A brief overview of incentive compensation and our thoughts on how managers should roll it out to their sales teams.
What is the definition of incentive compensation?
Your company is only as good as your employees' performance. This is especially true in sales. Motivating your sales reps to operate at peak levels is essential, but often difficult.
A common approach is to put sales reps on incentive compensation plans. There are several terms for incentive compensation: variable comp, sales comp, at-risk pay, performance pay, etc., but they all mean the same thing. Incentive compensation is simply additional money, or rewards of value (i.e. stock), paid to employees based on their performance, and on top of their base salary.
The performance measures companies use to structure these comp plans can vary widely. The most common performance measure for sales reps is sales volume (# of units or amount of revenue), but we often see other measures such as gross margin, price realization, and customer satisfaction.
Why all the focus on incentive compensation? Because it produces results. When sales compensation programs are designed well, sales rep performance can increase by 44%. They can also be leveraged for recruitment, retention, and brand recognition.
The bottom line, a thoughtful and well-designed incentive compensation plan can help increase revenue, raise employee motivation, and grow your business.
Rolling out a Successful Incentive Compensation Program
Before jumping into designing an incentive compensation program, do your homework. Make sure you understand the following at a deep level before designing your plans:
- Know your history: What has worked and what has not worked at your company? Don’t reinvent the wheel if you don’t have to. Understand how incentive comp has worked for your team in the past.
- Know your business: What are your company’s strategic initiatives? What types of customers do you want to acquire? What products do you want to promote? Develop a deep understanding of your company’s goals so you can design the plans to achieve them.
- Know your market compensation: You need to have a ballpark understanding of what pay levels you need to hit for each sales role. What compensation levels could your employees be making at comparable companies? It’s just as dangerous to under-pay as it is to over-pay.
Having a good understanding of these concepts will help you design an effective program.
Designing Incentive Compensation Plans
Much has been written about incentive compensation plan design, so we won’t go into detail here (we like this book by David Cichelli). The key theme across all of these resources is: be thoughtful. It’s easy to rush the design of an incentive comp plan and reward the wrong behavior. These are the key areas to consider:
- Tailor incentive compensation plans to each sales role: the enterprise account executive selling to national accounts should not be on the same plan as the junior person setting appointments
- Choose performance measures that align with your business strategy (e.g. if profit is a key objective for your company, don’t just reward sales volume)
- Keep it as simple as possible: do not use more than three performance measures for each plan. Plans lose their power when they become too complicated.
- Set pay levels that will motivate your employees: don’t be cheap, reward exceptional performance with exceptional compensation.
Being thoughtful about these areas will ensure your incentive comp plan works as intended and helps you achieve your business goals.
Implementation & Administration Sales Commissions
Once you have developed an understanding of your business and designed your plans, you are ready to roll out the program. Effectively implementing and administering an incentive compensation program takes the following:
- Over-communicate: This is people’s paychecks we’re talking about. Spend time making sure everyone understands the details of the program, who is eligible, how they will be paid, when they will be paid, etc. Now is the time to sound like a broken record.
- Leverage automation: Calculating and communicating sales comp is hard! Microsoft Excel will only cut it up to about 30-40 reps. Above that and things get hairy. Incentive Compensation Management software like Performio will automate your calculations and allow reps to log in to view their commissions online. These solutions will save you a ton of time so you can focus on higher-value activities like...
- Review the effectiveness of your plan: Enterprise-grade incentive compensation management software has robust reporting that allows you to get valuable insights from your sales comp data. Use reporting to identify overpayment errors, evaluate sales rep performance, and see the detail about where your sales comp dollars are going. Use reporting & analytics to proactively identify issues and ensure your plan is working as intended.
Ready to increase accuracy, remove the hassle of month-end calculations, and gain valuable insights from your data? Let’s talk!