How well does your incentive management enable your company to deliver on financial goals?
The push to finish strong in 2011 is over and many of us are now heads down again – focused on finalizing incentive payouts, reorganizing sales teams and launching new comp plans for 2012. At the same time, we’re all anticipating company results and how the investment community might react. But, as you prepare for the year ahead, how focused are you on the impact sales performance and incentive compensation management can have on the financial measures your executives are reporting against?
The ability to effectively design and execute on incentive compensation plans can have a significant impact on what your CEO reports each quarter. More specifically, the financial measures that investors and Wall Street care about – growing operating income, improving net profits, and improving earnings per share – are significantly influenced by sales performance. So, how well incentive management is aligned to motivate sellers to execute on these goals is a key lever in driving financial performance.
Example:
Consider incentive compensation and its impact on improving sales at a multi-billion dollar company. The company’s strategy is to provide innovative solutions to its customers, leveraging a full portfolio of products and solutions. Executing this strategy requires the sales organization to make an important transition from selling in product silos to selling across the full portfolio through national, industry-focused sales teams.
One of the company’s largest business units (Business Unit A), plans to expand its $500M in annual revenue with a strategy driven by the national sales teams. However, due to a variety of incentive compensation processing challenges (data, systems, and operations), they haven’t been able to consistently pay the national “overlay” sales teams. As a result, the national sales team’s interest has faded and after an initial push they’re no longer emphasizing a critical portion of the portfolio with customers.
Let’s examine the potential impact to executive level financial measures if the company could have executed on the compensation plans more effectively:
- An estimated recurring $200M of Business Unit A revenue comes from national accounts and a 25% increase in new revenue is reasonable with a motivated national team
- The resulting $50M increase in revenue would contribute $11.5M growth in operating income, $7.5M growth in net profit and $0.06 EPS growth.
The incremental impact on YOY Net Income and EPS growth are compelling:
- YOY Net Income Growth would increase by over 20% from ~$33M to $40M, improving the YOY growth reported from 14% to 17%
- YOY EPS Growth would increase by over 35%, from ~$0.16 to $0.22 per share, improving the YOY growth reported from 9% to 13%
So, the ability to handle incentive compensation can have a big impact. Most CEO’s would be thrilled to improve Net Income and EPS growth as outlined above.
As you plan for 2012, take time to consider how well your sales performance and incentive compensation operation are aligned to driving company financial objectives. Is your compensation back office working tirelessly just to keep the lights on? If so, think about how this group can play a more innovative and strategic role. By doing so, it’s likely you’ll discover ways that more effective incentive administration and performance reporting can help your company achieve its goals.
We’ll continue to share examples of how our framework aligns incentive management improvements to enable key operational and executive level financial KPI’s, including revenue growth, operating cost control and risk management.
Stay tuned and share your experiences!