I am following up to a question posed in a
Rolling Forecasts and Incentive Plans
Answers
Justin,
I haven't seen much literature here...however, when I have encountered the problem I solved it in two distinct ways.
1) Change the incentive plans to match the business planning cycle. This is not preferable, as it provides a level of uncertainty to the salesforce. A good sales exec can help structure something that makes sense, but quarterly moving targets are generally scary.
2) De-couple individual goals from the rolling budget. This tends to work better. The sales exec staff should be tied to the rolling budget (largely), but the individuals get their own fixed plans. It is then the Sales Exec's problem to deal with the moving target, that they have a role in updating. They might do mid-term updates, add or subtract staff, etc. to meet the goals that they sign up for, but as to the people at the bottom, they get insulated. Note a sales P&L as part of the exec comp can help here, so that the exec staff can make investment decisions based on business variations.
Generally, however, I prefer not to adjust incentive comp unless there is a really good reason. Even in highly volatile environments, I still prefer to give fixed goals over the compensation cycle.
KP
1
Justin, you might want to take a look at
"The
https://www.proformative.com/whitepapers/cfos-cheat-sheet-compensation-risk-reward
Although not specifically about adjusting to rolling forecasts, it does lay out some incentive compensation alternatives for a rapidly changing environment.
Enjoy!
Best... Sarah
In my experience in dealing with sales people and comp plans, unless there is a major restructuring of the company and products, do not mess with the comp plan. Sales people tend to be simple minded, they need to know what their sales goal is and when they will get paid on it. Bottom-line...in most cases you are going to have a sales guy earn from $1.5M to $3.0M annually in sales so if you have a good sales comp plan it should be able to withstand and organizational or forecast changes...
One thought is not to have incentive programs tied to budget/forecast. Instead base it on a return on assets or some other metric. You then build action plans (budgets) to meet that goal.
Beyond Budgeting Round Table is an organization that promotes the rolling forecast concept vs. budgets. Steve Player runs the North America group. There are several books (try Amazon) published by the group. One that specifically addresses the incentive issue (based on table of contents) is Implementing Beyond Budgeting; Unlocking Performance Potential, by Bjarte Bogsnes. Good luck
One reason why RF can become a "finance owned" instead of "business owned" process is because the RF has no impact on incentive compensation, hense people outside of the finance organization don't really care. Unless RF has some impact on how people are compensated, it will "lack teeth".
Sales persons' incentive plans should be designed and based on actual performance and not tied to budgets (whether fixed or rolling). Goals and guidance can be given based on budgets and may even be revised during the fiscal year, but the actual compensation plan with its frequently complex match behind it should be driven by actual numbers.
Tie most incentive plans to besting annual industry benchmarks, not an annual budget. In the case of the sales force, put on quarterly or semi-annual quotas so they are periodically refreshed based on direction from the rolling forecast.
Incentive plans need to be tied to the economic reality of business
Filed Under:
FP&A