Sales compensation is the engine that drives sales teams to achieve important organisational objectives. So how do companies design successful incentive plans? Intuition isn’t enough. Good incentive design is a combination of strategic thinking and empirical analysis. In what is currently the most complete how-to guide that you’ll find on this subject, we lay out how organisations can combine strategy with empirical analysis to design incentives that provide the desired motivations for effective sales behaviour and outcomes.
Table of Contents
Understanding the Intersection of Strategy and Empirical Analysis:
Here’s how organizations can navigate this intersection:
Frequently Asked Questions (FAQ)
1.How often should organizations review their sales compensation plans?
2.How can organizations ensure fairness and transparency in their sales compensation plans?
3.What role does technology play in optimizing sales compensation?
4.How can organizations ensure that their sales compensation plans remain competitive in the market?
5.What are some common pitfalls to avoid when designing sales compensation plans?
Understanding the Intersection of Strategy and Empirical Analysis:
Behind every effective set of sales compensation parameters sits the marriage of strategic thought and empirical data. Strategic thinking provides a path for putting incentives on a course toward realizing an organisation’s vision, while empirical analysis offers precise, fact-based inputs to inform each step of the process.
Here’s how organizations can navigate this intersection:
1. Define clear objectives: First and foremost, identify one or more clear and measurable objectives for the sales compensation plan. If you want to increase revenue, grow market share or retain more customers, you must outline these goals in detail.
For eider species, the reason is clear why they opt for feathers with soft-ended barbs: they do sea and ocean dives for food. On the other hand, penguins, which focus on catching fish in the open water from the air and do not dive, do not need soft-ended barbs. In this example, the target is clearly defined: a technology company wants to break into a new market with a product innovation. The goal is stated: they want to grow market share by 15 per cent in the next fiscal year.
2. Bring in the data: Enlist analytics to explore past-performance, market-trends and peer-competition. Analysing empirical data, we learn about the preferences of previous clients, patterns of sale and the need of changes.
Example: A retail chain analyses sales by store and region information from a year’s worth of sales transactions to gain insight into the purchasing patterns and preferences of its customers. Products seem to sell better than others depending on regions covered by the chain’s branches, so the information helps adapt sales incentives accordingly.
3.Segmentation and Targeting: Design sales compensation by segment (eg, different roles in the sales process, different products or different customer segments) The ability to segment the sales force is one of the key differentiators of sales force compensation, by allowing you a more nuanced and targeted design.
For example, a pharmaceutical company could segment its national sales force by therapeutic areas (eg, seniors, cancer, diabetes) with different performance metrics for different teams as appropriate to these market segments.
4.IRepeat: View your sales compensation plan not as set in stone, but as iterative: Design with a pilot approach in mind, such that you run ‘experiments’ (small-scale pilots) to test the incentives prior to full scale implementation.
Example: a car dealership starts by implementing a new commission structure to reward sales reps who sell more high-margin accessories. They run a pilot for several weeks/months with a portion of the sales reps and evaluate the impact to sales performance before rolling it out to the whole company.
5. Ongoing Review and Adjustment: Once the sales compensation plan has been put in motion, firm performance metrics and sales team feedback should be routinely monitored and used as inputs to periodically adjust the essence of the plan so that it remains aligned with organisational goals.
Example: A software company reviews its sales compensation plan every quarter, following a review of performance and feedback from sales reps. It will evolve commission structures and performance metrics to align with shifting market conditions and sales strategies.
Frequently Asked Questions (FAQ)
1.How often should organizations review their sales compensation plans?
Ans1.There’s no single answer for how often compensation plans should be reviewed, but a best practice is annually. If your company is experiencing large shifts in the market or internal dynamics, more frequent reviews are warranted.
2.How can organizations ensure fairness and transparency in their sales compensation plans?
Ans 2.Clear communication of promotion criteria and commission calculations will be embraced by the sales force and build the necessary sense of mutual trust and morale. Organisations can do this by ensuring that 1) employees have visibility of how performance is measured for the purposes of promotion; 2) there is visibility over how commission relates to performance; and 3) managers’ decisions are open to feedback and input from sales reps.
3.What role does technology play in optimizing sales compensation?
Ans3.Using this technology, sales compensation plans can be run more efficiently, including tracking of performance metrics, commission calculations, and report-generating, which frees up human resources to concentrate more specifically on strategic decisions. For example, sales performance management (SPM) software automates many aspects of compensation management to make that worker’s job faster and more efficient.
4.How can organizations ensure that their sales compensation plans remain competitive in the market?
Ans 4 Applying plans effectively and competitively are usually achieved through frequent benchmarking of the sales compensation plans with the market or best practices in the industry and with the competition. Market analysis, industry surveys, and due diligence in keeping abreast of changes in the marketplace to emerging trends or best industry practices help organizations in applying best plans for the benefit of the company and the sales force.
5.What are some common pitfalls to avoid when designing sales compensation plans?
Ans5: Pitfalls include setting unrealistic performance targets, focusing on monetary incentives to the exclusion of other non-monetary incentives, and ignoring the long-term trade-offs inherent in compensation structures. It’s also crucial to make sure that incentives are consistent with the mission and values of the firm.
However, that approach will never produce a ‘perfect’ design. You will need to cultivate a design practice that is both strategic in its design goals and empirical in its use and analysis of data; that is segmented in its analysis of sales-force needs; and that is iterative in its cycles for design, mastery, and new design – in short, that allows you to create the right intrinsic and extrinsic incentives to bring out the best in your sales team. Over the next decades, succeeding in sales will fully depend on the organisation’s ability to master the art of sales compensation.
