Contributed by Dean Ash with 360 Consulting
Compensation Plans are one way a company communicates areas of focus for employees. Whether the compensation plans are paid out as commissions, bonuses, stock, etc., they must be tied to your company’s Key Performance Indicators (KPIs) in order to drive the right outcomes for your company.
How do you define your company’s KPIs?
Defining your company’s KPIs starts with developing your company’s annual revenue plan by month, by product and service. As you project your company’s revenue plan, look at past history, your competitive position, new enhancements, new products, underserved markets, account growth/decline, etc. This will form the basis of your assumptions that underpin your revenue plan. It is not uncommon to build 2 or 3 revenue plans based on different assumptions (e.g. base plan, aggressive plan, and stretch plan).
Once you have your revenue plan(s), define the cost structure needed to achieve the plan(s). Look at the resources, capacity, efficiency gains, etc. required to deliver the margins your business needs with the revenue plan(s) assumed. Add these elements to your assumptions. You now have the basis for creating your KPIs.
How do you turn your assumptions into your company’s KPIs?
In your assumptions, you will have several elements that are critical to making your annual business plan. Those elements will often consist of items like revenue, gross margin or net profit. However, other growth or operational efficiency elements may surface as well. Growth elements may be upselling existing accounts, acquiring new accounts, and opening new market segments. Operational efficiency elements may be reducing rework, creating more accurate estimates on bids, delivering tighter scopes of work, improving terms with suppliers, reducing inventory, improving inventory turns, etc.
How do you align compensation to your company’s KPIs?
Look at each employee’s role in your company’s KPIs and develop a compensation plan that rewards that person when the KPI(s) they can affect is achieved. For instance, your sales representative tasked with growing existing accounts might have her commission plan focused on territory revenue growth and introduction of new offerings to existing accounts. Your business development representative tasked with new client acquisition might have his compensation plan focused on first year revenue of a new account. A sales leader might be compensated on revenue and gross margin targets. An estimator might be compensated on achieving the company’s average gross margins or gross margin dollars. Your office staff might be compensated on the overall achievement of stated company’s revenue and margin goals as a bonus. No matter what, the KPIs should be measurable and achievable with the right focus and execution. In addition, you might consider different levels of bonus or commissions if your aggressive or stretch plans are achieved.
How do you communicate the compensation plans?
Every person should have a written compensation plan for the year that clearly articulates their KPIs and the compensation associated with achievement of the plan for that year. This plan should be signed by both the employee and their supervisor. This provides a powerful communication vehicle at the beginning of the year and in the quarterly reviews to discuss and reinforce the employee’s progress and areas of focus to achieve the desired KPI(s). Consistently communicating ongoing progress versus the overall company’s KPIs is critical. Knowing the score at each inning of the baseball game gives you and the employee enough time to course correct to achieve the desired results.
When do you reward the achievement of your company’s KPIs?
As important as it is to communicate your KPIs and report progress against achieving your KPIs, paying for the achievement of your KPIs in a timely fashion is also crucial. Payment should occur as close to the achievement as possible. For employees on less leveraged compensation plans tied to overall company metrics, it might be soon after you close the books on that year. For employees on more leveraged compensation plans, it might be monthly or quarterly. Also, remember that the “reward” is more than monetary. Enthusiastically promoting the successes and individual employee contributions to the successes creates great job satisfaction and loyalty. This is another reason to make the results achievable with good execution. However, if the results are not achieved, clearly discuss the reasons why and areas for improvement openly and honestly. Resist the urge for “participation awards”.
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