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Strategic Incentive Design: Looking Beyond Overall Sales Results

Jul 12, 2016

Incentive plans are an investment of money, time and resources. Many young companies focus strictly on driving overall sales and managing the cost of sales compensation, which can work well in the early stages of a company’s lifecycle. The concept of driving results, while ensuring fiscal responsibility, is core to sales incentive plan design. Incentive plans should provide more compensation when results are good and less compensation when results are below target.

As a company grows, the definition of “good results” evolves well beyond overall sales, and it becomes increasingly important to focus on all of the benefits that a well-designed sales incentive plan provides.

When companies fail to think about sales incentive design holistically, they miss out on key opportunities to maximize the return on investment on their sales incentive dollars. Below we explore three strategic reasons why companies should look beyond overall sales results to maximize the impact of their sales incentive plans.

Good Sales Incentive Plans Support Attainment of Financial Targets
Well-designed sales incentive plans shine a light on specific financial goals and motivate participants to meet and exceed the goals. Linking incentive compensation to a specific goal allows companies to set clear performance expectations, to reward those who meet expectations, and to provide disproportionally larger rewards to those who exceed expectations.

Consider the case of a distribution company paying sales representatives a flat commission on revenue from their assigned territories. While each sales representative was assigned annual sales goals, these goals were not linked to incentive plan payments. Year after year the median annual goal attainment for the sales force was below goal. In order to drive attainment of annual revenue goals, the company rolled out a new sales incentive plan that linked incentive payouts to attainment of quarterly territory goals, and included an element that pays additional incentive for exceeding the annual goal. One year after the new plan was implemented, not only did the sales force reach the overall revenue goal, several high performing sales representatives exceeded their goal.

Good Sales Incentive Plans Provide Strategic Direction
While it is important to communicate financial goals, it is equally important to provide clear strategic direction. A strong push to drive financial results may lead to dysfunctional behavior when not supported by incentive elements linked to the defined strategic direction. Strategic incentive elements help the sales force understand what they should take into consideration when driving toward achievement of the overall financial goal. The incentive design possibilities are as varied as the business strategies that drive them. The bottom line is that some sales add value to the business that extends beyond short-term financial impact, and the incentive plan(s) should reflect this reality.

Let’s explore another example. A manufacturing company experiencing aggressive growth chose to transform the sales organization to better serve their expanding customer base. As part of this process they created a Major Account Manager (MAM) role.

The MAM role is primarily responsible for growing revenue from major accounts, and increasing account penetration by introducing additional product categories. The incentive plan for the MAM role includes an element designed to motivate MAMs to meet and exceed their revenue target. The plan also includes an element that pays the MAM a bonus each time they successfully introduce a new product category into one of their assigned accounts. The impact of this change was immediate. The median number of product categories per major account increased and several MAMs earned account penetration bonuses. It is important to recognize that clear definitions of “product categories” and “successful introduction” are critical to the success of this type of incentive.

Good Sales Incentive Plans Support Change Management
Growing companies experience change on a regular basis. In fact, most high growth companies embrace change as an integral part of the company culture. Change can be very difficult for the sales force, particularly in situations involving a merger or acquisition. Sales people are happiest and most effective when they understand expectations, know what to do to meet and exceed expectations, and receive rewards aligned with attainment of the expectations. Yet a changing environment often represents a moving target. Just when sales representatives think they have figured out what to do and how to do it, the rules of the game change. In the case of a merger or acquisition the change is often more drastic, bringing new products or services that may require different selling skills or different selling processes. While incentive compensation should not lead change, it should support change efforts and highlight the path to success. Specifically, sales incentive plans can reward ongoing focus on existing objectives while providing relatively more incentive for attainment of new, potentially more challenging objectives. In other words, the incentive plan can motivate the sales force to do the hard things.

A good example of the role of sales incentive plans in supporting change occurred in the merger of two medical products companies. One company sold fairly simple products, while the other company sold more technical products. Following the merger, each Territory Manager (TM) was given a goal based on growing sales of the complete portfolio of products. After a year, TMs that had traditionally sold simple products continued to sell simple products, while TMs that had traditionally sold technical products had, in many cases, dropped their technical, more profitable sales in lieu of higher volume simple product sales. To rectify this problem, the company added a product balance incentive to the plan. In order to maximize incentive earnings, TMs were asked to balance sales of both types of products and were rewarded disproportionally more if product balance was achieved. This encouraged TMs that had traditionally sold simple products to learn about the new technical products, and encouraged TMs that had traditionally sold technical products to continue to sell the simple products while maintaining historical levels of technical product sales.

Conclusion
Asking the sales force to deliver “more” without any further direction is a missed opportunity. Sales incentive plans are most effective when the primary incentive element communicates the financial goal to be met (the what), and secondary incentive element(s) shed light into objectives that support short-term and long-term attainment of the financial goal (the how). Sales incentive plans can also be effective at supporting change initiatives. Therefore, growing companies should view the sales incentive plan as a tool to communicate strategic priorities to the sales organization in order to maximize the impact of their incentive dollars.

Sales compensation is role-based compensation. Organizations should adapt the advice provided above to fit their business strategy, culture, sales roles, and current situation. The intent is not to overly complicate plans by adding an incentive element for every potential situation, but to encourage a broader view of sales incentives and a holistic approach to incentive design
 

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