Incentive design and implementation
Client Persona & Context
The client is the regional CEO and their executive team.The client has a multi country purchasing team whose annual bonus scheme is linked to achieving savings in purchasing costs. The client is concerned that the scheme is too sensitive to external factors outside the control of the purchasing teams. It would like the scheme to have less variability and to incentivise delivery of the target savings. The client is also concerned about an observed trend of increasing incentive outcomes. Is this based on real performance?
The 3XO engagement team will discuss the client’s concerns and objectives. As a first step it will review the existing scheme documents, the operational governance of setting and evaluating targets and the historic payouts versus the business performance. In this case, the client has recently acquired the business and this scheme was put in place by the previous owners. The client is concerned about the pattern of inflation in payout outcomes over three years.
The 3XO engagement team will work with the client’s finance and HR teams to model a less volatile and more aligned payout schedule. In particular, the team will look at the processes for setting targets and assessing outcomes. In this case, the joint team identifies that the time may be right to move from the existing ‘straight line’ payout schedule to an S curve where the highest marginal increase in payout occurs closest to the target saving for each team. It considers other options, including a collective ‘kicker’ to move the intercept of the curve upwards if collective goals are achieved. It also considers how to control for decisions which may sacrifice immediate savings for lower quality purchases, by changing the process for setting and evaluating targets and introducing a deferral mechanism.
The joint team presents the recommendations to the client. The proposal are to:
a) Refine the existing governance to mitigate biases and allow for more detailed and rigorous challenges in setting targets and outcomes.
b) Make changes to both the setting of performance curves and the governance of outcomes. These changes could be communicated ahead of next cycles and /or introduced over multiple cycles to maximise buy-in from business leadership.
Subject to the client’s approval the recommendations are implemented by the in-house HR team using a plan developed with 3XO. This includes production of communication material, documentation (rules, guides), measurement and reporting, and implementation in the client’s administration and reporting systems.