Incentive compensation within companies: a powerful motivating factor that needs to be managed

Bringing bonus schemes to life

The continuous improvement of the motivational effectiveness of variable compensation schemes requires three major conditions to be met:

• The schemes need to be aligned with operational issues;
• Fairness needs to be ensured among beneficiaries; and
• The company’s balanced budget need to be managed.

To ensure that these three key points are respected, it is essential to regularly check the effects produced by the schemes. This long-term monitoring enables reactive adjustments to be made as required or more substantial changes that a change in company strategy may require.

Cyclical diagnoses to get an overview

Many parameters are worth analysing during cyclical diagnostics:

• Is the budget envelope consistent with overall performance?
• Do the schemes create enough winners and losers to encourage the largest number of people to commit to the results expected by the company?
• Have exceptional events, linked to changes in the environment, impacted the fairness of the system?
• Should too many special cases lead to the general rule being questioned?

c. Very time-consuming adjustments without suitable software solutions

Various technical adjustments have to be made on a regular basis:

• Adjustments to curves and premium scales;
• The calibration of individual objectives; and
• The introduction of new performance criteria etc.

They do not call into question the structuring choices of the variable pay policy, but they are crucial for it to be properly applied. These adjustments are precise and recurrent, so can be time-consuming and risky.

Primeum offers suitable solutions for assessing the impact of these adjustments through simulations, which only modelling solutions designed for variable pay management can provide.

These software solutions can also reduce the time taken to make adjustments, which is critical for operators responsible for calculating bonuses and for whom the deadline for the payroll changeover is a major constraint.

The success of incentive compensation schemes is largely dependent on a company’s ability to set precise, fair and timely sales targets.

Why is sales target setting a complex process?

The assignment of sales targets requires a high level of technical knowledge of the SFE/BI/BA team or of all those responsible for the departments in charge of animating the incentive compensation plan of their collaborators. The exercise can take different forms, but one way or another, it is always about dividing a national sales target or aspiration into individual sales targets. In all cases, the requirement is the same: guarantee precision and fairness. This process is recurring: at the end of each cycle, the sales targes for the following period must be defined.

Due to its technical nature and frequency, this process takes time for the teams in charge, who may find themselves having to work under pressure, because the sales targets must be communicated at the beginning of the cycle in order to maintain the teams' motivation during the performance period.

Monitoring and optimising your objective-setting methods

To relieve the workload and above all improve the objective-setting process, Primeum provides the option to automate all or part of the process by designing algorithms for dividing the national objective into individual objectives. These so-called “normative” versions can be used as a working basis by managers, who are responsible for providing their operational knowledge to refine the objectives. In certain contexts, when the available data is of very high predictive quality, the objectives resulting from the normative version can be used directly.

Three ingredients are required to ensure these individual objectives are accurate and fair:

• A distribution key for the national objective: what is the criterion with the best predictive capacity of what will happen over the next cycle?
• A reference period to base this distribution on: should the previous cycle be used? Or the same cycle from the previous year? Here, too, the rule is to opt for data from the past that best explains the behaviour of the favoured indicator over the coming cycle; and
• Finally, the mix of differentiation of effort that will be asked of each employee: what is it reasonable to ask of each person to set individual objectives that are ambitious and accessible to all?

Primeum helps many clients set their objectives, ensuring accuracy and fairness. Our ability to cross-reference and work with a large volume of data, as well as our modelling and optimisation solutions under constraints, enable us to perform global simulations of the distribution of objectives based on several hypotheses.

Our objective is to ensure any exclusionary or income effects are eliminated for you so that you can be sure of the commitment of all your teams.

Not only are the models intelligent, but also provide a workflow solution that lets you adjust and have these objectives approved by your managers.

Your experts responsible for incentive compensation

Primeum helps your dedicated teams manage your variable pay schemes on a wide range of issues:

• Preparing negotiations or answering questions from your staff representation bodies;
• Specific analyses to meet internal demands;
• Thinking about new performance criteria, to determine how they truly justify premiums, such as qualitative aspects of customer satisfaction, for example; and
• Benchmarks of compensation practices in your sector, but also benchmarks mixed with other sectors of activity.
  
  

Your managerial teams in charge of co-ordination

Variable pay is a key component of management. Paradoxically, it may require a certain degree of technicality to remain accessible and understandable to all beneficiaries.

Understanding the intentions behind it, methods and requirements requires more than just a brief at the end of a management seminar. Whether it concerns your managers who have co-ordinate previous schemes, or new managers who have recently joined the company, a regular training and onboarding effort is necessary to reap the full benefit of the investments that the company makes through its variable remuneration schemes.

This training must cover the fundamentals of the company’s variable pay policy and answer any questions employees have about the procedure applied. The aim is to help employees understand the meaning of the decisions made.