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Determining a Budget for an Incentive Program |
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The number one failure of an incentive program is not establishing revenue goals and objectives for the program.Without this basic foundation in place the measurement of success or failure cannot be realized. Before a budget for the incentive program is established, you must first determine the ROI for the program. This can be accomplished by following these four basic steps. The sample shown here is a program which intends to achieve incremental sales growth. |
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| Step 1 | |||
| Current Situation | |||
| Enter the number of participants in the program | 35 | ||
| Clearly define program audience | |||
| Total revenue associated with the participants | 45,000,000 | ||
| If not established, then incremental revenue goals cannot be accurately established. | |||
| Average revenue per participant | 1,285,714 | ||
| Rules and goals of the program are dependendent on an accurate breakdown of who is doing what? | |||
| Profit margin | 18% | ||
| Will the incremental sales growth result in the same gross profit margin which the company has, or will itbe lower due to added costs of goods and services. | |||
| Average annual compensation per participant | 75,000 | ||
| The" Reward" must be an incentive to the audience. On average 3-6% of annual compensation is reasonable | |||
| Step 2 | |||
| Expected Growth | |||
| Expected growth without incentive | 0% | ||
| Sales are flat and the past year has seen a decline | |||
| Expected growth with incentive | 7% | ||
| Be realistic with the incremental goal | |||
| Incremental revenue associated with program | $3,150,000 | ||
| This amount is the 7% of sales | |||
| Incremental profit associated with program | $567,000 | ||
| The program will achieve 18% gross profit margin | |||
| VERY Important: This is the income which funds theprogram. What portion remains on the table for thecompany is based on a properly structured program. | |||
| Step 3 | |||
| Program Budget | |||
| Percentage of incremental profit to fund the program | 40% | ||
| In this case we are using a 40% budget. The percentage which is allocated to the program must be thoughtfully established toreward but at the same time return to the company incremental gross profit. In some ways this becomes a balancing act and the projected numbers must be scrutinized carefully. | |||
| Program budget | $226,800 | ||
| This represents 40% of incremental profit | |||
| Award fulfillment vehicle | To be Determined | ||
| What type of award will be used. Maybe it will be a multi-tiered program using travel, debit cards and web-based rewards program . The selection must meet the audience demographic and budget. | |||
| Dollars allocated to the incentive reward | $158,760.00 | ||
| In this case we have used 70% for the reward cost | |||
| Program administration | $68,040.00 | ||
| These costs are for such elements as communications and program promotion. In this case we have used a 30% budget. | |||
| Average award earnings per participant | $4,536.00 | ||
| Remember the guideline of 3%-6% of annual compensation. This number is calculated by dividing the dollars allocated to the incentive rewards by the number of participants in the program. | |||
| Average award as a % of average compensation | 6.00% | ||
| This percent is established by dividing the participant award amount by the the participant's annual compensation. | |||
| Important to remember: The incentive program must be a Win Win proposition for both the company and the participants. Using simple formulas as outlined the company MUST establish realistic revenue goals and reward allocation before a Program Budget can be established. | |||
| Step 4 | |||
| ROI for the company | |||
| Incremental gross profit associated with program | $567,000 | ||
| Outlined in Step #2 | |||
| Program budget | ($226,800) | ||
| Outlined in Step #3 | |||
| Gross profit left after deducting the program budget | $340,200 | ||
| Outlined in Step #3 This is the difference between the profit and the award budget | |||
| Deduct general company operating costs "Overhead" | ($198,450) | ||
| In this case we have used 35% as the cost of business. This varies by industry. Apply this percentage to the gross incremental profit, before the program budget is deducted. Keep in mind there will be general overhead costs associated with the incremental revenue and gross profit. | |||
| ROI | $141,750 | ||
| A guideline to use is at least a 3-to-1 ratio. This means that when all is said and done, the program Net profit to the company should be at least a 3-to-1 ratio. The ratio for this program has fallen to slightly below this ratio, therefore the overall program budget must be reviewed before the incentive program can be finalized. Maybe the award amount is too aggressive,or maybe the projected program administration costs are too high. Whatever the reason, the numbers should be adjusted to arrive at the goal of a minimum 3-1 ratio. | |||
| If you would like to discuss this formula in more detail . . . | |||
| Call 888-255-0000 and ask for Dick Gaeta | |||
If you would like to discuss this formula in more detail .
. . Call 888-255-0000 and ask for Dick
Gaeta
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