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Overview
Program Types
Program Rule Structures
There are three basic elements of an incentive program budget.
Rewards:
This accounts for the largest portion of your incentive budget. Whether this portion of your program budget goes toward a customized pen or a trip to the Caribbean, it must be meaningful, memorable and motivating to your program participants in order for your program to be successful.
Communication:
Make the investment of capitalizing on a great reward, by making sure participants know what to expect throughout the program. This is also an excellent means to generate excitement about your program. Communication funds can also include funds for training.
Administration:
This element includes funds for enrollment, reward issuance, performance measurement and feedback.
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Incentive programs are either measurable or immeasurable.
Measurable Programs:
These programs are funded from incremental sales or cost savings generated by the program.
This type of incentive program is self-funding, and is easier to justify financially. These programs can also provide a measurable ROI if performance measurements are established up front and program results are tracked. Sales incentives and employee suggestion programs are included in this category.
Recommended Program Spending/Costs:
5% - 10% of incremental sales or bottom line cost savings covers total incentive program costs (rewards, communications and administration)
- Rewards - 70% - 90% of total program budget
- Communications - 10 - 20% of total program budget
- Administration - 10% of total program budget
Immeasurable Programs:
These programs positively impact your organization, but don't necessarily generate measurable revenue or cost savings.
This type of incentive program is less likely to provide a measurable ROI, though it's possible if the right measurements are established up front.
Programs in this category include service anniversary rewards, quality initiatives and many programs designed for non-sales employees.
Recommended Program Spending/Costs:
Program spending should be determined based on the number of participants that will earn rewards and on the value of those rewards. Rather than having a budget number to begin with (as in the revenue-generating scenario), you'll need to work backwards in creating your budget. Set reward levels that are motivating enough to get your participants to achieve program objectives.
Reward Payout Rate
- 3% - 5% of participant income for 6-24 month program
- Example: Assuming a $50,000 annual salary:
- For a 12-month program, 5% of $50,000 annual income = $2,500
- For an 18-month program, 5% of 18-month salary ($75,000) = $3,750
- 6% - 8% for 1-5 month program
- Example: Assuming a $50,000 annual salary:
- For 3-month program, 6% of 3-month income ($12,500) = $750
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Incentive Program Rules Structures
Overview: The rules structure establishes how rewards will be earned, based on the program's objectives, the participants and the program length. Program participant can earn rewards as:
1.) An Individual - makes an incentive program more motivating because participants perceive their individual efforts will be rewarded.
2.) A team member - creates a sense of competition and teamwork in an incentive program. However, strong individuals may not earn rewards if their team members don't perform well.
Incentive rules structures are either:
1.) Closed-end - allow only a certain number of participants to earn rewards, since the rewards budget is pre-determined and fixed.
2.) Open-end - the greater the results, the bigger the rewards budget. This structure allows anyone who attains the objective to earn the reward. The rewards budget is not pre-determined and depends on the program results.
Closed-end Program Rules Structures:
Allows only a certain number of participants to earn rewards from a pre-determined, fixed rewards budget.
Advantages:
These structures allocate a limited amount of resources across an entire audience. Can create healthy competition. Controls financial exposure. Typically easier to administer.
Disadvantages:
They are less motivating because not all participants perceive an opportunity to earn based on their performance. Participants often reduce their efforts after the maximum reward is earned or objective is achieved because they are competing against others for top spots.
Closed-end Program Structure Examples:
- Top Performers' Competition:
Participants compete against peers to earn a limited number of awards (i.e., top ten performers each earn 750 points).
- Greatest Dollar or Unit Increase, Greatest % Increase (or both):
This one speaks for itself.
- Volume Groups:
Participants are ranked by volume size, largest to smallest. They are then divided into a number of like-sized groups with each group representing the same total volume, producing groups of a few large volume participants and groups of many small volume participants. Within each group, the same number of winners is determined by the greatest performance over objective, percent increase, etc.
- One-on-One or Team vs. Team:
All participants are paired off (or divided into teams) and compete against each other (or other teams) using any appropriate performance measurement.
- Break the Bank:
A reward pool is established and participants earn a portion of the pool as they sell/buy client's products. When the pool is gone, the program is over. It creates a sense of urgency to achieve program objectives.
- Sweepstakes: Participants earn sweepstakes entries for selling/buying client's product. Drawings are held on pre-determined dates and one or more participants receive a prize.
[Open-end]
Open-end Program Rules Structures:
Allows anyone who attains the objective to earn the reward.
Advantages:
Unlimited earnings potential encourages participants to exceed objectives. There is greater participation as everyone perceives a chance to earn.
Disadvantages:
They create an uncertainty of final program cost because reward payout is based on individual or team performance.
Open-end Program Structure Examples:
- Reward Per Unit:
X amount rewarded for each unit sold (i.e., 5 points per case sold).
- Reward Per Dollar:
- Dollar One: Rewards are issued from the first dollar sold or purchased.
- Over Objective (incremental): Rewards sales, purchases or units produced in excess of a pre-stated objective.
- Up To and Over: Combines Dollar One and Over Objective structures — all sales/purchases are rewarded from dollar one at a modest payout; once objective is achieved, sales/purchases over objective are rewarded at a higher rate.
- Retroactive to Dollar One: Rewards are not issued until objective is met, but payout is based on all sales/purchases from dollar one after objective is achieved.
- Accelerators:
The greater the performance, the greater the reward (i.e., earn 5 points per case for the first 99 cases sold, 10 points per case for cases 100-149, etc.).
- Top Stops:
Used to prevent "runaways", a ceiling is placed on a participant's earnings potential — must be high enough that participants are not de-motivated.
[Closed-end]
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