Should you include discretionary pay in your bonus compensation program?

Posted by Mike Martin on Tue, Apr 22, 2014

Discretionary payments have been around for some time, but they are often a late-design throw-in for many compensation programs.  Discretionary payments are fully dependent on the sales management’s choice, and are not on any schedule or based on pre-defined requirements.  Typically, these payments are made when a sales rep displays exceptional performance or the company hits a milestone.

Should you consider adding and/or continuing discretionary payments in your company’s bonus compensation program?  Let’s look at a few reasons in favor of adding discretionary pay:

• Field managers typically enjoy the freedom associated with discretionary pay.  Discretionary pay can help with a number of unique situations in the field, especially those too varied and numerous to build into a base compensation plan.

• With the amount of time it often takes to complete a sales cycle or for sales to hit the books, discretionary pay can be an excellent way to provide more timely rewards.

• If you already have a points program in place for contests, using those points for discretionary pay can be a logical next step.

There are really only two steps to follow to set up a discretionary payment program. Following these steps will help avoid program overdesign:

1. Set a discretionary budget.  I have seen estimates of 5% of the total bonus budget, or no more than $1,000 per sales rep per year.  Whichever level you choose, the budget should be a small portion of a rep’s total compensation because of its 100% reliance on manager perceptions.

2. Create some level-setting among the management team for distributing discretionary pay.  This can be done by providing examples and limits on payouts that individual reps can receive each quarter.  Of course, there is a tricky balance when adding restrictions if you want to keep it truly “discretionary.”

Hopefully, this is helpful if your company is considering discretionary payments.  What other advice would you add?

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