Current Trends in the Practice of Incentive Programs.(credit and receivables management business)

The ability to attract, maintain and motivate employees continues to be one of the high priorities for efficient credit and receivables management. Superior performing employees along with adequate systems support provide an excellent means for management to increase sales and profits. The Credit Research Foundation recently performed a study to determine the extent and use of incentive programs in the commercial collection environment. Of the 289 companies that responded to the online survey, exactly 33 percent said they do employ an incentive program for their collectors.

Theoretically, any incentive pay program, whether in the form of an increment to base salary or as a bonus, is designed to reward individuals for performance. Since many salary increases are geared to cost of living indexes, management is often limited in providing for merit increases. Incentive pay programs are felt by some to provide the solution to this problem. Such a plan needs clear, concise rules for implementation. A major problem is the selection of standards that reflect total performance. Once established, it is critical to their success that the plans are administered in an objective, equitable way. To determine how widespread incentive pay programs have become in business-to-business collections and the management of receivables, the Research Committee undertook this survey.

Success in the management of accounts receivable is measured by finding the delicate and ever-changing balance between several often contradictory forces. A reward system that will compromise the delicate balance of optimizing credit and A/R goals while maximizing sales, mininizing losses and doing it more efficiently can be difficult to implement considering the many intangibles in the formulation of a reward program. Conflicts may arise between the popular "customer care" approach for handling slow paying customers, and the use of an incentive pay program for collection activities to induce prompt payment. For example, an individual handling both credit and collections may not be inclined to approve sales to marginal customers, for fear that they would jeopardize incentive goals when it comes time to collect. In this study, over 82 percent of the respondents who use incentive plans felt that such a program does enhance overall performance. When asked about the duration of the incentive programs currently be ing utilized, approximately 50 percent said they have been using a program for more than 2 years.

Equitable standards and formulas are difficult to establish because of the many parameters that must be introduced. Some common measurements, such as DSO, bad debt losses and percentage over 91 days past due, can be subject to changing market conditions over which credit and collection personnel have no control. They also are affected by unpredictable outside influences, such as mail delays, electronic transmission problems and natural catastrophes. In addition, other essential activities, such as financial statement analysis, customer counseling and sales personnel training are subjective in nature and difficult to quantify but worthy of reward. Consequently, an incentive plan for collection may be based upon measurements that would only partially reflect total performance.

Establishing goals is often a tedious task when, as managers, we become familiar and comfortable with what we understand. Seeking new measures is usually a challenge. However, 59 percent of our audience said they did not base their current goals on last year's results but rather derived new goals for this year. Of the 41 percent who are basing their current goals on last year's results, only 33 percent are using the exact same goal this year as last year.

Interestingly, most incentives are not based ...