5 Tips for Designing Successful Sales Incentive Compensation Plans
By Christopher Cabrera, Xactly Corp.
Few leading indicators are more predictive of a company’s future sales performance than its incentive compensation plans. As former Reliance Electric CEO Chuck Ames once said according to General Electric CEO Jack Welch, “Show me a company’s various compensation plans, and I’ll show you how its employees behave.”
While multiple factors influence the effectiveness of your sales compensation plans, 5 tips for success stand out:
1) Structure Design Choices for Your Team
Getting incentive plans right requires balancing multiple design choices. Recent articles by MIT researchers in Selling Power magazine reveal why plans work in some settings and don’t in others:
Strong vs. weak incentives: Weak incentives provide small rewards as a portion of potential earnings and can discourage high performance and drive stars to competitors. Strong incentives, those that offer large rewards and make up a potentially large chunk of pay, work best when desired outcomes are simple, well-defined and closely tied to measurable performance that reps can control.
Group, individual or relative incentives: Group- and team-based pay works well when sales reps are interdependent, but if sales reps operate independently, team-based pay can cause weaker reps to piggyback on star performers or exacerbate swings in pay. If there is a balance of individual and team work, these incentives can be weighted in different combinations depending on the situation. Relative performance pay can work if the marketability of a product varies in ways salespeople can’t control.
Short vs.long quotas: Monthly and quarterly quotas can smooth revenue flow and adapt targets to outside circumstances. Longer periods average out random sales volatility and seasonal demand, but shorter periods encourage reps with short sales cycles to game the system. For example, a rep who has already made quota for the month may hold on to a potential deal so that it is counted toward the next month’s quota.
2) Know Your Employees — And What Motivates Them
Companies succeed in direct parallel to how they incentivize their employees. But what motivates employees can vary greatly.
To be effective, sales compensation plans should:
Clearly define job roles.
Customize pay methodology and metrics based on those roles.
Reward desired behavior with individualized incentives.
Provide real-time visibility to enhance consistent feedback.
Reward your farmers differently than your hunters. For example, it doesn’t make sense to reward hunters to upsell or farmers for passing leads to closers. Reward each job for its specific goals. Also consider the different other motivations in your team. For example, an internal Xactly poll overwhelmingly showed that money isn’t the only driver for Generation Y. Skill acquisition and career advancement are just as important. Gen Yers want recognition as individuals — in a community that supports them as people and professionals. Consider including training incentives for this group.
The more companies understand what makes their sales teams tick, the more they position themselves to win.
3) Set Fair and Accurate Quotas
One of the first things reps ask about a new compensation plan is, “What’s my quota?” A good quota system accounts for:
An achievable sales forecast: Without it, no one has a chance to win.
An understanding of each territory’s potential: Reps should be rewarded for their results, not the quality of the area in which they sell. That means their quotas and targets should specifically take into account the potential of their territory.
Manager control: Sales managers need the authority to adjust quotas after they are set to respond to major changes within a territory. This was an approach taken by many after Hurricane Katrina devastated Gulf-region territories. This authority helps control for problems and earns quota buy-in from your sales leaders.
4) Optimize Compensation Effectiveness by Choosing the Right Metrics
With the right sales performance metrics, leaders can make their incentive compensation plans more effective. But quality, not quantity, is key. Here are few things to consider when identifying which metrics are strongest for your organization:
Mind your bottom line. You know what matters — market penetration, units out the door, cash in and the final balance sheet.
Pick and choose. Use 3 or 4 sales performance metrics, so your reps know each one is important.
Bring everyone to the decision table. Get everyone working toward the same goals by involving all department leaders in selecting metrics.
It’s all about visibility and control. Use metrics that measure results sales reps can control. Give them real-time insight into their progression with commission software.
5) Model Plan Changes to Test Effectiveness and Impact
Sane companies don’t take products to market without thoroughly testing them first. It’s simply too risky to do otherwise. The same needs to hold true for sales compensation plans, which should address three key questions:
What? Model all components of your compensation plans. Don’t just focus on one aspect of a plan, such as moving a particular product. Look to understand the whole picture.
When? You should model your proposed plan as you create it, before it is deployed and throughout its life cycle as significant changes are made.
How? You want to model outside of your plan’s production environment, where you can do all the planning you need to do without disrupting operations. But you also want to be able to use actual production data.
When you look at the right things when designing your sales compensation plans, you’re more likely to reward the right sales behavior — and more importantly, your sales team will be more likely to achieve the sales performance you want.
About the Author Christopher Cabrera is the president and CEO of Xactly Corp. in San Jose, Calif. He is also the author of “Xactly Sales Compensation for Dummies.” He can be reached at firstname.lastname@example.org.
equally you could offer no extra money or variable compensation at the sales person level. Pay them for the job that needs doing and manage them effectively. To think that variable compensation some how elicits consistent and continued improved performance is as they say "hookum"!