Sales organizations today all love the concept of pay-for-performance. It encourages fairness, competitiveness, and hard work. But achieving an effective and equitable pay-for-performance program is clearly easier said than done. Here are some tips to help you find the right balance between individual, team, and organizational performance in your sales comp plan.
In reality, few sales organizations are indeed paying based on the right performance for their business. Most organizations want to pay for performance because it sounds like the right thing to do, but when the time comes to launch a new strategic sales initiative, they fall back on traditional compensation programs that are easier to implement. So they end up measuring performance using solely market rates, seniority or other antiquated methods.
But pay-for-performance incentives have a good name for a reason. When they are designed, implemented, and managed properly, they simply work better to drive sales results and desired behaviors amongst the sales force.
Putting together a good incentive compensation program begins by gaining clear consensus on the goals of the sales organization as a whole. Once there is a common understanding of these goals, the next step is to lay out the behaviors that will allow your reps to achieve their objectives. Finally, define measurable metrics to track performance.
What are you trying to measure and improve? Is it productivity? Do you want to drive sales? Are certain products more profitable than others? Do you need to raise customer satisfaction or retention? First, decide what you want your incentives to accomplish, and then you can look at the people in your organization who can make the impact. Is it an organizational, team, or individual effort?
Ask yourself these five questions to identify the structure that will serve your sales organization best:
1. Is the incentive targeting sales or support positions?
The efforts of salespeople are linked directly to their results within the organization, so they prefer to be proportionally rewarded. A higher individual-based incentive is most desirable for salespeople, as they have the means to directly affect these results. On the other hand, the sales support staff tends to make less tangible contributions. For them, team or organizational incentives should be more heavily weighted.
2. Is the incentive for a sales rep or a management position?
Sales reps tend to have a more direct impact on an organization’s bottom line, so individual incentives make more sense for them than for managers. The sales reps are the ones who really are on the front lines day in and day out, while the leadership is not.
For this reason, it is common to concentrate on the performance of their team or the results of the entire organization when you compensate leaders. Organization-wide incentives are not very frequent at the sales rep level. They tend to become more so the higher in the sales management hierarchy you get.
3. Is the incentive designed to control compensation expense?
If your sales compensation budget is restrictive, you might want to embrace variable pay for individuals. There are two different ways to reward people. One is with a base pay increase, and another is with incentive pay. While the former tends to be very expensive—employees re-earn base pay dollars every year—the latter provides an opportunity to keep payouts in check.
To do just that, you can tie the term of the reward to the time of the accomplishment. That means rewarding short-term achievements with lump-sum incentives and long-term development with modest base pay increases.
4. Do your employees cover the same or very different territories?
Broad-based incentive plans may work within small offices and individual locations, but they are difficult to implement when your sales force is widely dispersed. If people are under a common roof, or they’re sharing a limited geography, that lends itself more to team or organization-wide incentives. If they cover different countries, for example, it might make a lot more sense to have individual, customized accountability.
5. Last but not least, are you trying to stimulate teamwork?
You may want a minimal (or inexistent) individual incentive if you’re trying to incent teamwork. Individual incentives are counter-productive to teaming. By compensating individuals based on team or organizational performance, you can encourage mentoring, training, and cross-selling within your sales force.
Before designing your next strategic sales initiative, carefully consider these aspects. It will help you reward the right people for the right behaviors.
Across industries, studies show the best approach most times consists of a mix of individual, team, and/or company performance.
So what is the best mix for you?