The Step-By-Step Guide to Designing a Sales Incentive Plan
May 14, 2022
What is Sales Incentive Plan?
A Sales Incentive Plan (SIP) is a structured compensation framework devised to incentivize and reward sales personnel based on their attainment of specific sales targets and performance goals. This strategic tool plays a pivotal role in an organization's sales strategy by aligning the interests of the sales force with the company's overarching objectives. Typically, a SIP delineates the financial incentives, commissions, bonuses, or other performance-linked compensations that sales representatives can earn contingent on their individual or collective sales achievements. Key components often include sales quotas, commission rates, overachievement bonuses, and tiered rewards for surpassing predefined benchmarks. This approach fosters a more productive, customer-centric, and results-oriented sales team, which, in turn, fuels revenue growth and overall business success. A well-crafted Sales Incentive Plan ensures that the sales team's efforts are in harmony with the company's strategic vision while driving increased sales performance.
Types of Sales Incentive Plan?
Here are some common types of compensation plans to consider
In a commission-based plan, salespeople earn a percentage of the sales revenue they generate. This system directly ties their income to their sales performance, which can be a powerful motivator. Salespeople are incentivized to sell more and increase revenue because it directly impacts their earnings. However, this type of plan can lead to income variability, as sales may fluctuate from month to month.
Example: A software company pays its sales team a 10% commission on the total value of software licenses sold. If a salesperson sells $100,000 worth of licenses in a month, they earn a $10,000 commission.
Quota-based plans set clear sales targets or quotas for salespeople to achieve. When they meet or exceed these targets, they earn bonuses or commissions. These plans provide a structured framework for measuring performance and aligning individual efforts with company goals. Sales quotas should be challenging yet achievable to keep salespeople motivated without causing excessive stress.
Example: A car dealership sets a monthly sales quota for each salesperson to sell 10 cars. If a salesperson exceeds this target, they receive a bonus of $500 for every car sold beyond the quota.
Team-based incentive plans encourage collaboration and cooperation among sales team members. Rather than focusing solely on individual performance, these plans reward the collective achievements of the team. This can promote knowledge sharing, peer support, and a sense of unity within the sales department. Team-based incentives are especially beneficial when teamwork is crucial for success.
Example: A pharmaceutical company implements a team-based incentive plan for its sales department. The entire team earns a bonus when they collectively achieve a quarterly revenue goal. If they reach 110% of the target, each team member receives a $1,000 bonus.
Profit Margin Plans
In profit margin-based plans, salespeople earn incentives based on the profitability of their sales, not just the revenue generated. This encourages them to consider the cost-effectiveness of their sales efforts and prioritize products or services with higher profit margins. It aligns sales goals with the company's overall financial health and profitability.
Example: A manufacturing company rewards its sales team based on the profitability of their sales. Salespeople earn a bonus equal to 5% of the profit margin on the products they sell. This encourages them to prioritise products with higher profit margins.
Regular Review and Adaptation
Sales incentive plans should not be set in stone. Market conditions, business objectives, and sales team dynamics can change over time. Therefore, it's essential to regularly review and adjust these plans to ensure they remain effective. This can involve updating sales quotas, commission structures, or introducing new incentives based on emerging priorities. Flexibility and responsiveness are key to keeping the sales team motivated and aligned with company goals.
Example: An e-commerce retailer regularly reviews its sales incentive plan. As the holiday season approaches, they introduce a temporary incentive where salespeople earn double commissions on holiday-related products to capitalize on seasonal demand. This adaptation helps maximize sales during specific times of the year.
How to Design a Sales Incentive plan?
Here are some tips to help you design a sales incentive plan from scratch:
I. 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
II. 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.
III. 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.
IV. 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.
V. 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.
VI. 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.
VIII. 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.
IX. 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.
X. 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.
XI. 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.
XII. 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.
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.
Best practices to follow while forming sales incentive plan
I. Alignment with Business Goals
Your sales incentive plan should be closely aligned with the overall objectives of your business. This means that the incentives you offer should encourage behaviors and outcomes that directly contribute to the achievement of your company's strategic goals. For example, if your primary goal is to increase market share, your incentives might focus on acquiring new customers or expanding the reach of your products or services.
II. Clear and Measurable Metrics
To ensure that your sales team knows what's expected of them, it's crucial to define clear and measurable performance metrics. These metrics should be specific and quantifiable, making it easy for both the sales team and management to track progress and determine when incentives are earned. For instance, if your metric is "sales revenue," it should be clear how much revenue needs to be generated to qualify for incentives.
III. Differentiated Rewards
Not all sales team members perform at the same level, so it's important to offer differentiated rewards.
High performers should receive more significant incentives than those who perform at a lower level. This practice acknowledges and rewards top achievers while motivating others to improve their performance.
IV. Transparency and Communication
Transparency and clear communication are essential for the success of your sales incentive plan. Make sure that the details of the plan are easily accessible to your sales team, including eligibility criteria, how incentives are calculated, and when they will be paid out. When your team understands how the plan works, they are more likely to stay motivated and work toward earning incentives.
V. Regular Performance Reviews
Regular performance reviews involve evaluating the progress of your sales team toward their goals. These reviews provide an opportunity to offer feedback, recognize achievements, and address any issues or challenges. Timely feedback helps sales team members understand where they stand and what they can do to improve their performance, which can ultimately lead to higher motivation and better results.
In conclusion, a Sales Incentive Plan (SIP) is a structured compensation framework that plays a vital role in driving an organization's sales strategy. It aligns the interests of sales personnel with the company's overarching objectives by rewarding them based on specific sales targets and performance goals. This approach typically includes financial incentives, commissions, bonuses, or other performance-linked compensations tied to individual or collective sales achievements. Key components encompass sales quotas, commission rates, overachievement bonuses, and tiered rewards for surpassing predefined benchmarks. A well-crafted SIP fosters a more productive, customer-centric, and results-oriented sales team, ultimately fueling revenue growth and overall business success.
When designing a Sales Incentive Plan, several best practices come into play. First and foremost, it should align with the business's overarching goals and objectives. Clear and measurable metrics must be defined to track performance, while differentiated rewards should be offered to recognize top performers and motivate others. Transparency and communication are crucial for understanding the plan, and regular performance reviews provide valuable feedback to help sales team members improve their performance, thereby enhancing motivation and results. Overall, a well-designed SIP can drive success for both sales teams and the organization as a whole.
A sales incentive plan, often referred to as a sales compensation plan, is a structured system implemented by businesses to motivate and reward their sales teams based on their performance. The primary goal of such a plan is to align the efforts of salespeople with the company's objectives, whether those are increasing revenue, expanding market share, or achieving specific sales targets. Sales incentive plans typically offer various types of incentives, such as monetary bonuses, commissions, prizes, or recognition, to sales representatives or teams when they meet or exceed predetermined performance goals or metrics. These plans are designed to create a strong incentive for sales professionals to excel in their roles, ultimately driving higher sales, customer acquisition, and revenue generation for the organization. Sales incentive plans can vary widely in structure and complexity, depending on the industry, company size, and specific business objectives, but they are universally aimed at motivating sales teams to achieve desired outcomes and contribute to the company's success.
2. what is the purpose of a sales incentive compensation?
The purpose of a sales incentive compensation plan is to motivate and reward sales professionals for their efforts in driving revenue and achieving specific business objectives. These plans are designed to align the interests of salespeople with the goals of the company. By offering financial incentives or rewards, organizations encourage sales representatives to perform at their best, meet or exceed sales targets, and contribute to the company's growth and profitability. Sales incentive compensation plans not only attract top talent to the sales team but also retain experienced and high-performing individuals. They provide a clear framework for measuring performance, create a competitive environment that fuels productivity, and ensure that the sales team remains focused on selling the products or services that are most beneficial to the company's bottom line. Additionally, these plans can be structured in various ways, such as commission-based, quota-based, or profit-margin-based plans, allowing organizations to tailor their compensation strategies to suit their unique business needs and market conditions. In essence, the purpose of sales incentive compensation is to motivate, reward, and drive the sales force toward achieving strategic business objectives while fostering a culture of excellence and goal alignment within the organization.
3. How can one create a sales incentive program that works ?
To create an effective sales incentive program, start by aligning it with your company's overarching objectives, setting measurable performance metrics, and choosing an appropriate incentive structure, such as commission-based or quota-based plans. Transparent communication and fairness are crucial to build trust, while regular evaluation and adjustments ensure the program remains relevant. Consider incorporating non-monetary recognition to boost motivation. A well-planned and adaptable sales incentive program can drive desired results and keep your sales team engaged and motivated.
4. What is Incentive pay received by a salesperson ?
Incentive pay received by a salesperson, often referred to as sales incentives or commissions, is a critical component of many compensation packages in sales roles. These incentives are designed to motivate and reward sales professionals for their performance and contribution to a company's revenue. Typically, incentive pay is directly tied to the individual's sales achievements, providing a financial incentive to excel in their role.
5. What companies or jobs use incentive compensation to encourage productivity
Incentive compensation is employed in various sectors and job roles to boost productivity. Sales and marketing rely on commissions and bonuses, while manufacturing uses performance-based rewards. In technology, engineers receive bonuses for project success. Healthcare and customer service sectors also use incentives, encouraging doctors and service reps to meet goals. In essence, incentive compensation is a versatile tool across industries to motivate and align employees with organizational objectives.