Is Your Sales Incentive Structure Fulfilling Its Purpose?

September 9, 2011 by

Incentive Structure Cartoon

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Good customers are hard to come by, but when treated right they will reward your business with unconditional loyalty. So why then do so many companies take these customers for granted and elect to disregard and/or de-prioritize customer expectation management in their sales processes? The reality is that too many companies have sales teams that think short-term and are incentivized to do so through poorly designed sales incentive structures.

Here are 6 suggestions on how to design a sales incentive structure that motivates a team to execute against the short-term and long-term goals of an organization:

1. Plan ahead: Define the sales strategy and what the business is trying to achieve in the next year (short-term) and in the next 5 years (long-term) prior to designing the sales incentive structure. This information will be important in identifying the most important and effective metrics to target for individual and team commissions and bonuses. If you don’t, your sales management team will be trying to identify target metrics without really understanding what their target is.

2. Strategically select Key Performance Indicators (KPIs): Your team should target no more than 3 KPIs, as you want to keep your team focused on the short-term and long-term organizational goals that matter. Each KPI should be tied to one or more of the organization’s short and long-term goals and they should not overlap too much with other targeted metrics in the incentive structure. This will encourage the sales manager(s) and sales representatives to execute against all of the targeted metrics, so that they can maximize their total compensation.

3. Evaluate the costs and benefits of each compensation design option: There are 3 primary decisions in designing an effective compensation program.

      • The first decision you need to make is how much you want to leverage your sales team. By increasing compensation leverage, you increase your ability to influence sales representative and sales manager actions through incentives. However, a highly leveraged compensation structure generally enables an individual to earn more money if they perform well, so it can increase the total cost structure of your sales team. All sales teams should be leveraged to at least a small degree, so that you have a tool other than fear to influence their actions.
      • The second decision you need to make is how you want to divide incentive pay into individual and team based incentives. To encourage teamwork, it is recommended that at least part of the variable pay is allocated to team based commission or bonus offerings. However, it is important to also maintain individual performance commission and bonus incentivizes as well, so that individuals are incentivized to work hard and follow best practices.
      • The third decision that needs to be made is how to structure each incentive. Most incentives can be structured as either a commission or a bonus. However, it generally makes sense to structure aggregate metrics as commissions and percentage metrics as bonuses. For example, total contract value is a metric that generally works best as a commission percentage and first-year customer retention percentage generally works best as a targeted bonus.

4. Select achievable goals:Pick attainable KPI targets that will inspire your team to work hard and follow best business practices. Setting metric targets that are rarely reached can actually discourage best practice behavior because the sales teams may write-off the bonus or commission opportunities as unachievable and decide to only pursue some of the targeted metrics. Maintaining lofty variable pay targets over several bonus periods will also damage employee morale and will eventually lead to employee retention problems that will affect the stability of your company’s sales organization. Conversely, setting targets that are too easily achieved can also be problematic as it will signal to the sales representatives that they are easily meeting expectations and there is no need to further push themselves. The key is to identify an achievable target that pushes the team to work hard, but is still regularly reached by a significant percentage of the sales staff.

5. Set clear expectations: Make sure the total compensation algorithm is clearly defined in the sales manager and sales representative contracts and regularly reviewed with the team alongside individual, team and organizational goals. Be sure to explain how the targeted KPIs tie into the overall goals of the organization. This will establish clear expectations for all parties and help them better understand the vision of the sales organization.

6. Update incentive structure as needed: As with anything sales incentive structures need to be reviewed quarterly and reconfigured to reflect changes in organizational goals and strategies.

 

These sales incentive structure design recommendations are intended as an introduction. I highly recommend reading Inc’s guide on How to Set Up a Sales Compensation Plan before attempting to design or re-design your sales team compensation program and incentive structure. I also recommend reading my previous post on unethical sales practices that sales teams can succumb to if they are not incentivized to evaluate customer opportunities from a short-term and long-term perspective.