To establish an appropriate operational governance framework and an approach to monitor the alignment, efficiency and effectiveness of plans, the following 7 key principles should be considered:
1. Eligibility & participation
- Ensure the right people and roles are participating in sales incentive plans.
- Make sure all participants have clear accountability for sales performance.
- Ensure approvals are in place for any changes in participation.
2. Plan design
- Create a layer of independence between sales management and the final plan design approval.
- Utilise gateways and hurdles to ensure plan alignment with culture and values and to control risk.
- Ensure target setting is robust and reflects genuine performance growth.
- Revisit plan design to ensure ongoing relevance with operating models and sales force work.
3. Pay mix
- Tightly align pay mix and percentage at risk to levels of sales force prominence.
- Only use uncapped plans where there are appropriate controls in place including deferrals and enforceable clawbacks.
- Ensure the pay mix is right for the culture, operating model and customer value proposition.
4. Sales performance measurement
- Always focus on net revenue recognition clear of any credit notes, returned stock or cancellations.
- Monitor the distribution of sales performance – test for ‘sandbagging’ at month or period end.
- Where new client sales are differentiated, ensure there is no client churning and reheating.
5. Clawbacks and deferral
- Use a deferral (say 20 percent) to build in a level of protection against poor behaviour or performance volatility.
- Clearly define and establish enforceable clawback mechanisms for overpayments or breaches and communication of provisions to participants.
- Clearly define and communicate consequence.
- Consider linking deferrals to group financial results for the year or other team based goals.
6. Use of discretion
- Ensure the remuneration committee or executive group maintain the discretion to change the plan at any point in time and to approve final incentive outcomes.
- Ensure ‘windfall protection’ is clearly defined – providing business protection against sharp increases in performance not linked to individual contribution.
- Define clear procedures and approvals for the use of discretion around individual performance recognition or payments.
7. Audit and Review Processes
- Establish a dashboard to monitor performance pay alignment, cost and risk periodically.
- Define audit and review process focused for preventing fraudulent behaviour or plan gaming.
- Monitor the performance and behaviour of the top 25 percent incentive earners each period.