One would think that how you budget for your incentive program wouldn't really impact its effectiveness, but it does! See how one company succeeded and another failed, all based on their budgeting approach.
One Company's Success
A top computer manufacturer targeted its Value-Added-Resellers (VARs) with incentive programs. During the boom years, these programs were well funded. The firm’s VARs were eager to compete for a seat on a spectacular trip. Then the bubble burst. The incentive budget was among the first to catch the CFO’s eyes. He quickly reminded everyone of his lack of fondness for the program.
The dilemma – cut the budget or cut the program.
The incentive program team wanted to show that their program worked. First, they examined past programs. They were shocked that their incentive program cost the various departments and the company far more than they had thought. With a new sensitivity for incentive program ripple effects, or how a leaky hose works if only one hole is patched, the team designed an incentive budget that included all areas of revenue and all cost points.
Knowing that even with the best of budget projections might not be 100% right, the team devised a three-case scenario budget format.Using the baseline year numbers, from the same time period as the projected incentive program, they projected changes in selected key financial areas of the company.These projections were listed as Best, Most Likely and Satisfactory Cases.The “Best Case” scenario was a picture of what could happen if all of their projections came to light in a perfect environment.“Most Likely” created a scenario that showed a modest gain in the projected areas and the “Satisfactory Case” indicated what might happen if they read this process all wrong and only a slight improvement was realized. Only after they crunched the numbers did they arrive at a revised incentive program budget.
The CFO praised their efforts. He even began looking at the incentive program as an investment in the growth of the company rather than an expense. The following year, the incentive budget actually exceeded the original projections and those of past years. Even the CFO observed the program exceeded objectives during a depressed market. Participating VARs were truly amazed. In spite of the market conditions, their expectations were more than met.
Another Company's Failure
A worldwide telecommunications company used incentive programs to motivate dealers to sell products and service contracts. The awards included both a luxury travel program and high-end merchandise. The incentive trip was an all-inclusive program. Participants and their guests were provided with luxury resort accommodations, all meals and amenities, sports activities, and transportation. Each year the firm’s executive committee decided the budget for these awards. The company continued to expand its dealer network. As a result, the number of incentive participants grew as well. But during budgeting, executives were reluctant to approve the increased expenditure. Instead, they asked their incentive company to revise the program, specifically, to reduce the budget per award qualifiers without eliminating any of the features that had made this program such a success.
Relying on "deals" in the short-term is a long-term kiss of death.
The incentive company found “deals” to help satisfy the company, but those same deals created budget issues in subsequent years. The incentive company began having problems finding the "deal"s they needed for the destination and desired trip dates. The executives then decided to reduce the number of days the program would operate to accommodate the new budget restrictions. Predictably, dealers saw this as a big de-motivator. A shortened trip just wasn't worth the effort because the time required just to get to and from the destinations selected . Participant numbers dropped substantially. Eventually this once valued program was canceled altogether and this once proud company found itself losing market share. A major competitor eventually bought it.
The computer manufacturer's incentive program was successful because they considered incremental revenue and the expenses from other departments when they created their projections. They planned accordingly thus avoiding Mistake # 4 from the Top 5 Incentive Program Budgeting Mistakes.
The telecommunications company on the other hand began with cost savings rather than an investing mindset, Mistake #5, resulting in looking for deals, Mistake #3. Despite an expanding dealer network, participation in their incentive program declined. The previous years' deals created more problems in future years leading to decreased engagement in their incentive program and they eventually lost market share.
Despite what most may think, you cannot cut your way to a profit.
A True ROI Incentive Program plans for the budget you need to make your incentive program a success, while ALSO planning for Bottom-Line Profit.
Are you ready to invest in your incentive program and see a real return on your investment? Evaluate your incentive program against ROI Incentive Program best practices and you will see the difference.