The Step-By-Step Guide to Designing a Sales Incentive Plan

May 14, 2022
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The close, the upsell, and the renewal are three things almost every salesperson in the world pursues and are what the organization considers in the appraisal. And three things drive these actions–recognition, skill development, and compensation.

When it comes to assessing the tangible impact of compensation like revenue, market share,launching a new product or service, sales incentives come on top of the list of the many compensation programs organisations administer.

The motivational theory behind incentives that “the gain you can see in front of you, would be the motivation itself for the sales force to go after it” is pretty much infallible. The opposite effect is also true. When an incentive plan is not designed and explained well, there’s no motivation for salespeople to go above and beyond hitting their targets. A well-designed sales incentive plan aims to create a real, measurable impact on the organization’s bottom-line and induce favorable behaviors.

Here are some tips to help you design a sales incentive plan from scratch:

Identify objectives

The first thing you need to consider when designing a sales incentive plan is identifying your objectives i.e. the reason you are coming up with an incentive plan. It could be to increase revenue, increase profits, promote a particular product, increase customer retention rate, etc.

Correctly identifying primary and secondary objectives (grow revenue and reduce expenses, for example) will help you decide how you need to compensate your salespeople to help you achieve those objectives

Align objectives with business goals

No matter what the objective is, it must be linked to strategic business needs – New player in the market, achieving growth targets, stretch revenue targets, new product launches, etc. and must be customised to address the desired outcomes.

The overall revenue or profit must be the deciding factor to be eligible for any sales incentive. It not only creates a collaborative environment across the organization but also ensures that financial planning is viable for the business. Further, it encourages cross-selling behaviours, especially where employees are attached to a specific product/service or a line or products/services.

Know what your employees want

The more motivated your salespeople are the higher your profits go. It’s as simple as that. But, what each employee wants can differ greatly. While it’s not possible to design plans that are unique to each employee, you can limit the gap by:

  • Clearly defining roles like SDR, CSM, AE etc.
  • Create metrics, targets, and quotas based on the different roles
  • Clearly communicating the total value of the compensation

While money is definitely a top motivator, a lot of Gen Y and Z employees prefer other perks like career advancement, skill acquisition, and paid time off. Conduct an internal survey and ask them what motivates them the most. When you understand what drives your employees, you can incentivize desirable behaviors.

Determine the on-target earnings

Before you decide on the incentive and base pay, decide on what a salesperson would be paid annually. This is called on-target earnings (OTE). It gives salespeople a realistic view of what their total compensation might be when their quotas have been reached, including the base salary and the realistic commission.

Identify the right incentive form

The goal of variable pay is to reward employees based on their performance, especially when salespeople are financially responsible for results. Depending on the goal, you can decide on an incentive framework. This article delves deep into the various sales compensation plans and methods. Take a look and see which one fits your goal.

You also need to consider if your salespeople are interdependent, in which case the compensation should be a team-based pay, or independent, in which case, the incentive plan should be based on an individual’s performance. If there’s a hybrid mode, where there’s a balance of both individual and team work, you can design a weighted incentive plan depending on your unique situation.

Set achievable (but challenging targets)

The world is changing by the day and so are organisational targets. Sales incentive plans that are not agile enough to align with the dynamic marked-to-market approach fail miserably. Many companies make the mistake of embedding targets which are fixed for a year and even if the assumed business targets go completely haywire due to unforeseen reasons, SIP continues to penalise sales employees before it comes for review again.

Choose the right metrics

Sales incentive payout must be linked with business-focussed KPIs and not the ones that drive the behaviour and culture. Many companies struggle when they end up paying higher incentives due to over-achievement of qualitative KPIs such as discipline, reflection of competencies, compliances, etc., while employees don’t end up achieving 100 percent of their core targets. Reflecting competencies, values and following compliance are non-negotiable aspects of any job and should not be rewarded separately. Perhaps these must be used for considering sales people for development opportunities in the company.

Speaking of quotas, the right sales metrics can optimize the effectiveness of the incentive plan. What matters to you the most–number of units sold, number of new accounts, or the bottom-line in your balance sheet. Use three or four metrics that the reps have control over. Nothing is more demoralizing than being appraised on a metric that you can’t even control.

Be flexible

While the philosophy and umbrella plan can be standardised there must be elements of flexibility in implementation for each market (region, country, cluster and even cities) to embed the local needs and nuances such as customer behaviours, culture and high/low seasons.

Sales quotas need to be fair and achievable. You need to be aware of potential pitfalls of a particular territory and a sales rep handling a challenging territory can not be benchmarked against a territory with higher sales potential. It’s best to consult with sales managers to understand these factors before you arrive at a number.

Set the right payout timings

Incentive plans must deliver immediate and substantial gains to the sales force to keep the excitement and motivation levels high at all times. The most common failure of these plans is to operationalize it with discipline and within prescribed time. Monthly payouts reduce the hockey stick effect when a disproportionate number of deals close during the end of the quarter. The industry standard to pay commissions and incentives is one pay period after the quarter’s close.

You can also design a plan to pay part of it on shorter frequency but still keep the overachieved incentive payable towards the end of the year.  This can serve a greater purpose both in terms of employee retention for longer periods as well as removing the chance of incentivizing employees for bad sales. Such a hybrid model becomes particularly important when the customer onboarding cycles are longer than the incentive period itself.

Automation is the straightforward answer for this challenge. A good compensation software not only manages the process effectively, but also has an embedded incentive simulator for employees to calculate their potential incentives themselves can be highly effective and encouraging.

Review your plan

Audits and reviews are one of the most important parts of an SIP. To avoid failures, have necessary compliances from both ethics or regulatory perspectives. It is imperative to have a strong non-biased audit and review team that continuously monitors the actual performance of sales incentive, market dynamics and business needs.

Typically, incentive plans must be self funded from the additional revenue or net profit. Ideally can range from 1-2 percent of the above budget revenue gain or 4-5 percent of the above budget net profit gain depending upon the profit margins of brands in scope. The danger of not looking at this perspective at the design stage itself is to end up paying from the fixed sales budgets, which no business leader wants to sponsor.

Create the contract

The last step in designing a sales incentive plan is coming up with the contract. It needs to be simple to understand and communicate the plan clearly without confusion.

Closing thoughts

An effective sales incentive plan is easy to implement and administer, keeps the sales people happy and motivated, and doesn’t affect the company’s bottom-line. It benefits everyone. You need to keep it simple and ensure there’s a direct correlation between incentives and improved sales. It needs to be fair and should be administered in short durations.

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