A sales leader has to have a defined sales strategy and sales roles before designing or modifying the sales compensation program. From our experience, a well-designed sales incentive plan has several key attributes – it reflects the sales role, it sends sellers a clear signal about priorities, it provides a map on how to win, and it links sales performance to the company’s overall success.
There are five critical decisions that must be made during the plan design process:
- How much to pay – target total compensation for the expected level of sales performance.
- How much pay should be salary vs. incentive to provided motivation and leverage (upside potential).
- Which performance measures to use and how much to weight (if more than one).
- When to pay out incentives (monthly, quarterly, etc.)
- Which type of incentive to use (commission, bonus, combination).
Decision 1. Determine Target Total Compensation
Consider the relevant labor market. What are the sources for new hires and destinations for former employees? The talent market might be different than the market in which the business competes for customers. Depending upon the strategy, a sales organization might source people from the same or a different talent pool as its competitors. Furthermore, within the relevant labor market, a company might choose not to pay at the same level or in the same way as its competitors.
The sales strategy and the employee value proposition are factors that help determine target total compensation (TTC) for each sales role. This first key design decision sets the table for building the sales incentive plan.
Questions to consider: Has the organization defined its relevant labor market? Have past strategies and assumptions been updated to reflect changes in the marketplace or any change in direction, etc.?
Decision 2. Set Target Pay Mix and Leverage
Pay mix defines the proportion of salary and incentive at target performance, meaning performance to goal or quota. The total of the salary and incentive at target should equal the TTC for the job.
Pay mix is driven primarily by the “prominence” of the sales role. Think of prominence as an individual’s ability to directly impact results vs. other elements of the marketing mix (product, price, place, promotion). Pay mix can vary by sales job. For example, a role that is focused on new customer acquisition is likely to be more prominent and have more incentive pay as a percentage of TTC than a sales role focused on retaining existing accounts.
Questions to consider: Does pay mix appropriately align by role? Are there any plans with pay mix driving behaviors that are out of sync with sales strategy or intended results?
Upside potential is the incentive pay available to top performers, typically 1.5x – 3x target incentive to deliver 75th – 90th percentile of the market to top performers. The upside is a critical component to help the organization attract and retain the top sales talent.
Questions to consider: Do we appropriately differentiate incentive pay for top performers from average performers? Is the upside opportunity enough to motivate top talent to continue selling at higher levels than average performers?
Decision 3. Select Performance Measures and Weight
Sales incentive plans have become increasingly complex over time. Time-honored standards, such as limiting the number of performance measures to 3, remain a best practice. Likewise, selecting measures that are controllable and have been reported for at least 1 year continue to reinforce effective plan design efforts. If multiple measures are used, weighting should result in a meaningful incentive potential (e.g., at least 15% – 20% of target incentive).
Questions to consider: Do performance measures reflect priorities? Are metrics controlled by sellers and reliable / stable enough to link to pay? Are measures reported and creditable?
Decision 4. Determine Payout Timing
The timing of incentive payouts should reflect the sales cycle so pay and performance are aligned. For example, transactional sales that happen quickly are likely to be paid out monthly. Sales that take longer can be paid quarterly or semi-annual. An incentive for sales that take multi-years to complete can be paid when the sales are completed and finalized.
The administrative time and cost required to produce payouts is also a consideration.
Questions to consider: Do incentive payouts appropriately balance sales cycle timing with plan administrative requirements and costs?
Decision 5. Select Plan Type
Many use terms like commission and bonus interchangeably but there is a distinction[1]. The type of incentive selected should be consistent with the sales situation and role (e.g., commission for new product launches, transactional sales, etc.). Sales incentives using a bonus are increasing as are hybrid commission / bonus plans.
Finally, the formula used to payout the sales incentive reflects all the key decisions made during the design process (e.g., target total comp, pay mix and leverage, payout timing, incentive type.).
Questions to consider: Have you selected the appropriate type of incentive to execute the sales strategy and motivate the sales team to achieve results? Are the payout formulas easy to understand so a salesperson can recreate?
Sales leaders have 5 key decisions to make while creating a new sales incentive plan. Those who focus on the role and sales priorities, map how to win, and link individual performance to business success as they work through the key plan design decisions, are more likely to produce motivating and rewarding sales incentives that support business success.
Accelerate Consulting Group’s mission is to help clients improve sales performance by:
- Creating strong, coherent alignment between strategy, the drivers of organizational and sales effectiveness, and an organization’s people.
- Focusing on execution – the tactics and capabilities that will support change and create success.
- Developing practical solutions that can be implemented to drive results.
[1] Commission is paid as a percent of a specific performance measure, typically net sales. A bonus is paid based on quota attainment (% of quota).