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STEP 3 - BUILD YOUR BUDGET
Ideally, an incentive program should pay for itself out of the profits generated by increased sales volume or cost savings. In sales programs, companies generally spend about 10% of incremental sales on the program itself.
If your objectives are not based on incremental sales, but on less financially quantifiable improvements such as customer satisfaction or retention, consider the awards an investment that will help your company grow and provide long-term gains.
Calculating the budget begins with the two most important perspectives of an incentive program:
Company Perspective — Analysis of internal factors
- Revisit company/program objectives
- Determine if the program will be based on incremental sales; individual product profitability to counter competition or maintain market share; or a line item in the company's allocated budget to run employee programs
- Identify the importance and profitability of each activity or product as related to program objectives
- Determine percentage of profit which can be paid out to achieve a certain performance
Participant Perspective -- Analysis of demographics
- Examine your participant base. How many participants? Who are they? What is their average annual income?
- Award selection/value based on assessment of what it takes to motivate participants
How much is enough? Is there an amount that's too much? Remember, award payout guidelines are not inflexible; adjust up or down to derive a figure reasonable to management and appealing to participants.
1. Estimated Program Budget (based on % of profit contribution that the incentive program will generate)
- .5 - 3.5 % of Total Sales
- 5 - 10% of Incremental Sales
2. Budget Components (% of total program budget)
- Awards: 70-90%
- Promotion/Communications: 10-20%
- Administration: up to 10%
3. Participant Award Earnings (% of income for program period)
- Longer-term programs (6-12 months): 3-5%
- Shorter programs (60 to 90 days): 6-8%
4. Open-end vs. Closed-end Awards Budget
- Your budget estimate can vary greatly from actual if you base your budget on incremental sales and opt for an Open-end Awards Budget. Although it's difficult to forecast a final expenditure, usually the potential benefits outweigh the uncertainty. This structure offers the biggest carrot to participants to improve performance. Remember, as the awards budget increases so do results.
- On the other hand, if you opt for a Closed-end Awards Budget, you will have the security of knowing up front exactly how much your financial exposure will be. The downside is that a closed structure is typically less motivational to participants and can be perceived as a contest with a limited number of winners.
Use Budget Builder to play "what if's" with various budget scenarios.
Next step - STEP 4: Develop Program Structure
Previous step - STEP 2: Define Target Audience
Back to 10-Step Incentive Process
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