In the previous article in this series, Kevin O’Connell and Mark Blessington described the challenges faced by employers who want to implement the best sales compensation design to keep motivating their sales forces. In this article, O’Connell and Blessington outline the benefits of testing everything that touches the sales force’s work—including core assumptions that impact sales compensation test design.
There are three main assumptions about human behavior that are long-held yet seldom questioned by marketing and sales leaders.
1. People do more if paid more. This is the founding principle for all compensation plans including variable pay and sales incentives. Academic studies show this to be true under certain conditions. In one study, higher productivity was realized only when the extra pay was provided as a gift — no strings attached. There is more nuance here than commonly perceived. Many would agree salespeople are different from the general employee population with a larger appetite for risk and reward. But we hear many clients suggest “sales reps are coin operated,” which is just an oversimplified view of what motivates and drives them. By field-testing sales incentive plan changes, you can determine which design structure best motivates your sales team.
2. People do more if asked to do more. This is the basis of setting sales goals and quotas. Quota based sales incentive are most prevalent today (75% – 80%). However, issues and challenges with quota setting is a frequent chronic complaint from sales leaders and salespeople. A tendency to inflate quotas to ‘cover’ shortfalls is widespread. The best designed and most carefully calculated sales compensation plan will not necessarily motivate or drive performance with quotas poorly set or viewed as unfair. Finding the right balance between motivation and fiscal responsibility is the holy grail of effective sales incentive design. Field-testing varying quota-setting approaches to validate the best approach should be far more common.
3. Cash is king. While other rewards such as contests and recognition are increasingly prevalent, the vast majority of sales incentives are cash based. Effectively designed sales contests and recognition programs are necessary elements in the sales incentive portfolio. Other rewards can have a cost-effective impact on performance but need to be properly designed and tested to understand what option actual moves the needle.
Major Sales Compensation Test Criteria
There are five well-established standards for effective sales compensation test design:
1. Keep it simple. For sales incentives to be effective their needs to be a clear link the action (closing a sale) and the payout. Many talk about how the plan design should fit on the back of an envelope so that a rep can calculate their payout when the deal is inked.
2. Limit performance metrics to 3 or 4 max. The more metrics used the less clear, direct, and focused the sales incentive.
3. Use accelerators but don’t over-engineer. Tier plans motivate but to a point. Many reps discount the top tier or two as unachievable.
4. Do not cap sales incentive plans. If people break through with fabulous performance, why punish them and not pay for their tremendous result?
5. Use thresholds sparingly. For example, set a threshold like 80% of quota when there is a large installed base of business, and then only pay for sales over the threshold amount.
Measuring sales compensation plans with the above basic principles provides candidates for field-testing when it comes time to change the plan. Field-testing can validate or dispel some long-held foundational assumptions on which sales incentives are built. Some additional assumptions that may warrant testing include:
· Quotas keep reps honest and on track.
· Reps focus selling efforts based on the highest payout / commission rates.
· Highly leverage plans (50/50 – 60/40 salary/incentive pay mix) drive performance for all reps.
· Cash-based contests can spike short-term performance.
· Cross-selling means more money for reps that will jump at the opportunity.
· Salaries make some reps content and unmotivated.
In the next article in this series, Kevin O’Connell and Mark Blessington offer field-testing requirements, guidelines and benefits, and discuss how field-testing “eliminates the guesswork and assumptions that marketing and sales executives have relied on for decades.”