Incentive ROI Myth: Why Most Companies Get Sales Compensation Planning Wrong

What most companies never measure?  The incentive ROI. 

Most organizations believe their incentives plan works just because the revenue stream is trending upward. Organizations run their sales compensation plan blind. No companies measure if their incentives create incremental revenue or are they just paying for what would have happened anyways.

The reason why? Incentives are budgeted as an expense and are not managed as an investment. Therefore companies can easily overpay on their plans not tying them to performance which can distort sales performance. Optimize your sales compensation plan by learning how to tie your plan to specific business outcomes.

Aligning compensation with ROI 

If sales incentives are tied to revenues there is no concrete way to know what would have happened without them. Most companies just look at the top-line: Did we hit our revenue number?  Time to budget more money for next year.

Here are three ways how most companies get sales compensation wrong:

1. The Hidden Blind Spot: Incentives Without Accountability

Let’s face it. This isn’t pleasant but sales comp is the ugly truth. Companies spend millions of dollars on incentives every year and never take the time to measure if they are getting a return on their investment. The funny part is that no one bats an eye because there is no true ROI being measured. Most finance teams pride themselves on tracking revenue month over month, margins and most importantly customer acquisition cost. Incentive spend? Not so much. 

“Incentives equals Sales” is the biggest myth out there. When thinking about this problem we should ask ourselves why do we give incentives? Incentives are given to motivate sellers to do something that we want them to do. Whether that be faster velocity, larger deals or better margins. So how do we know if those incentives gave us that desired behavior?

Companies often times fear buying into new technology to track sales performance but with so much money riding on incentives there should be no excuse not to. By putting a few controls in place you can easily measure incremental revenue caused by incentives.

Here is an example: Lets say that your SaaS company gives salespeople massive commission accelerators to hit their quota by the end of quarter. However, when you analyze what drove that number you realize that those deals were never going to close until the end of quarter anyways. Essentially your incentives gave you nothing but a nice revenue distortion. You thought you grew but in reality your revenue stayed flat.

2. How to Tie Incentives to Real Business Outcomes

Companies get sales compensation wrong because they view incentives as an expense. When you think about incentives as part of your expense budget your main focus becomes “how do I control spending?”. Sound familiar? It should because this mentality will lead to much larger problems down the road.

Instead of thinking of incentives as a expense why not think of it as a tool to mold seller behavior? What if I told you that by simply changing your plan design you could increase profitable revenue by 10%? Seems crazy but hear me out. 

The same SaaS company we talked about above is no longer driving sales with quarter crushing deals. Now with proper tracking of incentive ROI they understand that giving salespeople discounts does not motivate them to sell more. Instead this company decided to raise the commission percentage by 5% companywide. What did they do with the extra money you may ask? The funnel wasn’t big enough to support higher commissions? Wrong. They took all the money that would have been spent on giving discounts and moved it to SPIFFs for new products.

Because this company took the time to measure which incentives worked and which didn’t they were able to grow their revenue by putting more money towards what’s important to them: New product adoption.

Let’s look at another example. You work at a large enterprise that sells $1M+ deals. You’ve tried every incentive in the book but it’s hard to know what caused what. Deals are taking so long that by the time they close you have no clue what incentives were offered during the sales cycle.

Implementing even a small test can give your organization insight on how to better design your plan. Something as simple as region A gets plan X and region B gets plan Y can easily be measured by looking at the contract signing date. From there you can compare what plans drive higher conversion or larger deal sizes.

3. Metrics that Matter: Turning Incentives into a Profitable Growth Engine 

Remember how I said that if you don’t measure you can’t optimize? The opposite is also true. If you are optimizing to improve your sales performance you are most likely measuring. The problem is that companies measure the wrong stuff. Things like quota attainment or % of revenue paid out in incentives are pointless if you know how to tie incentives to revenue.

How do you tie incentives to revenue? By asking yourself the right questions. Questions such as “What would have sold without X incentive?” or “How did incentives impact seller behavior?” are a great place to start. Once you have that information you can now calculate your incentive ROI.

For argument’s sake let’s pretend your incentive ROI is negative. What do you do with that information? You go back to step one and see where you can improve that plan. Maybe that meant increasing commission percentages but lowering the SPIFF budget. Don’t get me wrong spending more money on incentives can still be profitable as long as you know which incentives were the key drivers for your sellers.

Conclusion: If you track ROI, you will win! 

If you don’t take care of your margins you will go out of business. If you don’t measure your incentives, you will lose out on competitive advantages that your peers are likely already implementing. Spend your money wisely and know what you are putting your money towards.

Companies who spend the most on sales incentives are not the ones who come out on top. Measuring your incentives allows you to know what plans work and what doesn’t. Spend more money on the plans that drive the highest ROI and your compensation plan will be the best around. Want to learn more about how to measure incentive ROI? Click here!