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When Incentive Plans Go WrongWhen Incentive Plans Go Wrong
Aug 23, 2013 | The Canadian Professional Sales Association lock
Sales incentive programs have an enormous impact on the bottom line, and on the future growth of the business. Their sole purpose is to “incent” or promote certain behaviour. However, the results are not always positive. Sometimes companies inadvertently build sales incentives that cause salespeople to target accounts or opportunities that are not optimal for the overall success of the company, either in terms of top line sales or bottom line profit. The core of human psychology comes into play here.
 
Unless incentives drive activities that are important to the business, the result will be negative. People often naturally look for the path of least resistance to achieve maximum income with minimal effort. For example, a flat commission rate that doesn't vary depending on the difficulty of a sale will cause a sales person to focus on easy business, which might mean that the focus is on repeat business instead of generating new business. Since sales growth is critical for a company to thrive, the incentive plan needs to include a component that recognizes the difficulty of bringing in new business or selling new products. Therefore, it’s usually advisable to award higher commission for selling new accounts or new products than for selling older products or repeat business.
 
Another important consideration is that incentives need to accompany a clear set of objectives or guidelines for the salespeople to follow. At one company, the reps began to improve their customer training when it became clear that there was a link between well-executed training, customer satisfaction, increased business and variable compensation.
 
So how do you set up a plan that drives your salespeople to optimal performance? First you need to determine overall company performance measures, align them with sales goals, and finally calculate the right payout formula, taking into consideration the sales cycle of your business. Let’s explore each of these in more depth.
 
1) What are the key drivers that the company must achieve? Increase sales, reduce costs, rationalize manufacturing facilities, plan for succession, improve profit, reduce headcount, etc.
 
2) What sales goals will help the company achieve these objectives? Increase top line sales, improve margins, reduce cost of sales, focus on a certain mix of products, etc.
 
3) The payout formula is the mix of fixed and variable components, which includes salary, commission, bonus, and other rewards.
 
4) Is the sales cycle in your organization one week, one year or one decade? The answer to this question will help you to determine what the payout formula should be.
 
One aspect that often goes overlooked in determining the appropriate amount of salary versus commission is the impact on a customer's experience. A salesperson with too little incentive (commission) may not put in the effort to make a compelling sales call. The opposite can result when a salesperson over-incentivized. He or she may become too aggressive about closing the sale – a tactic that typically backfires and turns off customers.
 
Another factor that must be considered is non-monetary rewards. Frederick Herzberg, a very influential name in business management in the twentieth century, proposed the Motivator-Hygiene Theory of job satisfaction. As detailed in his 1968 Harvard Business Review article, "One More Time, How Do You Motivate Employees?"1 he stated that people are motivated by six factors: achievement, recognition, work itself, responsibility, promotion and personal growth. Often when a sales manager does not understand their individual salespeople’s key motivators, a huge opportunity for job satisfaction, and consequently sales growth, can be missed.
 
To execute a well-crafted sales incentive plan, your organization should create a sales culture of high performance where individual goals are aligned with those of the larger organization. When a company builds a reputation for recognizing and rewarding stellar performance, it helps them attract and retain top sales talent.
 
 
Footnote:
1. Herzberg, F.I. 1987, 'One more time: How do you motivate employees?', Harvard Business Review, Sep/Oct87, Vol. 65 Issue 5, p109-120 (note: the reference to sales numbers is in the abstract written by the editors.)
 
 
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Copyright ©2013 by The Canadian Professional Sales Association
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