An organization’s incentive compensation plan is a key component of sales strategy. It motivates the behaviors that lead to achieving sales goals. But how do you know if your incentive compensation plan is a success? How can you determine, before the end of the plan year, if it is on track or if you need to adjust it?
Why Incentive Compensation Plans Fail
The most common symptom of IC plan inefficiency is a gap between desired and actual behaviors. If the incentive compensation plan does not generate the right sales behaviors, it fails to fulfill its purpose of reaching the company’s sales goals. The impact of an unsuccessful incentive compensation plan is significant: failed product launches, lower revenue and margin, lack of growth, missed goals, payments far above budget, and high turnover rates.
How to Measure Success
Fortunately, a timely and efficient evaluation of the incentive compensation plan can help your company not only avoid all these negative consequences, but also achieve sales and corporate goals. Here are five of the most important evaluation criteria to consider:
- Financials – Is your compensation plan rewarding sales performance accurately? Use financial measures such as overall payout vs budget, sales force credit vs overall corporate financials, incentive compensation spend by team, or sales compensation cost of sales to determine whether your plan is financially on track.
- Equity – Does your plan fairly reward salespeople? In order to ensure that it offers equal grounds for compensation regardless of local circumstances, look at how payment is distributed among salespeople and accounts. If you notice any discrepancy between performance and rewards, investigate to determine the root cause, and adjust it.
- Earnings – Earnings metrics are about more than just checking to see if the plan is paying at budget. Check to see how earnings are distributed across the sales force. Look at the percentage of people at different levels of performance to infer the level of motivation and participation in the plan. Understand who your top earners are and why.
- Quotas – A successful incentive compensation plan has accurate targets that are both challenging and achievable. Targets that are too high and difficult to achieve discourage people. If they are too low, every salesperson will reach them easily, thus swelling the incentive compensation budget and hurting overall company performance. Adjustments to quotas are possible, but keep in mind that inaccurate quotas might be a symptom of a bigger problem with the plan.
- Strategy – An effective incentive compensation plan is one that enforces strategy, so never lose focus of sales goals. Whenever measuring plan success, answer this question: Is the plan motivating the right behaviors in the sales force? If the answer is “no”, see what changes you can bring to encourage the desired behaviors.
Evaluating the sales comp plan should be something you do ongoingly, not a one-time event. Define the questions to answer and the metrics you will use to measure success, and apply the same evaluation process several times during the year. While analyzing results, remain focused on strategy and the desired end goals.
If you decide to make adjustments, keep in mind that significant mid-year plan changes will be heavily scrutinized by the sales force and can have negative consequences for the plan’s credibility. Don’t change things too often or without good reason and plenty of forethought! In some cases, when strategy shifts require quick changes to behavior, contests can be an alternative to major plan changes.
Lastly, communicate progress in a timely manner to the sales force. Sales reps should understand the plan, why you are making changes, and how these will impact them.
It’s important that you don’t neglect incentive compensation plan evaluation. In my experience, companies tend to spend a lot of resources designing and planning incentive compensation, but lack proper follow-up. No incentive compensation plan is perfect from the get-go, so continue to monitor results and make necessary adjustments even after the plan is rolled out.
Is incentive compensation plan evaluation something that you are struggling with? I would love to hear your thoughts and answer your questions on the matter.
7 Steps to Designing an Incentive Compensation Plan that Drives Results
Most companies are dissatisfied with their compensation programs. Read this guide to learn how to design a comp plan that gets results.