Client Case Study: Incentive Compensation Design

Objectives/Challenges:

In the middle of 2004, Company A struggled with the compensation of their salespeople that resulted in significant margin erosion. The company was struggling with high steel prices and out of control costs, which resulted in salespeople being rewarded for sales volume regardless of profitability. The company decided that it needed a new compensation system that would drive their salespeople toward more profitable sales. Further, Company A wanted a compensation plan that allowed them to be flexible in the event that steel prices disrupted their future compensation systems. Additionally, management wanted the sales organization to be strategically aligned with senior management’s compensation system.

Our Approach/Strategy:

Company A teamed with Young & Associates, Ltd. to analyze their current compensation plan and measure its sensitivity to price increases. Working together, they identified the metrics that had the greatest value impact on the organization (such as receivables and days outstanding), and aligned with the corporate strategy. Using these metrics, Young & Associates designed alternative compensation systems that would better meet the organization’s needs and drive higher sales and profits. The team then ran compensation simulations to determine the impact the designed alternative compensation plans would have on financial results and would best meet the company’s needs.

Results:

Company A now has a strategy linked compensation system that ensure profitable sales and strategic behaviors are now rewarded.

More: Incentive Compensation Design.