Incentive programs are a great way to motivate your employees and increase productivity. However, designing incentive programs that’ll work for your business can be tricky.
In this blog post, we will discuss what you need to keep in mind when creating an incentive program and provide tips on how to create an incentive program that will work for your business!
The first question you should ask when creating a sales compensation framework is: who should you include in the model? For some groups, it’s immediately obvious whether they should or shouldn’t be included. For example, in the case of a sales incentive plan, for core frontline sales staff that own customer territories and relationships, the answer is nearly always “yes”.
For those employees whose job functions fall between these two camps, where do you draw the line? As sales processes become increasingly complex and involve numerous participants, navigating this grey area can become a complicating factor in building an effective sales compensation program.
It’s vital to define clear eligibility criteria and communicate these criteria effectively to your team. Without clear, unambiguous communication, you run the risk of causing confusion and dissatisfaction among employees, which can undermine the success of your entire incentive program.
2. Performance measures
Once you’ve decided who’s eligible, the next step is to choose which outcomes will trigger an incentive payment by defining the performance measures on which your plan is based.
The performance measures you use in your incentive compensation plan should be aligned with company desired outcomes and have real impacts on employee behavior that can lead them towards success in achieving these objectives.
The most common sales incentive performance metric is revenue. But it can be difficult to accurately measure profit at the individual salesperson level. Instead, most companies use proxies for this measurement.
This can be achieved by weighting revenue for certain product categories more heavily than others (essentially, rewarding for product mix), or by measuring things such as price realization (for example, the percent of list price attained—which is another driver of profitability that is often directly impacted by the sales force).
Taking time to define performance measures can pay off for other parts of the organization too. For example, although roles that support the sales process may not be eligible for the sales incentive plan, aligning their individual performance objectives with metrics assigned to the sales teams ensures that they both work towards the same company-wide goals.
3. Pay Mix
Determining the ratio between base salary and incentive pay at target performance is an important element to get right and it’s also the hardest one to change in the short-term.
For this, your decisions should relate closely to what types of sales roles you have, taking into account factors such as the length and complexity of your typical sales cycle, as well as the impact of the sales role on buying decisions.
For example, companies with sales roles focused on acquiring new business with short sales cycles use a greater proportion of variable compensation. Businesses that center on longer, more complex sales cycles, that are highly relationship-dependent, are often better off using a mix of pay that is heavily weighted to fixed pay.
Either way, it’s critical in both cases that the variable payments still represent a meaningful proportion of total compensation, or you run the risk of your incentive plan having no significant impact on behavior.
4. Total target cash value
To ensure that you attract and retain the right talent, benchmarking the target total cash earnings against competitors’ offerings provides a simple way to evaluate the competitiveness of your pay package.
With lots of variation in pay mix for different sales jobs in the market, it’s important to look at the competitiveness of total cash compensation, rather than considering base salary or incentive compensation in isolation. Looking only at the competitiveness of fixed salaries may give you misleading results if your mix of pay is more or less variable than the market average.
It’s also important not to default to looking only at median total cash data when considering the competitiveness of your pay. You need to ensure you’re not over-paying under-performers and under-paying best performers.
5. Payout mechanics
Once you’ve decided who, what and how much to pay within your sales compensation plan framework, you’re ready to address the payout mechanics of the plan. Here, you need to decide on the formulae to calculate earnings, the shape of the payout curves, and the rate of acceleration. This may also include a threshold (a minimum performance level that must be attained before earning any incentive), and caps or other mechanisms that provide financial risk protection.
Companies fail to clearly articulate both dimensions of payout mechanics (both performance and payout), causing confusion. For example, companies will refer to a 70 percent threshold within their framework, without clearly defining whether that refers to the performance requirement or the payout earned.
As a best practice, thresholds should be set at a level that’s met by the majority of your sales team – around 90 percent. Why? Because if many more than this are below the threshold, they’re not “in the game”. And if they are not participating in the plan, even at very low earnings levels, they have no motivation to make incremental performance improvements.
Remember, without a solid definition on payout mechanics, sales compensation plans can easily confuse plan participants and administrators alike.
6. Payout frequency
As a general rule, it’s best to pay as close to the time of the sale as possible to help maximize the motivational impact. Businesses where most sales are of the short transactional type, monthly or quarterly payments are usually recommended. Where employees are managing customer accounts over long periods of time with gradual incremental sales, an annual plan is likely a better fit.
Also, some plans operate on an annual basis but are calculated and paid quarterly, increasing complexity from an administrative point of view. It’s also quite common that within the same organization it may be appropriate to pay some incentive elements more frequently than others.
That’s why one rule doesn’t fit all, and the final decision should be based less on typical market practices, and instead, more on your own sales roles and business requirements.
The above elements put together work to meet the needs of your company, and providing with a solid foundation for peak sales performance. But your work shouldn’t end there; the key to continued success for an incentive compensation plan framework is ongoing communication about the plan, implementation, and management. After all, you can get all the elements just right, but without a long-term approach to administration and management, it can easily fail.
To protect against the failure of your sales compensation framework, contact us to learn more on how we can help you streamline your sales incentives automation process, schedule a meeting here.