Creating a sales incentive plan that excites your sales force and drives them to deliver the results for the business is no trivial task. When businesses implement sales incentive programs, they are attempting to manage their risk by offering employees greater exposure to upside in exchange taking on a greater share of downside risk. Though conceptually attractive to both sides, making such a program effective is much more difficult.
Effective sales incentive programs must address three common weaknesses exhibited by many commission-based compensation programs:
- Individual employee success does not directly drive business success
- Motivational value of the program varies dramatically with time and/or performance
- Employees disregard responsibilities outside of the commissioned activities
Success and performance are often related but are not interchangeable. Performance can be described in objectively measurable terms, but success is often a subjective amalgamation of multiple performance measures often varying based on context, perspective and timing.
For example, high revenue performance is generally good for the business unless it is delivered with low or negative profitability. Similarly, high margins are generally good for the business unless delivered at small revenue scale. Either way, high performance can still lead to low success of the business when taken with full context.
Often true success for a business is hard to define until looking at the business through retrospect. However, employees, especially those working under a sales incentive plan, need specific, transparent and objectively measurable targets to work towards.
Businesses generally combat this challenge in one of two ways:
Complimentary objectives – Sales incentive programs that reward participants based on multiple performance dimensions encourage balanced behaviors by employees. For example, being compensated for both revenue and margin performance can keep an employee from totally sacrificing one performance dimension for the other.
Blended programs – Fixed objectives can be combined with commissioned performance to motivate performance on competing dimensions. For example, a fixed bonus awarded for having more than a target number of customers in a cycle could motivate customer diversity even if the commissions awarded are solely based on revenue.
Companies must be careful not to add too much complexity to their incentive programs. Simple, understandable, transparent programs typically have the greatest motivational impact. Unlike subjective performance reviews that endeavor to measure all aspects of contribution comprehensively, commission programs are exciting for employees because there is no surprise. Employees know that they earn a certain amount based on certain objectively measured performance indicators.
While additional complexity may improve the decision-making of the participants to better align with the complex ambitions of the company, it almost always lowers the total level of motivation. This creates a difficult tradeoff for leadership who must decide whether it is more valuable to launch a tenacious sales force in one imperfect direction or unleash an only slightly excited sales force in a nearly ideal direction.
Whether measured against a single simple performance indicator or a complex blend of complementary objectives and targets, the value of incremental performance to the business typically remains relatively steady, but the effort required for improved performance and the value of the associated compensation to the employee move based on performance and move in opposite directions.
Effort increases because of time. With time fixed for the performance period, high performance requires success in a shorter amount of time per sale, typically only possible through greater or more effective effort.
With a simple percentage of revenue commission structure, perceived value declines with additional performance because on a percentage basis, each additional dollar of compensation becomes a lower percentage of total compensation to the employee. Coupled with the additional required effort, the percentage of compensation per amount of effort becomes much lower as an employee contributes more to the business further declining the perceived value. This often unintentionally caps employee results.
Still, there are a few tactics that can be employed to mitigate this challenge:
Use performance tiering – Changing the payout calculation for employees above a certain performance threshold to become more lucrative for employees combats the inclination for some top performers to reduce their effort once they achieve a certain level of results. While this at first seems to make these additional sales less attractive to the company, business leaders can think about these above target sales as not needing to cover any of the fixed costs associated with the employee (since those were expected to be covered by target performance).
Add additional compensation elements – Adding milestone or cumulative awards and/or the potential for subjective rewards can layer on additional compensation to continue to incentivize top performers even as their perceived value of rewards wanes.
Driving complete performance
When an employee is directly compensated for certain behaviors within his/her job description but not others, there is an implicit prioritization of the compensated responsibilities over anything else. The compulsion of an employee to do things which do not directly contribute to achieving the variable elements of compensation comes either from the need to retain the employment or from a sense of pride and responsibility.
For the former to have strong influence requires an employer to demonstrate a low tolerance for poor performance and willingness to act accordingly. For the latter to work, there needs to be a sizably lower level of effort required to achieve the non-commissioned responsibilities versus achieving greater commissioned results. Neither is typically attractive or feasible to most employers.
Therefore, companies often see employees subject to sales incentive programs fail to participate in mentorship programs, collaborate with other parts of the organization, invest time in training, and/or avoid activities which do not contribute directly to the next sale, even when they meaningfully contribute to the long-term health of the business. Yet if the business adds more complexity to the sales incentive program, it risks diluting the motivational value of the program.
While there is no panacea to address this, there are a few things that can be done to augment the efforts of the sales incentive program without substantially undermining its effectiveness:
Segmentation – Without changing the objectives on which commissions are calculated, segmentation allows the business to incentivize certain additional agendas without changing core sales behaviors. For example, offering different commission percentages for new and existing customers encourages a sales force to pursue new customers in addition to existing customers because the per revenue payout is higher when previously there was no additional incentive to put in the extra effort required to engage new customers.
Incorporate non-financial rewards – Adding the potential to earn non-monetary rewards (e.g. flexible working arrangements) for compliance with additional responsibilities not core to the sales process creates incentive without confusing the core commission program.
Designing the right program
Though the final design of any sales incentive program is very sensitive business context, the approach to designing that program generally follows a common path:
- Select the right variable to measure
- Define performance tiering
- Add segmentation
- Incorporate additional compensation elements
- Test against real and hypothetical cases
From this series of decisions comes a variety of sales incentive programs. For example:
- Businesses where customers frequently buy multiples times or not at all often reward sales to new customers differently than sales to existing customers
- Publicly traded companies often institute quarterly cumulative incentives to encourage closure of sales
- Businesses with long sales cycles or businesses subject to high cyclicality sometime offer “phantom commissions” to give employees greater certainty and predictability in their earnings without removing the motivation of being commission-based
- Companies trying to introduce or promote specific products or services may offer different commission rates for those products/services or may provide bonuses for sales of those products
- Milestone rewards can be used to encourage/reward collaboration or to motivate progress toward specific objectives not directly in line with primary commission metrics (e.g. if commissioned on gross margin, a revenue milestone can help to keep people from avoiding lower margin opportunity)
It is important that any sales incentive program is tested with real data (whenever possible) and evaluated based on the expected outcomes. Looking at changes in potential cost should only be done in the context of the necessary business outcomes to trigger those costs, else the comparison becomes irrelevant.
Furthermore, changes to sales incentive programs must work within the current and future cultural environments. Even if changes in the sales incentive program are intended to drive cultural change, business leaders need to be careful not to move too far too fast and may need to make program changes in steps over time.