Some Thoughts about Sales Incentive Plans
By John A. Haas
Management Strategies Group
Sales types are typically willing and anxious to take more risks than are
other employees. They are confident, self-motivated and usually “in it for the
money.
Top sales people often earn more than their managers and even the CEO—and
these executives are fine with that, provided, of course, that these highly
compensated sales people “earned” it? That is, has their performance contributed
to the company’s objectives and bottom line to justify these pay levels? Often,
the answer is “no.”
Some Sales Incentive Fundamentals
- Align sales effort with strategy. All sales aren’t necessarily
equal. If the business plan calls for introducing a new product or service,
or selling to a different customer base, the incentive plan needs to reflect
those priorities over more traditional sales.
Also, assure sales correlate with production capacity. You don’t want to
sacrifice quality or customer service by “overselling.”
- Base sales compensation on a realized profit measure. Often the
right measure is gross margin, especially if salespeople have pricing
discretion. Also, pay sales people for collected revenues, not sales booked
or billed.
- Reward current over historical performance. Many sales people are
being rewarded for retaining outstanding sales results that occurred many
years ago. If they are that good, they should be generating current sales
and their compensation plan should reflect that intention.
- Tailor sales goals to each salesperson’s situation. Whether
organized by territory, product line or market niche, each rep has different
opportunities, niche characteristics, competitive forces at play, etc. and
each needs to develop appropriate sales strategies. In most cases, trying to
assign all sales reps the same goals and incentives becomes a time-consuming
and ultimately elusive task, sure to be met with “grumbling” by some.
Special Considerations
Good sales people will figure out how to maximize their incomes under terms
of the compensation plan. In fact, you should want them to “beat the system,”
provided payouts are correlated with the company’s success. Just make sure the
system rewards the right behaviors and results!
Variables to consider include:
- Frequency of payout
- Withholding partial payout, pending next period results
- Avoiding excessive based on windfall results
- Use of negative incentives to assure sales are correlated with business
plans
- How to handle returns and allowances
- Defining “house accounts;” deciding if and for how long sales reps get
sales credit.
- How to handle split sales credits
- How to handle pricing changes
- Team incentives, e.g. inside sales, retail stores
- Ramp-up time; when will a new rep start on incentives?
Spring 2007 -Volume 17, Number 2 |