Pressure Testing Incentive Systems Under COVID-19

In the world of incentives, six weeks of disruption equals six months or more of uncertainty. The search for direction in times of significant change can be elusive, as specific and reliable information is sparse and requires organizations to act without a complete vision of the future. Creating a framework for action should be primary. Specific acts to follow should be based on:

  • The range of impact (industry-specific, employee participation, percentage of total compensation);
  • the range of plans (short-term, long-term, measurement type); and
  • the timeframe (remainder of the year, quarter, multiple years).

The options for action can also be placed into three categories:

  • do nothing now,
  • do something now, or
  • do a lot now.

Doing nothing is always an option. Remember, any change can erode the integrity of an incentive plan. Merely living with business realities, good or not so good, is the foundation of incentives. In its purest form, it is pay for performance. Letting the exception become the rule could have a downside, downstream so if you are fortunate to be in an industry that is only mildly impacted COVID-19, this option may be very attractive.

Doing something now is another option. This option recognizes the realities of a loss of revenue. Not recognizing a business reality could appear to be tone-deaf to employees and result in a flattening of effort and morale. This deteriorates the purpose of your incentive plan and is not good. On the other hand, if your organization is seeing a windfall from the current environment, an adjustment of targets or payouts might be appropriate.

Doing a lot now is the third option, and it means a total reset. This could be a desirable option for an organization in an industry that is forecasted to fundamentally change or the current environment might result in significant time for business recovery. Starting over with new milestones, profit forecasts, market share, etc., that reflect long-term business can show leadership agility. Starting over could create a “second wind” and rally employee creativity and productivity.

With that, a little context here would be appropriate. Meaning, how are organizations managing in this dynamic environment?

In a recent World at Work article, the Alexander Group’s report on a study titled, “COVID-19 Sales Comp/Quota Survey.” The survey, which was conducted the week of March 23rd, 2020, had responses from 203 sales departments representing 340,000 sellers in the United States. While this survey was conducted what seems to be a lifetime ago, the insights are still valid.

Sales leaders seek to protect sellers’ pay during the COVID-19 crisis, as 82 percent are planning some type of sellers’ pay adjustments. Sales leaders have yet to identify the amounts and techniques. The primary reason for providing pay protection is the retention of the workforce by supplementing sellers’ cash flow.

The following factors will influence how much pay protection companies will provide to sellers:

  • Revenue Impact: The extent of revenue impact will determine whether and how much pay protection to provide to the sales team.
  • Pay Impact: For some, the downturn will have a significant impact on sellers’ total annual earnings. In other cases, such modest incentive opportunities, the impact on sellers’ total pay might be marginal.
  • Performance Period and Payout Frequency: Longer sales cycles with less frequent payouts may not require immediate action.
  • Downturn Length: The anticipated length of the downturn will affect sales leaders’ pay protection considerations. For many, the length and extent of the downturn are unknown.

Pay Protection Techniques
Companies are considering a variety of pay protection techniques.

  • Quota Changes: Sales leaders are considering the following quota adjustment methods: target quota changes, bridge quotas using historical performance, quota indexing, terminating the current plan and developing new quotas, and reducing or eliminating quota thresholds. 45 percent will be making quota changes.
  • Pay Guarantees: Various pay guarantee methods are available to sales leaders: dollar payments, percent of target earnings guarantee, percent of base pay guarantee, incentive pay trend-line bridge, and increasing base salaries. 33 percent are considering incentive pay guarantees, and 75 percent plan no changes to base salaries.
  • Formula Changes: Another choice is to change incentive formulas such as payout rates, provide a recoverable draw, and move to a company bonus; 19 percent plan to change formula payouts.
  • Sales Crediting Practice Changes: To address specific situations, sales crediting changes are available: credit relief for canceled orders, credit relief for delayed or non-payment, shared credit, and credit timing changes (e.g., booking to the revenue paid). 61 percent of the companies are planning no crediting changes.
  • Add-On Plans: Sales leaders can offer new, add-on performance plans such as contests/spiffs, individual awards/cash, recognition, development programs, team awards. 51 percent are considering offering add-on plans.

Another study in WORKSPAN DAILY on April 3rd, 2020, found that nearly half (43 percent) of the 90 employers surveyed are undecided about whether they will adjust their performance metrics in annual incentive compensation plans in response to COVID-19 and economic uncertainty. 17 percent of employers said they considered adjusting but decided to revisit the option later, 15 percent said they are still in the process of setting performance metrics, and 14 percent said they considered the option but won’t adjust.

The Alexander Group’s “COVID-19 Impact on Sellers’ Pay 3-Day Update Survey” reveals sales leaders are looking at a variety of pay replacement methods, including guarantees, quota changes, and payout formula modifications. The survey featured 219 companies that provided their perspectives on how to treat the loss of sellers’ incentive pay. Survey responses were collected during the week of April 13th  and published on April 20th.

Here are the most popular actions sales leaders are taking by sales level decline:

  • Decline greater than 25 percent: Compensation formula changes (67 percent)
  • Decline 15 percent to 24.9 percent: Incentive pay guarantees (34 percent)
  • Decline 5 percent to 14.9 percent: Quota changes (35 percent)
  • Decline .1 to 4.9 percent: No adjustments (33 percent)
  • No decline: No adjustments (41 percent)
  • Increase in revenue: Varied practices (43 percent

Many sales organizations (43 percent) believe the need for pay adjustment modifications will end by June, meaning economic activity will return. That’s a great optimistic outlook.

Your choice of options will enviably be based on the business environment your organization faces. Not to be forgotten is the culture, message, and long-term impression you want to convey to your employees. As we all know, in a crisis, everyone is watching. Your employees are evaluating how the organization performs under pressure. Your choices will require you to “look around the corner,” to use a great deal of judgment and wisdom. Like the one-eyed man, when things are dark, a little insight can go a long way. Employers Council has resources and experts who can help. Feel free to call us with your questions.