Essentials of Sales Incentive Design

In her  November 16 Savvy Selling column on BusinessWeek Online, Michelle Nichols provides readers with the following ten essentials to consider when constructing a sales compensation plan, gleaned from the book which she lauds as "the definitive book on the topic" The Complete Guide to Sales Force Incentive Compensation written by Andris Zoltners, Prabhakant Sinha, and Sally Lorimer.  I find them to be right on target, based on my work in the areas of sales compensation design.

• If you want your reps to sell more of a particular or new product line, consider adding a bonus or increased commission. However, be careful not to make it so attractive that they stop selling your established, bread-and-butter lines.

• If you pay your sales force too much, they may get complacent and not go after new business. If you pay them too little, you'll have high turnover and high training expenses. If you pay the top performers too little and the low performers too much, you'll lose your profit-generators and keep your expense-generators.

• If you determine your commission percentage based only on volume, you may encourage your sales reps to discount more than necessary, resulting in lower profitability.

• If you pay bonuses based on customer-service scores, customer service will improve. However, you must guard against sales reps seeking customer satisfaction at the expense of additional sales.

• If you want your reps to sell new products or a new product line, you might want to offer a reward per demonstration, even if they don't make a sale right away.

• If you offer a monthly overachievement bonus, salespeople might be motivated to sell more every other month. When I sold on monthly quota, if an order came in at the end of a low sales month, we sometimes held it for the next month, hoping it would be better and put us over our monthly goal. We called this "putting an order in the drawer."

• If you let the sales manager decide how much bonus will be paid each month, sales reps will spend more time trying to please their managers than they spend trying to sell to their customers.

• If you make the plan too complex, your salespeople will ignore it. My stockbroker recently told me his pay plan was so convoluted that he just did what he thought was best and waited to see how much they paid him.

• If you're going to change the sales-compensation plan, compute how it will affect your top 20 sales producers. If a proposed plan hurts them, find another plan.

• If you have only a meager budget for bonuses, you can make a big deal out of the presentation, offer a humorous and symbolic award (one company I know gives a fake stuffed beaver, because the beaver is the hardest working animal in the forest), or provide a lasting memory, like putting their name on a prominent plaque.

Comments

[Paul Hebert]

I saw the same article but my take on it was a bit different. While I agree with many of the design ideas I don't believe that changing the compensation system is the answer. Compensation is the foundational element in the employee-employer relationship and should have some ongoing stability. If a company took all these ideas into consideration they would be changing their compensation structure too often.

I believe using non-cash or other reward/recognition systems allow companies to change focus quickly without revamping their entire compensation system. I'm not saying incentives are the only answer - simply a more flexible and manageable one. You can read my responses point-by-point in my November 17th post: Incentives vs Compensation at http://incentive-intelligence.typepad.com