iStock 000019093454Small resized 600The majority of companies follow an annual incentive plan period for salespeople.  This is likely for multiple reasons.  First, executive compensation and broad-based compensation programs – two additional categories of compensation programs – are almost always annual.  For consistency, companies place salespeople on annual plans, as well.  Second, most companies have an annual business planning process and annual incentive compensation plans and goals tie in nicely with this planning process.

But, based on recent research, a case can be made for using less-than-annual periods to drive performance.  A July/August 2012 article in Harvard Business Review cited research revealing that bottom performers performed 10% better if there were “pace-setting” bonuses to ensure they were on track to hit their annual sales quotas.  In other words, simply having multiple “mini-performance periods” in addition to the annual performance period helped bottom performers achieve higher levels of performance.  These “pace-setting” sales bonuses are different than simply paying salespeople more frequently – if salespeople didn’t perform at a certain level during certain periods, those bonuses would be gone for good.

Below are some of the features of shorter and longer plan periods:

Shorter Plan Periods (e.g., Monthly) Longer Plan Periods (e.g., Annual)
Drives immediate focus Drives longer-term result
Less dependent on long-term forecasting Dependent on good long-term forecasting
Drives performance each and every period Only drives annual number
May encourage salespeople to “hold” sales across periods Unlikely for salespeople to “hold” sales
Preferred by salespeople Less expensive to administer

Some plans try to obtain the benefits of both short-term and long-term plan periods.  For example, a tech-based inside sales force pays its salespeople on quarterly plan periods throughout the year.  But, it also has a “fifth quarter” that pays on annual performance.  In this way, it reaps the benefits of both shorter and longer plan periods. 

Payout Frequency

The frequency with which you pay incentives is another important incentive plan design decision. Timely measurement of results and prompt payment of rewards for performance are critical for incentive plan success. The motivational power of incentives diminishes significantly when there is a long lag in measuring the results and/or salespeople are not rewarded soon after they complete the work that creates the results.

The primary determinant of payout frequency is the salary: incentive mix of pay.  Below is a grid that provides a rough guideline for how frequently companies should pay their salespeople based on their pay mix. 

Pay Mix:  % of Cash Comp Paid in Incentives 10% 10-15% 15-35% 35%
Payout Frequency Annual Semi-Annual or Annual Quarterly or Trimesterly Monthly

For example, salespeople with a 50:50 mix of pay are almost surely going to be paid their incentive payouts monthly.  Because so much of their target income is in incentives, paying them any less frequently than monthly may cause a cash flow crunch.

However, salespeople with an 80:20 mix will almost always pay their incentives quarterly and not monthly.  Paying these incentives monthly would lead to a miniscule check every month (<2% of their annual cash compensation on average), making each reward check less meaningful and providing a sizable burden on the sales compensation administrators forced to generate the checks.

While pay mix is the primary consideration in determining payout frequency, another is the administration of the plan.  For some companies, the data can be extremely difficult to collect, aggregate, calculate and pay upon on a frequent basis.  This could be due to the source of the data (e.g., obtaining “tracings” data from distributors), the number of data sources, or the size of the sales compensation administration group.  In these cases, the payout frequency may result in a payout frequency slightly less frequent than the above table suggests.

Topics: sales compensation, sales quotas, Incentive plan design, Incentive compensation, Sales Bonus, performance incentives, Inside Sales, Chad Albrecht, compensation administration