Incentive Schemes Diluted By Too Many Performance Measures

November 6 2007 - A study by Watson Wyatt concludes that the effectiveness of sales incentive plans can be diluted by too many performance measures.

Watson Wyatt's 2007 Global Sales Incentive Plan Study shows significant differences between sectors. For example, the banking sector frequently used multiple measures while the hi-tech sector uses far fewer.

At branch management level, the banking sector uses seven dominant measures:

• revenue volume
• number of new accounts
• number of units sold
• sales growth
• profit margin
• expense control, and
• customer satisfaction

Conversely, a role at a similar level in hi-tech companies typically uses a mere three criteria: revenue volume; management by objectives; and profit margin.

Chantal Free, European head of sales effectiveness and compensation consulting at Watson Wyatt commented:

"We believe hi-tech companies are ahead of the curve by moving away from using lots of measures. We are likely to see other sectors following suit in having fewer measures. Companies are finding that having too many measures dilutes their effectiveness and the laudable intentions behind them risk getting lost. Two is ideal for any sales role, and three is the maximum."

Watson Wyatt's survey of over 200 companies in 22 countries, found revenue volume to be the main measure criterion for most industries and job roles. The study also found that team measures were increasingly used because of account management and cross-selling initiatives.

Bonus and Incentive Schemes

A study of 365 HR professionals by The Work Foundation in 2003 showed that 38% of UK organizations used bonus schemes. Senior managers were the most likely to be:

• offered a scheme
• assessed on sales/profit alone
• awarded a higher proportion of earnings as bonuses

Also, it seems that they were offered bonuses for different reasons. Annual bonuses were more for loyalty and strategic reward, while quarterly, monthly and even weekly schemes were designed to achieve set objectives.

Nearly two thirds (64%) of companies believed that their schemes were effective in meeting organisational objectives.

The most commonly cited objectives for bonus schemes were:

• Improving business performance (67%)

• Creating a direct link between employee and corporate performance (60%)

• In comparison, just 19% cited 'encouraging teamwork' and 14% reducing absence (14%).

More than half (59%) of companies surveyed were operating more than one scheme (the average number of schemes across all employers questioned was 2.9), with larger organisations much more likely to operate multiple schemes.

Most companies tried to keep their schemes simple, directly linking performance gains to bonuses. This was most prevalent in the South.

The survey also found that:

• The voluntary sector was twice as likely as all others to have bonus schemes for their manual employees
• Less than a quarter (23%) operated a scheme for the sales force

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