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Best Practices to Design your Sales Incentive Plan

8 minutes read

Nothing boosts your sales team’s energy and excitement as much as a good incentive. Most salespeople are born competitors. Adding a compelling reward to the mix fires up their competitive spirit and makes them even more enthusiastic to achieve their targets.

However, designing and implementing a truly motivating incentive plan is not easy. It’s a lot more than just choosing a desired outcome and promising a cash prize to the winner. In fact, if your incentive plan falls victim to bad design or implementation, it will have an adverse impact on your company and staff.

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Over the years we have worked with a lot of global sales leaders and learned the ins and outs of effective motivation. With that experience, we have brought to you the best practices to design a perfect sales incentive plan.

Whether you are building a new sale incentive plan from scratch or trying to improvise the existing one, these best practices will come in handy.

“According to Mckinsey, smart revisions of compensation models have been found to have a 50 percent higher impact on sales than changes in advertising investments”.

Best practices to Design a Sales Incentive Plan:

1. Build the Incentive Planning Team

Even before you start considering the variable pay options, you need to have the right incentive planning team in place. Your sales incentive plan touches several departments in your company in addition to sales. With that in mind, you should include key players from the following teams:

  • Sales (senior representative, Director, CSO, VP): People from the sales organization can help in incorporating these aspects into the incentive plan design:

    • Quarterly or yearly sales goals

    • Sales team’s performance capabilities

    • Impact of the compensation plan on recruiting and retaining the best talent etc

  • Finance: Finance team will be responsible for the cost assessment of the plan.

  • HR: Human Resource owns the overall compensation strategy and philosophy for the company. They will bring benchmarking and market pay data to the conversation. As well as current employment regulations, and fairness issues. HR will be focused on job roles and levels to help facilitate career paths within the sales department and organization.

  • Compensation Admin: Compensation admin can provide input into ease of setup and maintenance of the proposed plan.

  • Legal: The sales compensation plan is a legal agreement between the company and its employees. So it should undergo a legal review before it is shared with the salesforce

The goal of the incentive planning team will be to co-create a powerful incentive structure
  • that is aligned with the goals of the company,
  • can be financially supported by the company,
  • takes care of all employment regulations,
  • legally structured and
  • easy to set up and run.

2. The ABC of Sales Incentives

With your compensation planning team built, it is time to outline your plan’s foundation. To simplify this process, use the ABCs of sales compensation planning.

  • Align with sales roles: When it comes to incentive strategy, one size fits all mindset doesn’t work. As no two sales roles are the same, their compensation should also not be the same. Managers and their reporting reps don’t perform the same day-to-day tasks, and their sales comp should reflect that.

    Compensation should be tailored to individual sales roles so that they have more control over them. For instance, one sales rep at your company is tasked with bringing in top-line revenue and new clients. While another is responsible for managing client relationships, which helps in facilitating transactional renewals. Should both roles get paid the same? No, these two sales roles at the same company should have vastly different pay mixes, plan components, and mechanics.

  • Benchmark against industry pay data: Sales is a highly competitive industry. Organizations must attract the right talent to stay ahead of the competition. To do that, your sales compensation must be competitive in order to attract and retain talented sales reps. So how do you know that you’re paying competitively enough to attract and retain top performers? With data.

    Benchmark your internal pay and performance data against industry data to ensure that you're paying reps competitively. When your pay is fair, equal, and competitive, you also help reduce attrition.

  • Construct to drive the right sales behaviors: Ultimately, the framework of your compensation plan must be aligned with company goals so that it drives the right sales behaviors. Consider your corporate and executive goals like– revenue targets, product plans, releases, etc. Then, create incentives that drive sales behaviors that help you to achieve these goals.

3. Decide the Pay Mix

Pay mix is the ratio of base salary to variable pay at target. More aggressive mixes implement 50/50 or 60/40 ratios, while less aggressive mixes aim for 80/20 or 90/10 ratios. You should base your pay mix on each reps’:

  • Role

  • Type of selling

  • Length of the sales cycle

  • Amount of transactions

Here is a rule of thumb to follow to implement pay mix aggressiveness:

  • More aggressive: For jobs with more influence on purchasing decisions

  • Less aggressive: For reps with longer sales cycles and those with strategic or consultative roles

  • Mid aggressive: For managers with wider sets of responsibilities

Remember that sales managers have a wider set of responsibilities. So, they should almost always work on a less/ mid aggressive pay mix (meaning their base salary has to be high). And their reporting reps should work on the more aggressive pay mix.

4. Consider the Relation Between Tenure and Performance

According to research, an average sales rep hits her peak performance level at the three-year mark. At this point sales reps have gained enough experience to achieve quota at the highest level.

Prior to this time (years 1-2), reps aren’t as tenured, and won’t perform as high.

At 5+ years though, their performance tends to decline. So at this point, companies should look to the reps’ career goals and possibly move them into a new role, segment, or territory.

Incentives should reflect these experience levels. Less experienced reps are still onboarding and learning, and therefore, they might initially need an incentive boost. This is where companies often implement a draw against commission. As reps gain experience, their variable pay should increase alongside their performance abilities.

5. Aim for Simplicity of the Compensation Plan

Simplicity is the ultimate sophistication. This is key to designing your incentive plan. Because it is very important to ensure that your plan is simple enough for your stakeholders and sales reps to understand. When incentive plans are complex, companies see a higher attrition rate.

The key is to ensure that everyone understands the plan.

  • Your sales reps must clearly understand: achieving what targets will win them what

  • Compensation admin must understand:

    • How the plan functions

    • How to assign shared credits

    • How to accurately payout commission

  • The stakeholders and finance department must understand various budget allocations in the plan

Remember that the best incentive plans are simple in their mechanics and functionality, but are also effective in motivating reps to do their job.

6. Include Non-monetary Rewards

Money is definitely a powerful motivator. But when it comes to sales incentives, we must avoid having purely monetary rewards.

Let's suppose that you give the winner of your first sales contest a $500 check. She deposits the check, maybe buys something with it, but the glow of winning fades relatively quickly.

Now imagine you give the winner of your second contest, a flat-screen TV. Every time she has people over, they'll say, "Sweet TV -- where'd you get that?" Just think how this would fill her with a sense of pride every time she sees the tv. And, it motivates her to strive hard and win more such prizes going forward.

So, while paying your top-performers with monetary incentives regularly, make sure that you present non-monetary incentives as well occasionally.

You can get creative with your non-monetary incentives. You can present things like,

  • Dinner sets

  • Home decors

  • Tech gadgets

  • Treadmills

  • Virtual Points that can be redeemed

Read more about 23 creative sales incentives that you can add to your sales incentive plan.

7. Take Advantage of Automation

80% of organizations struggle with incentive payment inaccuracies. Whether it stems from lack of a single source of truth, human error, or version control of spreadsheets (80% of which contain errors), the point is manual processes cause a lot of costly problems.

Consider the following example. A company pays $100k in incentives for its 500 employees. That equals $50M paid out in incentives. If the business operates with a 3% payout error rate, that’s $1.5M that is mishandled in compensation. That’s a big cost for a small error percentage.

Automating incentive processing helps in fixing this. In fact, using automation companies are able to:
  • Achieve up to 99% payout accuracy
  • Complete 100% payout in 3 weeks or less
  • Save up to 172 hours per month of admin time
After designing the sales incentive plan, the next step is to implement it. Learn more about how to implement your sales incentive plan in the most effective way.
If you’re from the Insurance industry, explore how your sales incentive plan can be embedded into increasing productivity, decreasing agent attrition and reducing supervisory cost.
If you’re from Banking, explore how your sales incentive plan can be embedded into increasing productivity, decreasing agent attrition and reducing supervisory cost.
If you’re from the Pharmaceutical, industry, integrate your sales incentive plan into a gamified sales contest, focusing on collections, POB, doctor visits, chemist visits and more.
If you’re from the Medical Devices, industry, create one incentive plan that covers product knowledge, to handle customer conversations, to programming devices, to sales.

Published on Wed Sep 9 2020

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