Design Sales Incentive Plans Part 1

Introduction

Sales incentive plans fall under the umbrella of pay for performance plans. They are short term pay for performance plans; which are also known as variable pay for performance plans or earnings at risk plans.

The design of the sales incentive plans are tailored to fit the unique situation of the business, although there may be similarities between companies in the same industry.

Roles in the Sales Team

In this article, let us assume that there is a sales lead. He or she may have senior sales person (s) as well as a team of sales persons under him or her.

Performance Levels

There are 3 levels but the mix of these components may vary by companies, sales team and individuals:

  • Company: Lump sum bonuses
  • Group (team): Team incentives
  • Individual: Individual Incentives

For simplicity, let us exclude over riding commission.

Some Definitions

Base salary is the fixed amount of compensation that sales person receive regardless of how much they sell in the short term. It should exclude transport, mobile phone and similar fixed allowances that compensates for costs incurred due to the nature of the job.

On target incentive (OTI) is the amount of money the company expects the salesperson to earn in variable pay or incentive pay should e or she achieves 100 percent of the set sales target. It can be expressed as a percentage or in terms of number of months of the base salary.

Target pay mix is the proportion of base pay versus on target incentive.

Excellence Incentive is the amount of incentive when the salesperson is able to hit beyond the target incentive.

OTE stands for On Target Earnings. It comprises of base salary, monthly portion of the annual fixed bonuses and on target incentive. It can be expressed with or without the fixed allowance.

Assumptions

In this article, we will assume

  • Funding: The costs (total incentive payments) must be stay within the fund allocated.
  • Sales target for the company: Sales staff believes that it can be achieved although challenging.
  • Size, structure and experience of sales team: Management have determined and set this up adequately according to the market opportunities and challenges.
  • Sales incentive for sales management and support: We are not focusing on this in this article.
  • Sales force management: Sales staff believes that the sales opportunity versus efforts distribution is fair.
  • Salary and incentive pay-mix: Sales staff perceived the mix as fair, reasonable, “do-able” and exciting.

Features of Ideal Sales Incentive Plans

  • The plan is easily understood
  • The rewards is easy to calculate
  • Employees participate in administering the plan
  • The rewards are awarded as soon as possible after the performance, with considerations that payments are already collected from customers.

Complex Sales Situations

In some industries, (project) sale is characterized by long sales cycles or require the integration of products and services to deliver solutions that are valued by customers. Management needs to decide whether an incentive plan is desired during the sales process given that revenues are realized by milestones over a period of 2 to 5 years. If the decision is yes, the incentive plan design has to consider:

  • Key result objectives (KSOs): nature and number. Examples include winning approved vendor status; gaining commitment for prototype or pilot implementation; securing in-house design specification approval.
  • Weight of each KSO
  • Length of performance period

Steps in Designing Sales Incentive Plans

Robert J. Freedman highlighted the following steps in his article “How to Develop A Sales Compensation Plan” published in volume 18 number 5 pages 41 to 48 of Compensation & Benefits Review 1986.

  • Step1:Define the sales role
  • Step2:Study the “people” competition
  • Step3:Determine the competitive pay range
  • Step4:Relate external data to internal policy
  • Step5:Select a target/sales incentive mix
  • Step6:Design the incentive component
  • Step7:Test, communicate and implement the plan

Factors Influencing Salary Incentive Mix

Some of the factors that influence the pay mix decisions are:

  • The company’s selling process and the role of the sales force.
  • The level of the sales force causality and prominence.
  • The measurability of company results.
  • Industry norms.
  • Company salesforce management philosophy.

With respect to sales’ role, Aon Hewitt has an interesting model and 4 questions to prep one’s thinking (source: Beyond sales incentives plan – tackling key people issues, written by Gene Yap)

Sale Role Framework

The 4 questions are:

  • Are sales roles designed to effectively meet the customer’s needs in an efficient manner?
  • Are training & development programs focused on improving the behaviors that matter?
  • Is the sales incentives plan updated according to the changes in sales roles?
  • Were there any recent changes to the sales incentives plan? Were the changes well received by the sales team?

With respect to sales force management, the following diagram would give us some idea how poor sales management can affect sales results and cause some sales persons to quit (Source: A Preface to Payment: Designing a Sales Compensation Plan written by Frank V.Cespedes 15 October 1990 MIT Sloan Management Review)

Poor Sales Management

Relationship between Sales and Marketing

The relationship between sales and marketing sometimes get confused and heated arguments prevail between the 2 functions, when both should be performing as an integrated whole.

Frank V.Cespedes wrote: “At its most effective, compensation is a tool for achieving sales performance consistent with marketing strategy, a key means of guiding effort toward desired results. This view has 2 important implications:

  • Compensation, evaluation, and other motivational procedures should be linked coherently in the sales management system.
  • Despite the importance of individual abilities in sales, the sales rep is, ultimately, not an ‘ individual contributor’ within the organization; he or she should be viewed as the agent of the firm’s marketing strategy, and the compensation plan designed accordingly.”

Because of the hierarchical structure and functional specialization practiced by businesses, the HR practitioner has little influence in this area.

To be continued in Part 2 

 

 

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