As a business owner, you know how important sales performance is and that you want to keep your sales pipeline as full as possible. When it comes to incentivizing sales performance, both SPIF or Sales Performance Incentive Fund and sales commission can be very effective tools, albeit with different purposes.
Because these strategies serve different purposes, they also have different advantages, disadvantages, and factors you need to consider when designing and implementing a plan based on your business’s unique circumstances.
In this post, we’ll look at the differences between SPIF's and sales commissions, their pros and cons, and important factors in more detail.
What’s the Difference Between a SPIF and Sales Commission?
Although both sales commission and SPIF's are incentives that you’ll reward your sales representatives based on their performance, there are significant differences between them, and every sales incentive program serves a different purpose. To understand these differences, let’s look at SPIF's and sales commission in more detail.
Sales commission is an incentive that forms part of a sales rep’s total compensation in order to motivate them and improve their performance. Typically, you’ll pay reps a base salary and a variable pay component in the form of sales commission. For example, you might pay a sales rep a base salary of $500 per month and then a commission of 10% of all sales they make during the month.
Keep in mind that this is a simple example, and there are many other implementations of sales commission-based compensation structures. These include, for example, paying reps only a commission and no base salary, variable commission where the rate of commission differs based on the quotas, draws against commission, and more.
You can also vary the period you use to set quotas and determine reps’ performance against these quotas. For instance, you can set quotas monthly, quarterly, and so on. Ultimately, the compensation structure you choose will depend on your business’s unique needs and requirements, the products you sell, your sales cycles, and the goals you want to reach.
SPIF is an acronym for, among others, Sales Performance Incentive Fund.
SPIF programs are, in contrast to sales commissions, a short-term sales incentive that you offer to your reps when reaching certain specified targets or goals. These SPIF's typically take the form of prepaid cards that your reps can use to shop online, at retail stores, or withdraw cash from ATMs. They can also be in the form of other rewards like prizes, vacations, days off, and the like.
You’ll generally use SPIF programs when you want to achieve short-term goals. This can include everything from boosting the sales of a product, increasing revenue over a period, or increasing sales during product launches.
Pros and Cons of Sales Commission
We’ve now seen the basic differences between sales commission and SPIF's. Other differences between these two concepts lie in the advantages and disadvantages of each. Let’s consider these in more detail, starting with the pros and cons of sales commission.
Some of the pros of sales commission include:
Incentivizes performance. With sales commission, you incentivize performance. In other words, you’ll pay your reps based on how they perform. So, you’ll only pay those sales reps that perform well and won’t overpay those that don’t make any sales.
Increases motivation and performance. When you use an effective compensation plan that includes sales commission, you’ll drive your reps to perform better because they’ll know what they’ll be able to earn when they meet their quotas. As such, you’ll motivate employees and increase their performance, which has a direct impact on your bottom line.
Improves employee morale. When your sales reps know what they’ll be able to earn and that their efforts are appreciated, you’ll increase the overall morale of your sales teams. In turn, this has a significant impact on their performance and motivation.
Access to talent. When you implement a sales compensation plan with a competitive commission structure, you’ll be able to retain the best salespeople in your business. In addition, you’ll also be able to attract those salespeople who know they have the skills and experience to earn a good income when they meet their quotas. Ultimately, this reduces employee turnover and gives you access to the best talent.
Makes managing expenses simpler. When you implement a commission-based compensation plan, you’ll only pay your reps if they make sales and meet their targets. Likewise, you’ll limit your expenses on those reps that don’t perform well. As a result, sales commission makes it easier for you to manage your payroll expenses.
Unfortunately, sales commission does come with some disadvantages, including:
Decreasing morale and performance. Although sales commission can increase morale and performance, it can also decrease it. This will typically be the case when your quotas are set too high and your reps can’t achieve them. Here, they’ll either become demoralized or discount their quotas, which means you’ll never sell as much as you hope to.
Promoting the wrong behaviors. If your sales commission plan isn’t well-developed, it could end up promoting the wrong behaviors. For example, it could lead to your reps using aggressive sales techniques that negatively impact the customer journey and could lead to a loss of revenue.
Competition. Although competition can be helpful in motivating your sales reps and increasing their performance, unhealthy competition can have the opposite effect. As such, it could lead to a toxic work environment which reduces motivation and performance. Fortunately, a well-developed compensation plan can alleviate this.
No security. Understandably, compensation plans based on sales commission offer less security to sales reps than fixed salaries. Fortunately, you can alleviate their concerns by using the right ratio between fixed and variable pay which, in turn, reduces the amount of risk involved in the position.
Challenging to manage. Managing the sales commission for small sales teams can be relatively straightforward. However, as the number of reps and commission structures increases, it becomes far more challenging. As such, compensation plans that incorporate sales commission can become challenging to manage.
Pros and Cons of SPIF's
Likes sales commission, SPIF's have several advantages and disadvantages. Here, some of the pros include:
Acquiring new customers. Because a SPIF program can help your sales team focus on short-term goals, they can be very effective at acquiring new customers or prospects. For example, if you want to break into a new territory with a new product, a SPIF can help you to do this. Remember, however, that although SPIF's can be helpful for this purpose, they shouldn’t form the foundation of your sales strategy.
Achieving short-term sales goals. When you intend to achieve short-term sales goals, SPIF's are an extremely effective strategy. These can include anything from making a new product launch more successful to reaching certain revenue targets over the short term.
Improving employee engagement. Employee engagement can go a long way in improving sales rep performance, motivation, and morale. Simply put, when reps are more engaged, they’ll perform better. Despite this, many businesses struggle to keep their employees engaged. Because SPIF's offer short-term rewards, they can help improve sales rep engagement which, in turn, helps them meet their quotas.
Offering rewards quicker. Because SPIF's are not part of your reps’ usual compensation and offer short-term rewards, they allow reps to be paid out faster. As such, they don’t need to wait for, for instance, the end of the month or quarter to see if they’ve met their quotas and whether they’ll earn their commission. As such, this can keep their morale and motivation up.
Some of the cons of SPIF's include:
Possible dishonesty. One of the main challenges of SPIF's is that they can lead to dishonesty under sales reps. For example, knowing that a SPIF's is coming up, reps might hold back on sales to earn more during the period of the SPIF. Another problem is that they could sell the wrong products to the wrong customers to make more sales. As a result, customer satisfaction could suffer, which could lead to a loss of revenue eventually.
Challenging to implement. Because SPIF's focus on short-term gains, they could be challenging to design and implement to get the best out of them. If they’re not implemented properly, it could lead to certain reps being qualified, SPIF's not being awarded correctly, or not having funds available to reward reps when they should be. This results in a loss of morale and motivation.
Could be expensive. Although SPIF's can be helpful to boost short-term sales or reach other goals, you should use them sparingly. If you don’t, it could become costly and, by using too many of them, could decrease the engagement and motivation they’re able to generate.
Unhealthy competition. As mentioned earlier, competition can be effective at motivating sales reps to perform better. However, unhealthy competition can create a toxic work environment that reduces morale, motivation, and performance. This will typically be the case where your SPIF favors certain reps above others, or where it can have only one winner.
Factors To Consider When Implementing Sales Commissions and SPIF's
For the best results, you’ll need to ensure that sales commissions and SPIF's are properly designed and implemented when you use them. To ensure that they are, there are certain factors you’ll need to consider.
One of the most important considerations when implementing either sales commissions or SPIF's is your goals. So, you’ll need to decide what you want to achieve, as this will form the basis of your planning and implementation. Also, if you don’t have concrete goals, your implementation will be disjointed, and you’ll get bad results.
Your goals can also inform what strategy you’ll need to use. For example, as mentioned earlier, SPIF's are focused on short-term gains. So, if you have short-term goals that you want to achieve, SPIF's will be the appropriate way to achieve them.
Likewise, if you’re focused on long-term, sustainable growth, sales commission is the right tool. Keep in mind, however, that you can use both strategies to create an effective sales strategy.
The next consideration is whether you have the budget available to implement either of these strategies. This is simply because implementing these strategies can be costly and improper budget planning could lead to your reps not getting the incentives they should, which leads to unhappiness, decreased morale, and poor performance.
Ideally, when planning either sales commissions or SPIF's, your budget should be sufficient to reward all your reps if they meet their quotas or reach their targets. In other words, you should accept that all your reps will receive the full reward or incentive.
Another crucial consideration when implementing SPIF's or sales commissions is that you be completely transparent. This means your sales reps should know exactly how the incentive works, what they need to do to earn the incentive, and how much they’ll earn if they do.
This transparency eliminates any confusion and ensures that all your reps know exactly what’s expected of them. Also, knowing exactly how much they’ll earn will, as mentioned earlier, increase their motivation and performance.
The Bottom Line
When you want to increase sales, either over the short-term, or to ensure long-term growth, you need the right sales strategies. And here, SPIF's and sales commissions are especially effective tools. However, you should know when it will be appropriate to use them and how they can help you. Hopefully, this post helped illustrate these aspects in more detail.
To learn more about sales commissions and other incentives and how to make managing sales compensation simpler, get in touch with Performio. Our sales performance management software takes the hassle out of commission calculations and management and saves you time that you could rather spend on running your business.