The Complete Guide to Sales Force Incentive Compensation

Andris Zoltners, Prabhakant Sinha, Sally Lorimer

• Publisher: AMACOM
• Year: 2006
• ISBN:
  9780814429723
• Topic: Business
• Subtopic: Sales
• Index: Business

A well-designed and implemented incentive program is an essential tool for building a motivated, highly effective sales force that delivers the results you need.

Incentive programs are seductively powerful but complicated instruments. Without careful planning and implementation, they can be too stingy to motivate, too complex to understand, too quick to reward mediocre results, and too difficult to implement. The Complete Guide to Sales Force Incentive Compensation is a practical, accessible, detailed roadmap to building a compensation system that gets it right by creating motivating incentives that produce positive outcomes.

Packed with hundreds of real-life examples of what works and what doesn't, this important guide helps you:

• Understand the value of building an incentive plan that is aligned with your company's goals and culture.
• Avoid the common trap of overusing incentives to solve too many sales management problems.
• Measure the effectiveness of your current incentive program, employing easy-to-use tools and metrics for pinpointing its weak spots.
• Design a compensation plan that attracts and retains successful salespeople, including guidelines for determining the correct pay level, the best salary incentive mix, the proper performance measures, and the right performance payout relationship.
• Select an incentive compensation plan that works for your organization -- then test the plan before it is launched.
• Set territory-level goals that are fair and realistic, and avoid overpaying the sales force or demoralizing salespeople by having difficult goals or not fairly assigned.
• Create and manage sales contests, SPIFFs (Special Performance Incentive for Field Force), and recognition programs that consistently deliver the intended results.
• Manage a successful transition to a new compensation plan and build efficient administration systems to support your plan.

Filled with ready-to-use formulas and assessment tools and a wealth of insights from frontline sales managers and executives, The Complete Guide to Sales Force Incentive Compensation is your hands-on, easy-to-read playbook for crucially important decisions.

CHAPTER 1

Sales Force Incentive Compensation and the Successful Sales Organization

How This Chapter Is Organized

Introduction

Examples of Some Common Sales Incentive Plan Design Successes and Failures

Can Incentives Encourage Effective Cross-Selling?

Will Incentives Enhance the Success of a New Product Introduction?

Can Sales Contests and SPIFFs (Special Performance Incentives for Field Force) Promote Attainment of Company Goals?

Will an Incentive Plan That Works Today Still Be Effective Tomorrow?

Is the Incentive Compensation Plan Too Complex?

Does Paying Incentives on Sales Force Activity Drive the Desired Results?

Can Sales Force Pay Levels Be Reduced Successfully?

Can the Impact of a New Incentive Plan Be Predicted?

Is the Sales Compensation Plan Consistent with the New Sales Strategy?

Why Companies Use Sales Incentives

Salespeople Drive the Company's Top Line

The Output of Salespeople Is Usually Measurable

Variable Pay Helps Ensure That Salespeople (Who Are Largely Unsupervised) Produce Results

Variable Pay Acknowledges a Salesperson's Success

The Drivers of Sales Force Compensation Change

The Need to Adapt

The Desire to Improve

The Sales Force Compensation Challenge

The Sales Management System

The Role of Incentive Compensation Within the Sales Management System

Consistency: An Upstream View

Compatibility: Alignment with Other Sales Force Effectiveness Drivers

Consequences: A Downstream View

How the Sales Incentive Compensation Plan Affects Salespeople

How the Sales Incentive Plan Affects Sales Force Activities

How the Sales Incentive Plan Affects Customer Results

How the Sales Incentive Plan Affects Company Results

Diagnosing Sales Force Issues

How This Book Is Organized

Introduction

Variable sales force compensation—or incentive compensation—represents a major investment for many firms. In the United States alone, companies spend $200 billion each year on variable sales force compensation—approximately as much as they spend on advertising. Almost all companies use some form of variable compensation for their sales force, including cash bonuses, commissions, trips, or other awards that are tied to the achievement of performance outcomes. The average salesperson in the United States earns approximately 40 percent of his total cash compensation through performance-based incentives. At one end of the spectrum, approximately 15 percent of salespeople do not earn any salary at all—100 percent of their income comes from variable pay that is tied to performance. A small percentage of U.S. companies pay their salespeople 100 percent salary with no incentive opportunity.

The impact of a sales force incentive program goes well beyond cost. The sales force compensation plan is an important driver of sales success. A well-designed plan that is implemented effectively helps a company attract and retain the best salespeople. It energizes salespeople, who often work alone, face frequent customer rejection, and consequently seek positive reinforcement for success. It motivates salespeople to engage in activities and behaviors that will drive high levels of customer satisfaction and good company results. An effective incentive plan can be a considerable source of sales force enthusiasm and inspiration. On the other hand, an ineffective plan can cause salespeople to feel discouraged and disengaged. If the incentive plan is not right, the best salespeople may not come to work for the company, and above-average salespeople may leave for better opportunities. Salespeople may not be motivated to work hard or may focus on the wrong customers, products, or selling activities. Even worse, salespeople may spend their time looking for ways to game the incentive plan to maximize their personal earnings, rather than acting in the company's and their customers’ best interests. Relationships with customers may suffer. Sales, growth, market share, or profits may fail to reach company expectations. An inappropriate sales incentive plan, or the poor implementation of a good plan, has the potential to do considerable harm to a firm.

Lack of an Incentive Plan Hurts Retention at a Courier Company; Introducing a Plan Turns Performance Around

A small local courier service set a company objective to “grow revenues by positioning the company as the fastest, most reliable, most competitively priced courier service in the local area.” Unfortunately, the sales compensation plan did not align well with this business objective. Salespeople were paid a straight salary, and good salespeople would demand raises whenever they grew their business. Many of them left the firm for competitors who offered higher pay for top performance by paying salespeople an attractive commission. Revenue growth was severely hampered by the high sales force turnover. In addition, the sales force sold too much unprofitable business, acquiring customers who were so distant from the home office that drivers were left stranded, too far away to be dispatched to another job quickly.

In an effort to fuel sales growth and improve profitability, the company changed its incentive plan. A new commission-based plan was implemented. Salespeople earned 5 percent commission on business generated within a defined geographic area close to the home office. Commission rates rose to 7 percent at $75,000 in sales and to 10 percent at $100,000 in sales. Sales jumped 130 percent after the new pay plan was instituted.

FedEx Revamps Compensation Plan to Address Sales Force and Management Concerns

In 2002, executives at shipping and logistics giant FedEx realized that they needed a new compensation plan. Both salespeople and top management had voiced significant concerns about the current pay plan. Field salespeople complained excessively to management about how confusing and unpredictable the plan was. The plan had been adjusted so many times that it had become overly complex and was no longer motivating to the sales force. At the same time, as the FedEx product line was becoming more diverse, top management felt that the current plan was not encouraging salespeople to spend their time on the right mix of products.

FedEx developed a new compensation plan to address these concerns. Salespeople were given quotas for each of the three major FedEx product lines, and certain bonuses and commissions could be earned only if the quota were achieved for all three. This made it clear to the sales force that all product lines were important, since the highest payout levels could be attained only by salespeople who did well in selling all three product lines. The new plan was supported with a comprehensive communication program that educated salespeople about the new plan and provided constant feedback on performance.

Authors’ note: Tying significant payouts to achievement of multiple goals is not always a positive feature. If salespeople have unrealistic goals for even one of the product lines, the incentive plan can become demotivating. Does the company believe, for example, that for every salesperson, achieving 120 percent of goal on two product lines and 95 percent on one is worse than being at 100 percent on all three product lines?

In addition, incentive plans need to adapt to new situations over time. Plans that worked well yesterday in one environment can fail in tomorrow's context. Sales incentive compensation has high salience for sales leaders, since sales incentives have a high cost, high impact, considerable opportunity for misdirection, and the need to evolve. Designing and managing an effective sales incentive program is a complex and difficult sales management challenge.

Examples of Some Common Sales Incentive Plan Design Successes and Failures

Successful incentive compensation plan design requires a complex mixture of experience-based wisdom and analytics. Without both of these, serious mistakes are easy to make and are in fact very common. Experience enables a management team to foresee the consequences of plan features and to design a plan with longevity. Analytics provide insights regarding the likely impact of future events on sales force motivation and plan costs. Here are some examples of incentive plan design successes and mistakes that have resulted from the presence or lack of experience and analytical rigor in the incentive plan design process.

Can Incentives Encourage Effective Cross-Selling? A bank wants to encourage its tellers to upsell customers when they come into a branch location to deposit money. Tellers are offered $10 for every customer who opens an account with the bank's investment division as a result of teller referral to one of the bank's investment advisers. This incentive has almost no impact on teller behavior; the vast majority of the tellers feel that the prospect of earning a $10 reward is not worth the effort and the possible humiliation of appearing to be “pushy.” In addition, the tellers do not know the investment advisers and therefore do not trust them to necessarily act in the customers’ best interest.

In addition to incentives, successful implementation of cross-selling initiatives usually involves adjustments to other sales force effectiveness drivers. For example, management at Iowa-based Brenton Banks wanted to encourage successful cross-selling of banking and brokerage products and services. The banking division, which sold deposits, loans, and trust services, operated totally independently from the brokerage division, which sold investment products. A strong referral culture between the two divisions did not exist, and bankers and brokers preferred to keep their customers to themselves. Brenton's management recognized that incentives alone would not be enough to change this culture. To start, management redrew the organization chart, creating a single Brenton sales force. Bankers and brokers were given a single net income goal that was not broken down according to the old banking and brokerage divisions. Bankers and brokers met twice a week, at first to discuss their plans for the week, and later to share their best client names. Joint sales calls crossing the traditional banking and brokerage boundaries were encouraged. A training company was hired to provide training across the sales force on the full range of product offerings. In addition, the incentive plan was revamped so that bankers could receive commissions for broker product sales and brokers could receive commissions for bank product sales. The new approach, incorporating multiple sales force effectiveness driver changes, encouraged the entire sales force to be much more sales-oriented and proactive about developing leads and cross-selling.

Will Incentives Enhance the Success of a New Product Introduction? A company that currently sells one major product is launching a new product. The sales force uses a quarterly bonus plan that begins payouts at 95 percent of territory goal achievement. Historically, the vast majority of salespeople have achieved at least 95 percent of their goal each quarter. When the company adds the new product to the incentive plan, it uses the same payout schedule for the new product as for the existing product. Within two months, it is clear that the company's sales expectations for the new product are too high, with sales tracking at only 70 percent of goal. Not a single salesperson is expected to hit the 95 percent threshold. The sales force is so demotivated that it spends much less time than planned on the new product, making the problem of low sales even worse.

It is usually a mistake to treat a new product like an existing product in an incentive plan. For example, in the following year, the same company launches another new product, and this time a more appropriate incentive plan is adopted. The company realizes that the national forecast for the new product is likely to be wrong (either way too low or way too high), and the design of the new incentive plan takes this uncertainty into account. In the first quarter following launch, salespeople are paid a commission on new product sales. This rewards the sales force for early success, ensures that every salesperson is engaged, and protects the sales force and the company in the likely event of a national goal-setting error. In the second through fourth quarters following launch, commissions are paid for sales growth, thus encouraging the sales force to continue to build sales momentum and drive product success. By the second year following launch, the firm has gained considerable experience in the market, and sales become more predictable. At that point, the product is incorporated into the firm's regular quarterly quota bonus plan.

Can Sales Contests and SPIFFs (Special Performance Incentives for Field Force) Promote Attainment of Company Goals? A sales force sells two strategically important products that account for the vast majority of company sales and profits and 90 percent of the incentive plan focus. A small product that accounts for just 10 percent of target incentive pay is also sold. The small product is being largely ignored by the sales force, and so its product manager launches a sales contest for a three-month period to stimulate sales. Any salesperson who grows sales to 105 percent or more of goal during the contest period will receive a 42-inch plasma television set. The contest is a huge success for the small product, with over half of the sales force exceeding 105 percent goal attainment. However, the contest causes a significant loss of sales focus for the two strategic products. Neither core product achieves goal. Company sales and profits suffer measurably.

Effective sales contests and SPIFFs are aligned with the firm's strategic priorities. For example, a sales force that sells computer servers to medium-sized businesses becomes demotivated when it becomes clear that most salespeople will not make their territory sales goal and therefore will not make any incentive money because the firm's management has set an overly aggressive national goal for a new server line. Sales leaders do not want the sales force to abandon this strategically important new server line, and so they establish a supplemental incentive program to encourage the sales force to continue to support it. Salespeople receive a supplemental bonus of $200 to $500 per server sold (depending on the model) during the last five months of the year. The program encourages the sales force to continue selling the new product, thus strengthening the company's competitive position and enhancing the new server line's chance for future success.

Will an Incentive Plan That Works Today St...