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Describing the compensation plan

Objectives

After completing this lesson, you will be able to:

Name the steps of the process flow of a compensation plan.
Identify the types of compensation plan rules.
Describe the use of variables in a compensation plan.

Plan Data

A Compensation Plan is an object that contains a set of rules that specify how to compensate each payee. The compensation plan contains many different components and elements. Using these rules, the Compensation Plan determines how transactions and orders are allocated and how incentive earnings are calculated and paid to the participant.

We’ve seen how Organization Data is created with Participants, Positions, and Titles.

A Compensation Plan is generally assigned to the title, although you can also assign a plan to an individual Position. Data is always calculated in the context of the Position. The system looks at a single Position for any given calculation and can access data from any of these objects. As a result, we can create a rule that pulls, for example, the Base Salary from the participant record and the job code from the Position record.

This screenshot shows compensation plan details.

Assigning a Compensation Plan to a Title

Why assign a Compensation Plan to the title? In short, because a typical compensation scenario will have a large number of Participants, each assigned to a unique Position.

As we saw earlier, the title groups together Positions who are compensated in similar ways. Assigning the Compensation Plan to a title will cascade to the participants, so everyone is compensated as long as they hold that title.

Let’s look at an example. Terry Callahan and Amy Whitton are both Sales Reps. Terry sells in the US East region, and Amy sells in the United Kingdom. Each has a unique Position, but both hold the title Sales Representative.

Our plan will compensate all Sales Representatives, so assigning the plan to this title will ensure that both Terry and Amy are compensated with this plan.

This diagram shows an example of assigning a compensation plan.

Preparing the Design of a Compensation Plan

As with any development project, development begins with careful planning and documentation. As we go through the various components of a plan, you will see how the records and objects we have created work together to create the desired outputs. Let’s start with the basic steps to create a plan.

Identify the needed outcomes of the plan.
- Work backward from incentive to credit to identify these needs.
- Document in which values, conditions, and formulas are needed.
Create the plan in the user interface.
Assign the plan to a Title.
- This will link all Positions that hold this title to the plan.
- This will lead to more efficient processing and easier management.
Build rules from Credit to Deposit based on identified needs.
Assign compensation elements to variables.

Questions to Ask

Because compensation plans can be quite complex, it can be daunting to get started in your planning. A good first step is to start with your list of requirements.

Some questions to ask when getting started are:

How will transactions be differentiated?
For example, you may pay a 5% commission on new business but only a 2% commission on renewals.
Are credits going to roll within the organization?
You can use relationships between payees, as we saw earlier, to determine how credits can roll from one payee to another. For example, you may want a Sales Agent to receive credit from a transaction they closed, and their manager to receive credit from the Sales Agent. This is called a Rolled or Indirect credit.
Will credits roll only through the reporting hierarchy, or will custom roll relationships exist?
If you are rolling credits, you can use the reporting hierarchy or create custom roll relationships. For example, if a presales engineer assisted with a sale, you may also wish them to receive credit.
What Business Units are needed?
You may recall our discussion of business units earlier in this course. We recommend always using at least one Business Unit, even for smaller organizations.
How will transactions be credited to the payees?
Transactions can be credited to a payee already identified on a transaction, using a territory, or using a custom condition.
Will payees receive commissions, bonuses, or other incentives?
Each of these types of incentives will be defined in the incentive rule.

Flexible Rules Configuration

Compensation plans are made up of Compensation Rules. These rules follow each other in sequence to ensure each participant is compensated accurately.

There are four types of rules that you can use in a plan: credit rules, which allocate credits to sellers and sales managers, agents, and any other payees; measurement rules, which aggregate credits for each payee to measure attainment, total sales, bookings or other KPIs; incentive rules, which calculate the earnings amount for each payee based on the measurement, and deposit rules, which set the terms of payment for each incentive earning.

This screenshot highlights the types of compensation rules and examples of each.

Let’s look at each of these in more detail.

Credit Rule Overview

Who gets the credit?

Incentive Management uses credit rules to analyze transactions, orders, or rollable credits to determine which Positions should receive credit for a sale. As needed, credits are allocated based on one or more transactions, category, territory, or other conditions.

There are two types of credit rules: Direct and Indirect credit rules.

A Direct credit rule allocates credits to the Sales Rep, Producer, or Agent that made the sale. Transactions and orders are the inputs to a direct credit rule.

An Indirect credit rule is used to allocate rolled credits. The input is the output of a Direct Credit Rule. For example, you would use an indirect credit rule when a Manager receives compensation based on a sale executed by their subordinate.

99% of compensation plan designs are direct and indirect credit rules based on transactions. Occasionally, there will be order-level processing, so their credit rules are based on orders. Order-level processing is not the best practice because it’s an intensive and inefficient way of designing a plan. Order-level processing can’t do complex calculations, so it’s not a customizable compensation plan development approach.

Credit Rule Example: Preassigned Transaction

This screenshot shows an example of a credit rule.

Although there are several ways to allocate credits, let’s look at a simple example in which we want to allocate credit to a payee assigned to the transaction.

First, we would ensure that either the Participant or the Position is associated with the transaction. In the image above, the Position SR-C2 is preassigned. This information originated in the CRM and was transferred to Incentive Management along with the transaction.

In the credit rule, we would check the box Credit if they are identified on the transaction.

Measurement Rule

How do we measure achievement?

Measurement Rules are used to measure the achievement for each payee. There are two types of measurement rules: primary and secondary.

Primary Measurement Rules aggregate all credits for a single Position Assignment. Primary Measurement rules are generally simple, but you can fine-tune them in several ways. For example, you may want to aggregate only credits that meet certain criteria. In this case, you can add a condition or territory to the rule.

Secondary Measurement Rules performs additional calculations based on the Primary Measurement to manage the data in rules, dashboards, and analytics further.

Some common uses for Secondary Measurements include:

When calculating a compensation amount that doesn’t require an Incentive Rule.
When you must preserve a result for reporting or compensation purposes. Some examples include:
- Attainment rates
- Prorating payouts
- Aggregating Primary Measurements for a Quarter or Year

Measurement Rule Example: Aggregate all Product Credits

Let’s look at an example of a measurement rule that aggregates all credits with a credit type of Product Revenue. First, we only add a condition to include this credit type. Next, we set the amount of the measurement to Credit.Value; in other words, the aggregate value is contained in the Value field of each credit.

This screenshot shows an example of a measurement rule.

Incentive Rule

How much will the payee receive?

An Incentive Rule calculates the earnings of your sales force. It can be simple, using a single measurement as input and producing a single output, or complex, using multiple inputs and producing multiple outputs.

There are three types of incentive rules: Basic or Aggregate, Bonus, and Per-Credit Commission.

A Basic or Aggregate Incentive Rule calculates commissions using either a fixed or sliding rate. This type of rule uses the Measurement as the input and generates the commission amount based on the Measurement, using a Rate Table, Fixed Value, Look-up Table, or Formula.

The Bonus Incentive Rule is ideal for calculating a bonus or other incentive that is not a commission. We generally define a Bonus Incentive Rule as one that doesn’t calculate the incentive amount based on the Measurement.

A Per-Credit Commission Incentive Rule evaluates the value of each Credit to produce individual Commission amounts for each credit. The rule then aggregates these amounts to yield total Commissions in the form of an Incentive.

Incentive Rule Example: Apply a Rate Table to the Measurement

Now that we have the total sales from the measurement rule, we can look at how we would apply the rate table in the incentive rule.

Earlier, we saw how to use a Fixed Value to contain the quotas. The incentive rule will use this as input to determine the attainment rate.

The rate table we saw earlier has two tiers: sales below 100% of the quota pay a 3% commission, and sales above the quota pay a 5% commission. We can then reference this rate table in the incentive rule.

The result of this incentive rule is the Earning; in other words, the amount each payee has earned from this rule.

This screenshot shows an example of an incentive rule.

Deposit Rule

When Does the Payment Occur?

The Deposit Rule determines the terms of payment. It determines how much incentive earnings will be deposited and when to deposit it.

A deposit is created only if the incentive is available for deposit. For example, a calculation run in February does not generate a deposit output for a quarterly incentive rule.

There are two types of deposit rules: basic deposit and detail deposit.

A Basic Deposit Rule uses results of the incentive rule to determine payment.
If your plan does not contain an incentive rule, you can create a Detail Deposit Rule, which gets values from the original credit. Some things you can do in a Deposit Rule:
- Put a hold on all or part of a Deposit until a future period.
- Differentiate or combine multiple incentives into a single payment.
- Assign Earning Codes to a payment.

Deposit Rule Example: Set the Terms of Payment

In this example, the output from the incentive rule is the input for the deposit rule. Notice that the incentive rule in the Deposit Rule Example figure has an output name of IO_Monthly Product Sales Commission. The same object is used in the Amount field in the Deposit Rule shown in the Sales Rep Compensation Plan figure. This means the value of the earnings we calculated is the same as the amount we will pay.

We also need to instruct our system to encode the payment as Product Commission for the benefit of the Payroll team. This is done in the Earning Code field in the deposit rule.

This screenshot shows an example of a deposit rule.

Using Variables to Add Flexibility to a Plan

So far, we’ve seen how each type of rule plays its part in calculating compensation for each payee. But what can you do if your payees have the same basic compensation structure but different territories or rates?

If this is the case, you don’t need multiple rules. Incentive Management has a type of object called a Variable that acts as a placeholder for the compensation elements in the plan.

Let’s look at an example. Terry Callahan and Amy Whitton are sales reps assigned to the same plan. Both have a sales territory and are paid a monthly commission and a quarterly bonus. However, the territories, rates, and bonus amounts are different.

We resolve this when creating our rules by substituting the variables in place of the actual compensation elements. For example, when prompted for the sales territory, we insert the territory variable instead. We can do the same with rate tables and fixed values throughout the plan.

These variables would then be mapped to the correct objects once we create the compensation plan.

This diagram is an example of a sales rep compensation plan.

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