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Compensating Business Development Jobs: Incentive Plan Design Considerations
In our June 18th blog post, we make a case to clarify the job before leaping to a conclusion about how to shape the compensation plan. For jobs that are truly executing to the classical BD role we described, we offer the following guidance to incentive plan designers:
– Incentive opportunity. Typically, BD incentive plans are not “capped”. However, contrary to popular beliefs held by some leaders of BD functions, “the sky is the limit” is not the prevalent benchmark when planning either the target incentive opportunity or the upside incentive potential. We have recently examined BD incentive compensation practices in three industries: Professional Services; Power Utilities and, Training & Education. While we have seen actual incentive earnings in the range of $200k to $900k, the incentive opportunity is rarely set at more than 50% of target total compensation (common range 25% to 50% of TTC). Further, it is not uncommon to see 2.5x to 5x leverage on the incentive opportunity. It is our opinion that the reason high-earners realize significant pay outs is that they significantly over-achieve on their assigned goals.
It is important to keep in mind that the incentive target, upside opportunity and range of earnings is very much a function of the BD role’s stage of development. Frankly, that is what makes it difficult to have in place the right plan at various points in time – time frequently defined in years and not quarters!
– Plan type. One of the most common types of BD incentive plan is one that includes two elements – incentive pay (either commission or rate per point bonus) based on sales (bookings) and/or revenue (payment) and, SBOs (strategic business objectives) bonus. Generally speaking, we believe that companies prefer to use a rate per point incentive formula in plan design rather than a commission rate to deliver incentive pay for financial performance metrics because doing so balances cost of compensation against the profitability of the business sold. SBOs are common, particularly in plans for start-up BD jobs because of the long cycle time associated with new business wins.
– Performance measures and incentive weights. The two most common performance measures included in BD incentive compensation are: 1) Sales (or Gross Margin) Bookings; and, 2) Revenue. Typically, 70% to 80% of the incentive opportunity is associated with the financial performance measures; the balance is allocated to the SBOs.
– Payout frequency. While companies favor annual incentive plans for their BD jobs, it is common to provide a payout opportunity on a more frequent basis (e.g., quarterly).
– Long term incentive (LTI) opportunity. The continuity of account coverage – that is, keeping in place the same BDs – is an important consideration to business success. This is particularly true in companies where a new market development program is in the early stage of its life cycle. Building business in new markets with new accounts involving six or seven figure deals often occurs over several years. Thus, we believe it is appropriate to adopt cash LTI to reward and recognize BD employees for their contributions to long term business success. Our experience shows that the following factors are important to consider when designing a cash LTI for BDs:
– Plan period – typically, three years
– Size of LTI opportunity – typically, a “carve-out” of annual overachievement dollars, e.g., if OA is 3x, the carve out may be .5x
– Actual earned long term incentive is a function of two variables: # of years of annual plan achievement and, actual earned incentive in those years.