Underestimate the importance of getting it right with Incentive Compensation Management at your peril

Underestimate the importance of getting it right with Incentive Compensation Management at your peril. How to spot if you have a problem, and what you can do about it.

So, what is Incentive Compensation Management (ICM)?

Incentive compensation management (ICM) is, in short, the process of designing, implementing, and managing the compensation plans that reward your employees for achieving specific goals.

And when we refer to incentive compensation, it is sometimes referred to as other terms, such as bonuses or even commission. Essentially, it is a variable component of compensation to staff, which in some cases can be a very significant cost to a business.

And ICM plays a key role in many businesses. For example, it can help you align your workforce with your business strategy, motivate and retain your talent, and importantly, drive performance and growth. These are key factors in the long-term success of any business!

In this article, I will discuss why I think ICM is important for your business, how to identify the signs of a problem with your current ICM process, and then move on to what I see are some best practices and tools that position ICM as a real value-add process.

Who in a business cares about incentive compensation, and why should management focus on getting it right?

Incentive compensation is something that impacts people around the business, such as salespeople, managers, finance teams, HR teams, and executives. And each of them has different needs and expectations from the ICM process:

  • Sales teams want to be paid accurately and on time;
  • Managers want to have visibility and control over their team’s performance and compensation;
  • Finance teams want to ensure they accurately plan and capture the costs correctly;
  • HR teams want to support employee engagement and retention; and
  • Company Executives want to optimize the return on investment (ROI) of their compensation plans and ensure that business profitability grows.

So as a business, you should care about getting ICM right, because it can have a significant impact on your bottom line, your competitive advantage, and your organizational culture.

So, what can happen when you get it right with ICM?

When you get it right with ICM, there can be some tangible benefits to a business. Here’s 3 examples:

1. Increased sales performance and productivity:

By aligning your compensation plan with your business objectives, you can incentivise your salespeople to focus on the activities that drive results. You can also reward them for achieving or exceeding their targets. The result of this? You boost their motivation and satisfaction.

The whole area of Sales Performance Management is one of the largest value-add opportunities for many businesses.

2. Improved employee engagement and retention:

By offering fair and transparent compensation, you can show your appreciation and recognition for your employees’ efforts and contributions.

Furthermore, you can also foster a culture of trust and collaboration among your teams, which can enhance their loyalty and commitment. When employees feel like it is unclear as to how they should get paid, it can create real feelings of uncertainty.

3. Reduced operational costs and risks:

When you think about the ICM process itself, by automating and improving accuracy of as much of the process as possible, you can reap a whole array of benefits. To throw a few simple examples out there, you can eliminate manual errors, delays, and disputes that can cause frustration and dissatisfaction among your employees.

And what can happen when you get it wrong?

Let’s face facts, very few processes work well all the time. So, what can happen when you miss the mark and have a poor ICM process?

1. Decreased sales performance and productivity:

By misaligning your compensation plan with your business objectives, you can create confusion and inconsistency among your salespeople. This can have a catastrophic impact on what is your key source of revenue generation. When salespeople don’t think that their package is fair in comparison to what is on offer elsewhere, you run the risk of them walking out the door.

2. Reduced employee engagement and retention:

When the process is messy or unclear, it can be easy for dissatisfaction to start to grow. You can also damage your reputation and credibility as an employer, which can increase your staff turnover rate and recruitment costs.

3. Increased operational costs and risks:

In terms of the tools you use, if you are relying on manual or outdated methods to manage your ICM process, you open yourself up to a risk of a lot of headaches.

Managing ICM effectively is really important. But how do you know if you have a problem?

It’s one thing to discuss what good looks like and what bad looks like. But how can you diagnose your position. What sorts of things are indicative of a sub-optimal ICM process? A few ideas could be:

Frequent errors or discrepancies in calculations or payments: For example, you may notice that some of your salespeople are receiving incorrect commissions or bonuses due to miscalculations or data entry errors. Even worse, the employees are spotting these errors themselves.

Lack of visibility or transparency into performance or compensation data: For example, you may find it difficult to review and analyse the relevant data for your team’s performance, or even struggle to understand how it aligns with performance of the business.

Compensation plans are being managed in multiple spreadsheets: For example, there might be one central master spreadsheet. However, individual departments, or even individual salespeople manage their own, because they need to look at information more specific to their needs.

With lots happening all the time, it is very easy to see how many businesses develop suboptimal ICM processes over time. But in almost all circumstances, there will be ways to find improvements.

You have a problem. What are the best practices for managing an effective ICM process?

Every business has its own unique set of circumstances. But there are some simple step changes that can be made that can have a huge impact with how you develop your ICM process.

1. Align your compensation plan with your business strategy:

You should design your compensation plan to support your business goals and priorities: Whether this is to increase revenue, grow market share, or enhance customer satisfaction scores, make sure that you create targets that help improve your key business KPI’s.

2. Communicate your compensation plan clearly and regularly:

Never underestimate the importance of getting it right with communication. You should communicate your compensation plan to your employees and managers in a simple and understandable way. Updates and feedback is extremely important. And never forget to have clear channels to communication modifications to a plan. Nobody likes surprises!

3. Automate and streamline your ICM process with modern technology:

Leveraging technology is one of the key changes many should be thinking about. There are now solutions that can transform the whole process in a way that drives really positive business outcomes. I jump into some of the reasons why this sort of technology should be considered, especially if you currently work predominantly in spreadsheets.

Many companies use spreadsheets to manage this process. 3 reasons why you should be using modern technology to do ICM.

Without diving deep on the challenges of spreadsheets, in short, despite their flexibility, they can be inefficient to use and manage, error-prone, and also risky from a security perspective. That can create real limitations for your ICM process.

Here are 3 reasons as to what you get by making the jump to a modern ICM solution:

1. Real Speed and Scalability

As your business grows, so does the complexity and volume of your compensation data and calculations (which become ever-more error-prone). Whereas spreadsheets can become cumbersome and unmanageable.

Modern solutions seamlessly and accurately handle large data sets and complex calculations and give businesses more breathing room to work with the value-add side of ICM.

2. Security

Spreadsheets have well documented challenges with security. With ICM, you are managing extremely sensitive data – the compensation of your employees. You need to make sure you feel that your data is secure, and with modern planning software, that comes as standard.

3. Capabilities to enhance decision-making

You want ICM to be a real value-add opportunity for a business. You can optimise revenue, and efficiently grow profitability when you are able to dynamically manage targets and goals. The ability to build and manage scenario planning is a key benefit you get from working with modern solutions.

You can build and update plans and see the results in real-time. Having this at your fingertips is a superpower for decision making!

I could build a bigger list, but as you see from these points above, getting it right with technology has transformative powers!

Key Takeaways – ICM is a key process for any business with significant amounts of variable compensation. Be sure to give it the right investment it deserves because the business case is clear!

Hopefully I have brought to the surface just how valuable an effective ICM process is to any business that has significant variable compensation.

As businesses grow in size and both complexities, you want to make sure you have your incentives planned in the right way. And you want to make sure you have the best people sticking around to help you achieve your long-term goals.

Getting it right with both process and technology play a key role. And there has never been a better opportunity to get started!

By Iain Main

Iain has been working at Bedford since 2021, and partners with customers around Europe to help them get the most out of Anaplan by utilising it in new ways across their organisations. He has also implemented Anaplan with a number of customers.

Prior to joining Bedford, Iain worked in various roles across finance in both large multinationals as well as start-ups and is passionate about the role that finance teams can play in driving organisational performance.

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