Cichelli, who is senior vice president of the Alexander Group, offered his tips at WorldatWork’s Total Rewards 2013 Conference and Exhibition, held recently in Philadelphia.
Hurdle
The hurdle is a prerequirement measure, says Cichelli; that is, the first measure must be accomplished before favorable treatment of a second measure can occur.
The employer establishes minimal requirements for the first measure. Then the approach is a binary on/off one, Cichelli says.
Example: Commission with Hurdle
After salespeople reach 100% of quota, their commission rate rises. However, all three products must be at least 95% of goal before second rate (over 100%) becomes effective for any of the products.
So, here, if the salesperson exceeds quota for product A and B, but sits at 80% for product C, no higher commission rates will be applied for sales above quota for products A and B.
|
Sales Volume |
Commission Rates |
||
|
|
Product A |
Product B |
Product C |
|
To 100% |
2% |
8% |
5% |
|
100% and over |
4% |
12% |
7% |
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Modifier/Multiplier
With this approach, there is a posttreatment of the primary measure. That is, the first measure payout is affected by performance on the second measure.
The important distinction here is that performance on the second measure can increase or decrease earnings of the first measure.
The employer can calibrate the pay range depending on the desired outcome, Cichelli says.
Example: Commission with Multiplier
|
Commission |
|
|
Volume |
Rate |
|
Up to $3M |
2% |
|
Over $3M |
3% |
|
|
|
|
X (multiplied by) |
|
|
|
|
|
Gross Margin Modifier |
|
|
Percent of Commission Earnings |
|
|
Gross Margin Percent |
Modifier |
|
≥30% |
125% |
|
20% to <30% |
115% |
|
10% to <20% |
100% |
|
5% to <10% |
75% |
|
<5% |
50% |
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Example: Bonus Formula with Product Modifier
In this case, the new monthly volume bonus commission is 1% on target monthly volume, which jumps to 3% for volume over target.
Then, along with that is a quarterly Product Mix Bonus for Major Emphasis Lines (MELs).
|
# of Product MEL Goals Reached |
Percent of Quarterly Incentive |
|
5 |
35% |
|
4 |
20% |
|
3 |
12.5% |
|
2 |
5% |
In tomorrow’s Advisor, we will share more from Cichelli on the bonus matrix, plus an introduction to the all-compensation-in-one-place website, Compensation.BLR.com.
What are some of advantages/disadvantages of these? Are there certain circumstances that one is better than the other?