Operational governance of sales incentives | KPMG | AU

Operational governance of sales incentives

Operational governance of sales incentives

Traditional approaches to the design and management of sales force reward programs are being challenged by new operating models, technology, regulatory regimes, and changing customer perceptions. Our spotlight series on Sales Force Reward explores the emerging issues and key considerations for future practice.

1000

Also on KPMG.com

Three people doing business using a digital tablet

Managing operational governance of sales force incentive plans

Why is this important?

  • Establishing and maintaining robust operational governance of sales incentive plans is an increasing area of focus for boards and management teams. Sales incentives can account for some of the largest remuneration arrangements in an organisation, and where heavily geared can deliver total remuneration levels equivalent to some senior executive roles.
  • Maintaining the integrity of sales incentive plan design and management practices ensures that plans are operating as they were intended to, whilst mitigating any systemic risks for business, customers and employees.
  • There also has been increased public scrutiny in recent times around the impact of sales force reward programs on customer outcomes. In some sectors this is leading to greater regulatory coverage and interest in the way plans are designed and managed, and an impetus at board level to ensure that practices are well designed and governed.
  • The rapid onset of the digital economy has also resulted in substantial shifts in the way sales force groups are organised and perform their work. In some cases this can lead to existing sales force reward programs becoming misaligned – which when left unchecked can drive outcomes that are inconsistent with business priorities and objectives.

What to look out for?

The key issues that require consideration when applying effective operational governance across sales force reward programs are:


Where sales incentive or commission plans are used across an organisation, there should be clear accountability and responsibility for effective operational governance and control. The governance role can be distributed between the Board Remuneration Committee, Senior Executives and Human Resources.

Key principles to consider

To establish an appropriate operational governance framework and an approach to monitor the alignment, efficiency and effectiveness of plans, the following 7 key principles should be considered:


1. Eligibility & participation

  • Ensure the right people and roles are participating in sales incentive plans.
  • Make sure all participants have clear accountability for sales performance.
  • Ensure approvals are in place for any changes in participation.


2. Plan design 

  • Create a layer of independence between sales management and the final plan design approval.
  • Utilise gateways and hurdles to ensure plan alignment with culture and values and to control risk.
  • Ensure target setting is robust and reflects genuine performance growth.
  • Revisit plan design to ensure ongoing relevance with operating models and sales force work.


3. Pay mix

  • Tightly align pay mix and percentage at risk to levels of sales force prominence.
  • Only use uncapped plans where there are appropriate controls in place including deferrals and enforceable clawbacks.
  • Ensure the pay mix is right for the culture, operating model and customer value proposition.


4. Sales performance measurement

  • Always focus on net revenue recognition clear of any credit notes, returned stock or cancellations.
  • Monitor the distribution of sales performance – test for ‘sandbagging’ at month or period end.
  • Where new client sales are differentiated, ensure there is no client churning and reheating.


5. Clawbacks and deferral

  • Use a deferral (say 20 percent) to build in a level of protection against poor behaviour or performance volatility.
  • Clearly define and establish enforceable clawback mechanisms for overpayments or breaches and communication of provisions to participants.
  • Clearly define and communicate consequence.
  • Consider linking deferrals to group financial results for the year or other team based goals.


6. Use of discretion

  • Ensure the remuneration committee or executive group maintain the discretion to change the plan at any point in time and to approve final incentive outcomes.
  • Ensure ‘windfall protection’ is clearly defined – providing business protection against sharp increases in performance not linked to individual contribution.
  • Define clear procedures and approvals for the use of discretion around individual performance recognition or payments.


7. Audit and Review Processes

  • Establish a dashboard to monitor performance pay alignment, cost and risk periodically.
  • Define audit and review process focused for preventing fraudulent behaviour or plan gaming.
  • Monitor the performance and behaviour of the top 25 percent incentive earners each period.

Example: Operational governance of sales incentive plans

ABA Retail Banking Remuneration Review – Increased Regulatory Requirements

  • The ABA Retail Banking Remuneration Review (Sedgwick report) has provided a spotlight on incentive plans for front line staff rewards and how the design and governance of these remuneration plans can potentially conflict with customer outcomes.
  • The review at its heart directs banks to review how their incentive plans are designed and managed to remove an over emphasis on sales and financial targets. In their place performance should have regards to a range of performance indicators that overall support ethical behaviour and a focus on customer outcomes. Leadership is given a clear role to play in managing performance in a consistent and more holistic fashion.
  • The review recommendations also place responsibility with the Board and most senior managers to take accountability for not only implementing the recommendations, but ensuring genuine culture change where there is a bias towards sales to the detriment of customer centricity.
  • Organisations must have appropriate oversight to ensure that they can monitor implementation to enable reporting to shareholders on how retail staff are remunerated and their performance assessed. Banks have publicly committed to adopting the Sedgwick recommendations which will as a result put a spotlight on their operational governance processes.

How KPMG’s team work with clients to manage sales force reward

  • Working with Board Remuneration Committees or executive groups to undertake operational governance reviews of sales incentive plan practices. This includes identifying the number of different plans operating concurrently across different business units to understand the variation in design, competitiveness, risk factors and cost – benefit back to the business.
  • Working with sales leadership teams to develop sales force reward strategies tightly aligned to new operating models, structures and/or product and service delivery strategies. This includes developing performance scorecards and designing and modelling different pay mix and commission schedules that align back to business needs.
  • Working with HR leaders and specialist reward teams to manage the design and implementation of incentive and commission plans as part of a broader total rewards strategy. This includes helping establish and manage the right monitoring, review and control processes.

Connect with us

 

Request for proposal

 

Submit