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Are Financial Controls Killing Your Sales Incentive Plan?

Jun 9, 2016

Most companies invest significant time, effort and dollars to design, implement and administer a sales incentive plan. Yet despite the best intentions, companies often fall prey to sales incentive design gaffes that reduce the motivational impact of their sales incentive dollars in an effort to maintain financial control. In this section, we will look at three common sales incentive design mistakes: company performance qualifiers, total incentive earnings caps and management discretion, and discuss why they are unnecessary in most situations.
 
Company Performance Qualifiers
This incentive qualifier sets a minimum level of overall company performance that must be met before sales incentives can be paid. Company performance qualifiers reduce the motivational impact of sales incentives because they make sales incentive earnings dependent on a metric that is significantly outside of the sales person’s control. The idea for this type of qualifier frequently stems from company culture or inadequate modeling rather than a real need for fiscal control. A well-designed sales incentive plan is strongly aligned with company financial objectives and value creation. Financial modeling can test the alignment between sales incentive payouts and company financial performance and prove that an overall company performance qualifier is not necessary.
 
Total Incentive Earnings Caps
Sales people hate caps. It does not matter if the cap is set at a level so high that reaching it would be essentially impossible. The impact is psychological, not rational. Furthermore, a well- designed incentive plan is self-funding on the upside. This means both the sales person and the company benefit from each additional dollar of revenue or margin above target. There should never be a financial reason to stop selling!
 
Like company performance qualifiers, total incentive earnings caps frequently stem from company culture, and more specifically from the fear of having to explain why a sales person earned what is perceived to be an excessive amount of money. Rather than fearing this circumstance, companies should embrace it. A high performing sales representative earning a significant incentive payout is fodder for company lore, and positive company lore bolsters morale well beyond the current plan year.
 
Let us consider some options. A sales incentive plan may have two or three components, only one of which may be uncapped. As long as at least one component is uncapped, total incentive earnings are uncapped. Other tactics may be to incorporate one or more cap alternatives such as decelerating payouts above the 90th percentile level of performance, limiting sales credit from any one deal, or incorporating a windfall clause in the plan provisions. These cap alternatives are not meant to prevent a high performer from earning top incentive dollars, but rather to control the circumstances under which they do.
 
Management Discretion
In this case “management discretion” does not refer to the general management discretion clause included in most sales incentive plans, but rather to the use of qualitative performance measures based on a sales manager’s assessment of performance. These qualitative performance measures are sometimes built directly into the sales incentive  plan through the use of a scorecard or individual objectives element. In other cases, qualitative performance measures are a part of the annual performance review process, linked to the sales incentive plan through a modifier or qualifier based on the sales person’s annual performance score.
 
Consciously or unconsciously, companies use these qualitative performance measures to control the total amount of incentive paid and the distribution of incentive payments. Once a sales person can no longer track their incentive earnings based on quantitative results from controllable performance measures, motivation is greatly reduced. This is true whether the resulting incentive payment is higher or lower than it would be based on quantitative results alone. There is certainly room for management discretion in a sales person’s base compensation or performance goals, but not in the sales incentive plan. If a sales person is achieving sales objectives but failing to meet requirements in other areas (or vice versa), it should be addressed outside of the sales incentive plan. A sales incentive plan is not a substitute for good sales management.
 
Conclusion
Company performance qualifiers, total incentive earnings caps and management discretion significantly reduce the motivational impact of a sales incentive plan. What is more, these design constructs are unnecessary in the context of a well- designed sales incentive plan. The key to eliminating these overt control tools while maintaining fiscal responsibility is to clearly define acceptable financial outcomes as part of the design process, and to design the plan to operate within these parameters. Once the plan is designed, it should be modeled under a variety of performance scenarios. Armed with this information, management can support and embrace a more subtle yet effective sales incentive management approach.
 

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