Your incentive program is meant not only to reward and motivate but to make money for your company. Use these guidelines (the dollar amounts are hypothetical) to make sure your next incentive program produces the bottom-line results you want.
Sample Figures 1. Expected Level of Performance (sales) with no incentive program--$10 million
2. Desired Level of Performance (within reason) with the incentive program--$12 million
3. Incremental Increase in Sales at Target--$2 million (20 percent)
4. Gross Profit on the Incremental Increase--$600,000 (30 percent)
5. Program Investment--$240,000 (40 percent)
How They Were Derived 1. Expected Level of Performance--This is what our hypothetical company expects to achieve without the incentive program. Starting with this number ensures that you are only paying for performance above and beyond your expected overall sales.
2. Desired Level of Performance--This figure is what you would like to achieve if the program produces as expected. Be realistic: Incentive travel and merchandise award programs will not sell obsolete stock or overpriced goods and services. Look at your past growth and factor what you believe is a reasonable and attainable increase (on average, a 10 percent to 20 percent increase in revenue).
3. Incremental Increase in Sales --This is the amount of increased revenue that you expect the program will bring in. Here, the number is based on a 20 percent increase.
4. Gross Profit--In the hyphothetical example, the gross profit value of the incremental revenue was $2 million. For the sake of discussion, we've assumed the company makes a 30 percent gross profit, or $600,000 of the incremental revenue.
5. Program Investment--This is what the company has agreed to invest back into the program, including the promotion and the trip. In this case, the company planned to spend 40 percent of the incremental profit, or $240,000.
If this incentive program performs as projected, our hypothetical company will invest $240,000 for a return of $360,000 to the bottom line. That's anof 150 percent.
Cost Per Winner Now that we have a total target investment and return on that investment, let's break it down to a per-winner investment. To do so, we have to make two assumptions: 1) that we have 100 salespeople who sold a total of exactly $10 million in products last year; and 2) that each person has an identical goal for this year: $20,000 in new revenue. With 100 people, that will give us the $2 million in incremental sales we need. If they reach the goal, they qualify for the award. We will also assume that production and distribution costs are linear, and that there are no changes in cost if we go above or below our target.
Of course, all 100 people will not sell exactly $20,000 in additional business. However, we can average them out for the purpose of making some projections. Using the Paretto Principle (the 80/20 rule) with some modification, here's how our performance might look on average for a $2 million increase:
* 15 salespeople will add $40,000 in business, contributing a total of $600,000 (15 x $40,000).
* Twenty of our 100 will add $30,000, contributing another $600,000 (20 x $30,000).
* Another 15 will hit the goal exactly, adding $300,000 (15 x $20,000).
* The other 50 will average only a $10,000 increase, adding another $500,000 (50 x $10,000).
Following this model, we had a $240,000 total budget for the incentive program. This total includes promotion and administration, which typically averages 15 percent of the total budget--in this case, $36,000--leaving $204,000 for the program. That's a total budget per winner of $4,080 for 50 winners.