Linking Performance Management and Incentive Pay By Beth Carroll, The Cygnal Group
Incentive plan measures must be both objective and quantifiable, such as “Total revenue sold in the performance month,” or “Number of new customers with more than $10,000 in margin.” Conversely, performance plan measures can be subjective and qualitative, such as a person’s cooperative, leadership or communication skills. Because so many elements differentiate a successful sales representative from an unsuccessful one, it is critical to create two sets of performance measures: one for the incentive plan and one for the performance management plan.
Performance management is sometimes viewed as a vehicle for delivering salary increases and, therefore, not applicable in a sales environment that doesn’t offer base salaries. This automatic dismissal of performance management might be premature, however. Even if salespeople are on a 100% variable pay plan, a performance review system could be used to provide a foundation for promotions or retention programs, especially in tough economic times.
One challenge of linking sales incentive pay to qualitative “performance” measures may be that a top-performing sales person as measured by your sales incentive plan would not score highly on a subjective performance review. Often, top salespeople are not inclined to be team players. Company leadership will need to determine how important the more subjective qualities are for the long-term health of the organization and focus the performance plan accordingly. If a poorly reviewed sales person continues to receive high incentive payouts and internal accolades, the performance review system is ineffective.
Solve this problem by linking the performance review process and the sales incentive plan through one of two common methods. The first is to rethink your base salary strategy for your salesforce.
If your reps are currently 100% variable, consider adding a small salary in lieu of a draw (the odds are high that your draw is actually acting like a salary anyway, especially if it is non-recoverable). Also, consider making the salary adjustable based on merit. Then, you can really put some teeth into your incentive program by making your target incentive pay a percentage of the base salary. In this way, annual salary increases also will increase the amount of pay earned under the incentive plan. Conversely, a sales person who is not scoring well in the performance review process will see his or her incentive pay stagnate. A word of caution on this approach, however: if salary increases are given primarily for tenure and not merit, it is common to find seasoned salespeople earning a higher incentive payment at below target performance than a new salesperson with a lower base salary who achieves over-target performance.
A second method for linking sales incentives with performance management is to make performance review scores a modifier to one or more elements of the sales incentive plan, with the effect of increasing or decreasing the amount of pay earned under one of the incentive plan measures. For example, the following table could serve as an annual performance review modifier for an illustrative $10,000 calculated year-end payout:
Modifier applied to incentive pay
Actual Pay Delivered
$12,500 (extra $2,500)
$11,000 (extra $1,000)
$10,000 (no change)
$9,000 (loss of $1,000)
$7,500 (loss of $2,500)
It is almost always necessary to make this linkage on a part of the incentive plan that is paid annually, as very few companies find it practical to conduct performance reviews more frequently. If the majority of pay is delivered on a monthly basis, then an alternative to an annual modifier would be to put in a “hurdle” or qualifier that is tied to a recent performance assessment. Most companies only use this for extreme circumstances, such as when an individual is under a short-term “warning.” The qualifier could have the effect of reducing the amount of incentive pay earned until the warning status has been removed.
Successful companies do not rely on their sales incentive plans alone to drive the required business results. Strong managers and a solid performance review system are the keys to balancing the immediate productivity imperative with the long-term importance of building a sales team that reliably produces results.
Beth Carroll is a Principal with The Cygnal Group and is located in Chicago and has developed and implemented hundreds of sales compensation plans. Prior to joining The Cygnal Group, Beth spent 10 years as a Senior Consultant with Towers Perrin’s Sales Force Rewards Practice. She is a frequent speaker and author on various aspects of sales compensation design and management and can be reached at 815-485-4711 or firstname.lastname@example.org.