1. Incentive Compensation
MANA 5322
Dr. Jeanne Michalski 1

2. Sales Incentive

3. Guiding Principles for Sales Incentive Plans
Aligned with company’s business strategy
Designed to specific jobs
Capable of differentiating various levels of performance
Limited in the number of performance measures and and capability is in place to track and report results
Realistic goals (i.e. set so at least 90% achieves threshold, % achieves target/quota and
10-15 % exceed)
Administered in timely and cost-efficient manner (not a lot of manual intervention
Supported by all levels of management

4. Sales Incentives – Terms
Target Cash Compensation (TCC): Total cash compensation (including base salary and incentive compensation) available for achieving expected results
Salary/Incentive Mix: Relationship between base salary and target incentive amounts usually expressed as percentages (e.g. 80/20 mix)
Leverage: Amount of increased or upside incentive opportunity that outstanding performers might earn.

5. Leverage Mix and leverage are strongly linked
More pay at risk the greater the upside opportunity

6. Salary/Incentive Ratio (Mix)

7. Factors that Impact Mix
Sales Process
Role in the Process
Type of Product or Service
MORE PAY AT RISK
Transactional
Product Focused
Frequent Sales
Key impact on decision to buy
Limited expertise required for sales success
Commodity
Sold on price
LESS PAY AT RISK
Consultative
Relationship-focused
Few, large sales
Long sales cycle
Team member
Provides leads or fulfillment only
Key expertise in product customer, or segments
Specialty or custom
Sold on value

8. Types of Commissions TYPE EXAMPLES Flat Commission: Rate X Volume
3% X ($s)
Individual Commission Rate (ICR): Individual’s Incentive Target
Divided by Individual’s Quota
Rep 1: $100,000 incentive target/$1,000,000 quota = 10% rate applied to sales volume
Rep 2: : $100,000 incentive target/$1,500,000 quota = 6.7% rate applied to sales volume
Ramped Rate Adjusted on Achievement of Sales Volume or Quota
0% - 100% of quota 5% rate
achieved
> 100% of quota % rate
Adjusted Rate Varies Based on Characteristic Other Than Volume or Quota
Product A % rate
Product B % rate

9. Performance Standards
CRITICAL TASK – establishing expected performance standard, usually set at least 3 achievement levels
Threshold: Minimum level of performance that must be achieved before an incentive can be paid
Target: Expected level of sales results or individual performance (earn target incentive opportunity)
Excellence: Point at which the defined leverage or upside is earned

10. Plan Measures and Performance Standards
Factors to consider
Job – should reflect job accountabilities and salesperson can control or influence outcomes
Business Drivers – consistent with the financial drivers of the company’s business plan
Focus – to ensure focus on appropriate measures it is best to use limited number of measures
System capabilities – if it cannot be tracked and measured today it does not belong in the sales compensation plan

11. CASE Strategy Implications

12. CASE - Strategy
Value proposition same high quality products backed by excellent service
Market focus on drugstore and doctor clinics (not hospitals)
Product focus on selected items instead of 100+ items
Larger orders – economies of scale – more contribution – more profit
Price reduced to the low-medium to medium price range
Contribution margin important

13. Current Plan - Biomed Base Salary 60,000
Commission Ramped <100% 1.5 % of sales volume
>100% 3% of sales volume
Quarterly Bonus
Achieve 100% Q1 YTD goal 3,000
Achieve 100% Q1-2 YTD goal 4,000
Achieve 100% Q1-3 YTD goal 5,000
Achieve 100% Q1-4 YTD goal 6,000
Expected annual sales of 2,000,000 per sales rep

14. CASE Assume that Target Total Cash Compensation is appropriate
Propose a sales plan that supports the new strategy, especially contribution margin, number of new accounts, and percent of contribution derived from focused items
Ok to change the mix of base and incentive
Change expenses to flat expense rate and use extra dollars for incentive

15. Current Compensation Base Salary 60,000
Sales commission and bonus 48,000
Benefits Equal to other emps.
Contests/special rewards –
Recognition events –
Expense reimbursement 98,400
206,400

16. Change expense reimbursement to a true expense flat allowance 400 per day. Annual allowance of 98,400. Provides 2,400 for additional commission/bonus amount

17. Sales compensation 60,000 + 48,000 + 2,400 = 110,400 Expense reimbursement 96,000 206,400

18. CASE Questions
Given this market strategy, what would you propose for a sales compensation plan? What steps did you go through to get to this recommendation?
How will you successfully implement this change? Remember you are tinkering with someone’s wallet
Is changing the compensation plan all that Chiemchanya has to do in order to tie the sales program to the new strategy?

19. Compensation Mix Change mix from 55/45 to 40/60 Base salary 44,160
Sales Compensation ,240
Total ,400

20. Other Changes
Include a monthly threshold to reinforce company profitability (cover fixed costs)
New hurdle of contribution margin derived from focused items and target number of new accounts added in order to receive bonus

21. Compensation Mix and Hurdles
Component
Base Salary with Commission and Bonus
Base Salary
Base Salary/Year
44,160
Commission Rate
Performance To Monthly Goal Commission rate
To monthly threshold %
1st Commission Rate From threshold to 100% X%
2nd Commission Rate Above 100% Y%
Quarterly Bonus*
Performance to YTD goal Bonus
Q % of Q1 YTD Goal THB3,000
Q Achieve 100% of Q1-2 YTD Goal THB4,000
Q Achieve 100% of Q1-3 YTD Goal THB5,000
Q Achieve 100% of Q1-4 YTD Goal THB6,000
*Hurdle: To receive bonus, 75% contribution margin must be derived from
focused items and target number of new accounts must be achieved
*Bonus for previous quarters are retro-backed when YTD goal is achieved

22. Still Needed Commission Amount Threshold Amount Target Amount
Commission Rate

23. Defining the Threshold and Target Commission Rate
Commission Amount: Incentive less bonus 66,240 – 18,000 = 48,240 ( or 4,020 monthly)
Threshold Amount: Fixed costs were 4,000,000 annually or 4,000,000 / 11 (sales reps) / 12 (months) = approx. 30,303 monthly
Target Amount: Contribution margin should cover the cost of capital (10%)
30,303 (fixed cost) x 10% (COC) = 33,333 per month per sales rep. Need to pay for commission as will so actual target must be higher.

24. Define the Target Commission Rate
Actual target contribution – commissions = required contributions to meet cost of capital Actual target contribution – 4,020 = 33,333 Actual target contribution = 37,353 Threshold was fixed cost ( aprox 30,000) so payable range = 37,353 – 30,000 = 7,353 Commission rate = Total Commissions/Total payable range 4,020/7,353 = 54%

25. Defining Commission Rate
Component
Base Salary with Commission
Base Salary
Base Salary/Year
44,160
Commission Rate
Performance To Monthly Goal Commission rate
To threshold (0 – 30,000) %
1st Commission Rate From threshold to target %
(30, ,353)
2nd Commission Rate Above 100% Y%

26. Defining Commission Rate Above Target
Contribution margin above target represents profit beyond the cost of capital and thus can be shared with sales force by any amount deemed appropriate.
Biomed chose 60% - wanted it higher than target commission
Motivate strong performers
Align interests with the company
Increase loyalty to the company

27. Defining Commission Rate
Component
Base Salary with Commission
Base Salary
Base Salary/Year
44,160
Commission Rate
Performance To Monthly Goal Commission rate
To threshold (0 – 30,000) %
1st Commission Rate From threshold to target %
(30, ,353)
2nd Commission Rate Above target %
(37,535 - )

28. Hurdles for Bonus
Seventy-five % of contribution margin is derived from focused items – eligible for ½ bonus
Achieve target number of new accounts – eligible for ½ bonus

29. Compensation Mix and Hurdles
Component
Base Salary with Commission and Bonus
Base Salary
Base Salary/Year ,160
Commission Rate
Performance To Monthly Goal Commission rate
0 – 30, %
1st Commission Rate From 30,000 – 37, %
2nd Commission Rate Above 37, %
Quarterly Bonus*
Performance to YTD goal Bonus
Q % of Q1 YTD Goal THB3,000
Q Achieve 100% of Q1-2 YTD Goal THB4,000
Q Achieve 100% of Q1-3 YTD Goal THB5,000
Q Achieve 100% of Q1-4 YTD Goal THB6,000
*Hurdle:
A 50% bonus paid if 75% contribution margin is derived from focused items
A 50% bonus paid if target number of new accounts is achieved
*Bonus for previous quarters are retro-backed when YTD goal is achieved

30. Other Implementation Issues
Transition Phase
New Selling Materials
Training and Training Materials
New Price List
Communication and Roll-out Plan
“Sell” Manager first
Develop FAQs
Possible assessment of existing sales force ability to implement to new strategy
Coaching on new strategy
Recognition important
Prepare for Sales Rep Turnover

31. Key Learning Points Need clear understanding of
the company’s market strategy
the role of the sale’s force in achieving goals of the strategy
Specific tasks of the sales role
Implementation is risky
Importance of change management principles
Other dimensions of sales management program (i.e. training, job aids, management) have to be synchronized

32. Executive Compensation

33. Executive Compensation
Base Salary
Short Term Incentives ( Cash)
Long Term Incentive (Equity – Restricted Stock, Stock Options)
Retirement Plans
Perquisites

34. Equity Awards Stock Options Key terms
Valuation method since usually no value on grant date
Key terms
Grant date
Vesting Period
Expiration Date/Exercise period
Under water options
In-the-money options
Vested and Exercisable
Performance stock

35. Equity Awards Restricted Stock
Value on day of grant but restricted
Restrictions can be performance and/or time based
Requirement to hold stock – usually a multiple of salary – 1- 5 times salary

36. Proxy Statements (Kimberly Clark)
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This Compensation Discussion and Analysis is intended to provide investors with an understanding of our compensation policies and decisions regarding our named executive officers for Our named executive officers are our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers.

37. Name and
Stock
Option
Incentive Plan
Compensation
All Other
Principal Position
Year
Salary($)
Awards($)
Compensation($)
Earnings($)
Total($)
Thomas J. Falk
2008
1,224,996
2,208,418
1,479,661
943,247
1,276,613
103,896
7,236,831
Chairman of the
2007
1,212,497
4,744,250
1,343,165
2,498,992
1,195,872
143,406
11,138,182
Board and Chief
2006
1,175,000
5,695,857
1,477,498
1,367,700
1,057,314
118,565
10,891,934
Executive Officer
Mark A. Buthman
645,000
492,700
323,032
370,260
252,410
114,775
2,198,177
Senior Vice President
578,756
963,722
288,786
734,400
221,778
88,087
2,875,529
and Chief Financial
507,517
1,139,698
318,604
405,425
192,137
78,881
2,642,262
Officer
Robert E. Abernathy
606,249
788,743
494,612
349,745
433,139
100,337
2,772,825
Group President —
545,009
1,212,724
348,264
822,794
529,655
11,250
3,469,696
North Atlantic
521,285
1,290,421
349,006
437,394
404,905
14,608
3,017,619
Consumer Products