introduced a new component that adjusts sales goals based on territory size and market potential to establish a fairer system.
Incentive compensation plan audits must always be driven by business needs. In the long run, we will always need to anticipate and adapt to external events and internal, strategic changes in direction. Especially in the short term, an audit will help keep incentive compensation plans on budget.
In pay-for-performance scenarios, you don’t want to pay your sales force too much or too little. Finding the right balance—what’s equitable, fair and reasonable—ensures your incentive compensation plan rewards behavior and boosts profitability.