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I thought I might share a conversation with you between three of our commercially experienced partners on the subject of ‘Incentives’ for staff.

It’s very easy to get it wrong in this area and end up paying people incentives based on the wrong targets.  Here’s some fantastic advice on how to get it right.

Question

I have a client in a warehouse/distribution business with KPIs and budgets in place.  I’m interested in setting up ‘Incentives’ that would apply to sales staff, logistics and purchasing managers and also the finance department.  Issues to be covered in the agreement would include: timing of the payment (e.g. in quarters or at the end of the fiscal year), payment of a bonus if the organisation’s net profit is not achieved, but individual targets are met and a cap on bonus payments.

Answer

Never mix sales commission schemes with bonus schemes. Sales commissions are a separate area and are unique in that they reward the sales staff for their primary function of achieving sales.  Sales commissions are usually paid monthly and at least quarterly.  And paid as promptly as possible, so that there is a clear connection between performance and the amount of payment received – this means the way of measuring and so calculating commissions must be simple enough that it can be completed promptly and fairly.

Bonus plans can be put together for just about everyone else other than salespeople.  These can be a lot of work, as the KPIs for people will vary; you rely on input from a great many managers and from a purely practical viewpoint you need to try to pay these annually .  While it may be appealing to pay these more regularly, it is usually just too time consuming to collect all the required inputs to be able to pay these more often (as usually this job is just added to someone’s existing duties. I expect that if a new position were created – that of bonus calculator – then these may be able to be paid quarterly, but you would still need all the KPI managers to give their prompt quarterly feedback – a task which in my experience is never completed on time).

The bonus needs to be split.  Part needs to be calculated on the specific employees’ achievements so that they have some direct control over the size of bonus.  And part needs to be based on company performance (to avoid the situation where a company could be up for large bonus payments to the production and logistic teams as a result of their good performance, but the company lost money as the sales team did not perform well…).

There doesn’t seem to be any magic formula here so I find that a 50/50 share is most common.  50% based on company performance (e.g. against budget) and 50% on personal performance eg against KPIs.

The company performance could be: $1,000 bonus if the company achieves its budget income.  A sliding scale down, e.g. $500 for 90% of budget, $250 for 80% of budget and 0 for 80% or less, and an upside where the $1,000 is increased by 10% for every % over budget.