Guidelines for Sales, Incentive, Bonus and Recognition Plans

Design, Implementation and Evaluation Guidelines for Sales, Incentive, Bonus and Recognition Plans

To help ensure plan success, a company should take special care to address key goals anytime it implements a new incentive, bonus, or recognition plan or revises a plan. This also includes sales compensation plans. These include the following:

  • Good communication is another form of employee education. When employees understand the reasons for a new program or change, they are more likely to accept and participate in it. Communication and education should occur at various levels and times, including plant-wide and departmental meetings, one-on-one meetings, bulletin board postings, newsletters, letters to employees’ homes.
  • Employee acceptance or buy-in will help ensure that employees focus on the behaviors the company is trying to create. This will be achieved primarily through good communication, but companies should seek and consider seriously the various feedback that employees give to the employer.
  • Consistent administration is critical for fairness and to achieve overall plan goals. It is also a mark of good internal customer service. Companies should stick to “plan” as to how key variables are measured and how incentives are calculated. Otherwise, the plan should be changed.
  • Quick and fair resolution of disputes is also a key indicator of consistent administration, but companies should plan for how questions and disputes will be handled up front.
  • Bargaining with labor representatives (if applicable) for any incentive, bonus, or recognition plan is required by federal law. Such plans are a mandatory subject of bargaining.
  • Avoiding wage/hour or discrimination claims will be achieved by addressing the above as the steps outlined below.

Steps to Take in Plan Design, Implementation, and Evaluation

  1. Review company goals, strategies, and financial position. Any incentive, bonus, or recognition plan should be created with company goals and strategies in mind.
  2. Create a plan design team.A cross-functional design team will help ensure that any and all plan implications (good and bad) will be addressed. A design team could be made up of the general manager, controller, human resources manager, sales/marketing manager and manufacturing department head.
  3. Identify keys areas to address with incentive, bonus, and/or recognition plans. Most companies will be striving for specific production numbers or employee behaviors that lead to higher quality, customer service, or safety levels. Generally, the more specific a plan is regarding what the company is trying to motivate employees to do, the greater chance the company will have in achieving its goals.
  4. For each plan, identify its purpose and objectives. Identifying such objectives will help the company in the plan-design process and in creating effective communication about the plan. In most cases, increased profitability will be a key objective, but stating how this will be achieved will help employees understand the purpose of the plan. Companies should ensure that each plan’s purpose and objectives are in line with the company’s stated goals, objectives, and strategies.
  5. Review market trends for such a plan. This can be accomplished by reviewing wage surveys and networking with various companies in your area or market segment. The 2016 Outside Sales Compensation Report can be purchased from our Bookstore.
  6. Obtain senior management approval. This point may occur earlier in the process, but reaffirming top management’s commitment will help ensure that the plan is on the right track and guarantee middle management’s buy-in.
  7. Determine performance measures. This may include operational, performance, quality, waste, financial, behavioral measures. Will weighted measures be used? Note: too many measures (more than five) may be too many and may conflict with one another.
  8. How does this plan affect the existing performance evaluation system? Can an employee be awarded through this program yet not perform his or her duties at an acceptable level? Any and all mixed-messages in both processes should be addressed.
  9. Determine funding for plan. Incentive and bonus plans are usually self-funded, while recognition plans are usually budgeted.
  10. Determine eligibility for employees or employee groups and thresholds. For example, are part-timers and/or employees hired after the plan period has begun eligible to participate? If so, is their incentive pro-rated? Determine if you need to establish thresholds, for example eligibility after probationary period. Determine the effect of non-participants, if any. Also determine how terminations and job moves affect eligibility. For example, you should consider promotions, demotions, transfers, retirements, voluntary and for-cause terminations, layoffs, personal leave of absence (sick/vacation), military leave, Family and Medical Leave Act leave, workers compensation, or short-term and long-term disability leave. Your plan documents should be consistent with the company’s employee handbook and various policies contained therein.
  11. Determine minimum, maximum, and target plan payouts. These levels are usually for incentive and bonus plans. The levels will aid the company in evaluating plan effectiveness as time goes on.
  12. Determine the effect on others in place or being proposed. Will one plan cancel the other out in terms of what management is trying to get the employees to accomplish? Also, look at total compensation costs and potential effects on each eligible employee.
  13. Determine payout levels. For example, will they be on a percentage basis, incrementally based on performance improvement, after a specific threshold(s) is met (step method).
  14. Create plan document: Incentive, bonus and recognition plans should be documented in advance and well defined.  See also Elements of a Sales, Incentive, or Bonus Plan Document.
  15. Test and model plan using several scenarios. Production and financial history going back at least two years will help test and model your plan. Review how the plan will affect the overall total compensation budget as well as affect your pay compared to the market. Ensure that business goals are being addressed at this stage.
  16. Create implementation plan and communication vehicles. For example, communicate through means such as department/group/individual meetings, plan documents, newsletter announcements, and letters to employees’ home. Initial communication about plan rollout should be decided upon, along with communication while the plan is in effect. Effective communication will help to ensure plan success.
  17. Bonus/incentive period and payment. Check state and federal law and regulations to ensure that these areas are not regulated. For example, depending on when an employer determines that a commission is “earned” (as defined in the plan document), it still may be due to a terminated employee.
  18. Effect on Taxes. Cash and non-cash incentives (usually $25 and above, except for food) must be afforded the proper tax withholding. Employers may want to “gross up” or “net down” the award because of taxes in order to have the desired effect. Depending on the type of recognition award and how it is paid and earned, certain tax incentives may be available for the company. See your tax professional for more information.
  19. Effect on Benefits. Summary Plan Documents for benefit plans (for example, disability, life, and retirement) should be reviewed to evaluate if paid incentives affect contributions to the plan(s). Employers can change their plan documents in many circumstances.
  20. Legal Review. Legal counsel who has experience in compensation laws should review the plan before implementation to ensure compliance with federal, state, and local laws. Also, legal counsel should determine if and how the plan will affect overtime pay for non-exempt employees. Discretionary bonuses (e.g., spot bonuses) paid to non-exempt employees do not have to be used in overtime calculations. A discretionary bonus is one that is paid when it is not expected or agreed to by the employee prior to the payment. Overtime calculations for production bonuses that are expected by hourly personnel will be affected by the bonus payment. (Sample overtime/bonus calculation spreadsheet).
  21. Communication. Depending on the plan, managers and supervisors in many cases are the best people to communicate the new plan. To help ensure their buy-in, they should be able to comment on the plan before communication and implementation. Valuable feedback may be gained in this process. If multiple managers are communicating the plan assure they all adhere to the “party line.” In other words, all employees should hear similar explanations and come away with a similar understanding on how the plan will function.
  22. Implementation: Choose a date for implementation and closely monitor performance measures to ensure accuracy as well as supervisor and employee feedback.
  23. Reports: Reports to managers, supervisors, and plan-eligible employees on plan measures as they relate to goals and performance should be distributed during appropriate timeframes (daily, weekly, monthly, quarterly or annually) in the plan period. Ensure that managers and supervisors understand how to read the reports. Otherwise, their lack of understanding will hurt subordinate motivation.
  24. Assessing Plan Effectiveness:The design team should evaluate a new plan for effectiveness within six months after rollout and annually thereafter. Issues to consider include:
    • cost vs. plan budget,
    • desired vs. actual behaviors of plan participants,
    • quota distribution versus plan,
    • sales outcome versus communicated objectives, competitiveness of earnings to the market place,
    • pay for performance (for example, whether top performers are the top earners),
    • quota attainment,
    • turnover and information gathered from exit interviews from plan participants,
    • customer relations/feedback,
    • success of recruitment of employees who would fall under the plan,
    • cost of results versus budget,
    • obtainment of business objectives/financial results,
    • feedback from employees in the plan and those not in the plan.
    Some companies use confidentiality and/or non-compete agreements with sales people.  Typically these are signed at the time of hire and are not part of the sales compensation plan document.

For more information on plan design and for sample plans from the printing industry, see our new book, Sales Compensation Plans: Samples from the Industry 2013 Edition.  Or,  Incentive, Bonus, and Recognition Plans from the Printing Industry. This book contains sample plans on safety, production, waste reduction, gain sharing, employee referrals, profit sharing, sales commission, executive bonus, CSR bonus, and attendance plans.  See also Sales Compensation and Incentive Plans from the Printing Industry (2001).

The 2016 Outside Sales Compensation Report can be purchased from our Bookstore.

Once your sales force is hired, you might need sales contracts to offer to your customers.  See Printing Sales Contracts: Samples from the Industry for a variety of live samples.  

Published on Wednesday, February 8, 2006 (updated 01/26/2017)

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