Incentive compensation is a powerful tool that can be used to drive behaviors that result in higher profits, the retention of top performers, and a culture of excellence. However, if not designed and structured properly, sales incentives can have disastrous consequences.
When designing an incentive compensation program, CFOs should consider sales compensation as part of the company’s investment portfolio and demand an attractive return. Instead of thinking about the total dollars they’re spending on sales compensation, they should understand what they’re willing to pay for each level of performance and type of revenue.
Performance levels and revenue types are important to consider when designing a sales incentive compensation program. Target performers are the salespeople who just meet their quotas and earn their target incentives. Their neighbors, the “mighty middle,” range 10% to 20% above and below quota and make up the bulk of the organization. It’s important to get the incentive and return right for this group, because they represent 60% to 80% of the organization and the bulk of the cost.
But the investment levels that drive CFOs crazy are pay levels for the very high and very low performers. Top performers – those in the 90th percentile of your sales organization, sometimes called the “excellence level” – can earn 200% to 300% of their target incentive. Depending on the organization, related performance may range from 120% to 150% of quota. The upside can get expensive, and CFOs tend to question why it’s necessary, especially if the compensation plan doesn’t have a cap. But the idea here, again, is that there’s a worthwhile return. In a properly designed sales incentive plan, you’re not paying hundreds of thousands – or in some cases millions – of dollars unless the company is benefiting. Without upside potential, the incentive compensation plan favors the company but leaves it with only average sales talent. A core principle of incentive compensation is that the rep is putting incentive pay at risk in return for a significant return if they perform at a high level.
Bottom performers – typically the lowest 10% of achievers – should be paid a fraction of what a target performer earns. It’s important to clearly understand what you’re paying this group; in too many organizations, we see bottom performers earning a pretty good living, sometimes close to their target incentive despite being far from quota attainment. Thresholds are used to prevent the overpayment of lower performers. They can also fund upside incentives. We call it the Reverse Robin Hood Principle, because the company takes the incentives that would be paid if a threshold didn’t exist and transfers them to the top performers.
In addition to understanding what you’re paying for performance, consider what you’re paying for each type of sale:
If caught in a dilemma where you’re paying new customer-acquisition rates for business the company has had for years, you should restructure your incentive compensation plan and lower your cost of sales. Compare sales costs according to revenue type. You may have created an annuity plan that continues to pay the hunters for years for business they’ve already acquired.
Understand the ratios for what you’re willing to pay a high performer versus what you’re willing to pay a low performer. Consider each level part of the overall investment strategy and determine specific returns for each.
Measuring the Return
Here at SalesGlobe, we call this Return on Sales Investment, or ROSI for short. ROSI has many definitions. The most common for sales incentive compensation is productivity value divided by the financial costs invested in the compensation plans. The most obvious type of return is increased revenue.
It is important to note returns can be both financial and strategic. Additional financial returns may include increased profitability, increased bookings, and decreased expenses. On the strategic side, returns may include an improvement in performance for certain products, growth of certain markets, and decreased sales-force turnover.
Setting a company’s strategy is a collaborative exercise that evaluates customer, product, coverage, financial, and talent goals. Your company strategy and the metrics associated with it will determine how your ROSI definition is developed. For example, your company may be interested in growing revenue in a certain area of the business or focusing on a new product set. Additionally, your strategy may dictate that you need to invest more in an emerging market or technology that is different from your traditional business. In either situation, you may need to calculate a separate ROI on those business lines or products to understand that specific return. As you are developing your strategy keep in mind that strategies involving new customers and/or new products tend to be more expensive because of longer sales cycles, lower close rates or a strategic product that isn’t producing the expected returns.
Money talks, and incentives typically trump leadership messages, sales strategies, sales management, and sales training. Use this powerful tool to drive the correct — and legal — behaviors and to celebrate positive returns on your investment.
SalesGlobe is a leading sales effectiveness and data-driven creative problem-solving firm. We specialize in helping Global 1000 companies solve their toughest growth challenges and helping them think in new ways to develop more effective solutions in the areas of sales strategy, sales organization, sales process, sales compensation, and quotas. We wrote the books on sales innovation with The Innovative Sale, What Your CEO Needs to Know About Sales Compensation, and Quotas! Design Thinking to Solve Your Biggest Sales Challenge.
Founder and Managing Partner at SalesGlobe
“We help companies solve tough sales challenges to connect their sales strategies to the bottom line.”