Jean-Patrick Tsang, PhD & MBA (INSEAD)
Tel: (847)920-1000

Igor Rudychev, PhD
Tel: (847) 679-8278

Incentive Compensation

Comp design consists of devising a plan that aligns the individual repís financial interests with management objectives. Reps are typically paid a fixed salary and a variable portion (commission and bonus) based on activity/performance. They are usually assigned sales quotas, based on the profile of the territory (sales, market, market share, growth, demographics, competitive product offering, etc.) Below quotas, reps are paid little or not at all. Above quotas, the higher the performance, the more they are paid (and this relationship may or may not be linear). Performance is evaluated against a combination of sales, market share, growth, profit, etc.

Building a comp plan entails two challenges: equity and simplicity. A good comp plan gives the reps the same ability to make money. Easier said than done! Reps that own a small territory should not be penalized because of low sales volume. Reps that have done a great job growing their territory should not be penalized because of slower growth. Reps that inherit a lousy territory should not be at a disadvantage either. Taking into account such considerations often lead to plans that are fair. The real problem though is reps may not find those plans intuitive. This is where creative trade-offs between fairness and simplicity have to come into play.

The downstream task is comp payout, which consists of computing the monthly paychecks of the reps based on the comp plan.