Case Study On Incentive Plans

ILR Review

Description: Issued quarterly since October 1947, the Industrial & Labor Relations Review is a leading interdisciplinary journal, broad in scope and international in its coverage of work and employment issues. We also publish reviews of some 20 books per year. We define industrial relations to include a broad range of market, organizational, and institutional processes related to the world of work. Relevant topics include the organization of work, the nature of employment contracts, human resource management, employment relations, conflict management and dispute resolution, labor market dynamics and policies, labor and employment law, and employee attitudes and behaviors at work. Our articles are edited with the aim of making their findings and conclusions intelligible to all readers.

Coverage: 1947-2014 (Vol. 1, No. 1 - Vol. 67, No. 4)

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ISSN: 00197939

EISSN: 2162271X

Subjects: Business & Economics, Business, Sociology, Economics, Social Sciences, Labor & Employment Relations

Collections: Arts & Sciences IV Collection, Business & Economics Collection, Business I Collection, JSTOR Essential Collection

This post is a short case study of a company that created a successful incentive plan for its sales force.

One of our clients, a food ingredient manufacturer, decided to change its long-held business strategy of emphasizing profitability to one designed to increase market share.  By diversifying its product lines and venturing into new markets, the manufacturer believed it could increase growth and eventually profitability when it achieved economies of scale.  The company knew that to drive business growth, it had to change its short-term incentive plan.

Under the old plan, sales people were rewarded for all products they sold individually and received a percentage of their territory's gross margin.  Consequently, most reps sold mature product lines that had the highest gross margins.  The manufacturer quickly realized that although the incentive plan maximized profitability, it was not helping the company gain market share with its new product offerings.  Clearly, the incentive plan had to change to support the new strategy.

The company revised its incentive plan and based incentives on units sold rather than gross margins.  It also divided its products into three categories: Develop, Maintain, and Harvest.  Develop products had the highest per-unit incentive, while the Maintain and Harvest categories had a lower and lowest per-unit incentive, respectively.  With the new incentive plan in place, top management was able to communicate clearly its new strategic direction and performance expectations.

Rewards were made substantial enough to drive change. The company set its annual target awards at 25% of base pay for achieving goal; however, the award could increase to as much as 40% of base pay for superior performance.  This was a significant increase over the old plan which had a maximum award of 30% of base pay. Incentives were paid quarterly or semi-annually, so that the sales force would almost immediately see the connection between their efforts and their rewards.

The manufacturer also focused its more seasoned sales people on Develop products, while assigning the less experienced sales people to the Maintain and Harvest products.  This approach freed experienced sales people to devote more time to the new products, and provided a better training opportunity to less experienced personnel.  Although the Maintain and Harvest products had lower per-unit incentives, the products were easier to sell in an already established marketplace.

The company trained employees to sell its new products and to recognize the characteristics of the customers most likely to buy them.  Through the training program, management communicated to the sales force the new products’ potential and convinced them of the probability of success.

As this company’s experience illustrates, performance-based awards can be powerful tools to create and reinforce change in an organization. If what gets rewarded is indeed what gets done, companies need to make sure their performance-based rewards programs are aligned with overall business strategy. Any disconnect between the two may undermine a company’s ability to achieve its goals.

 

Need help creating a performance-based reward plan? Contact our CEO, Don McDermott, at dm@dgm.com or (732) 842-8634 for a no obligation initial consultation.

 

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