When I work with clients to structure incentive-based compensation for their sales and non-sales teams, I see many issues. Where many get trapped is that they start in the middle. What I mean is they focus on the compensation itself instead of their business goals. The right incentives reward professionals for contributing to achieving strategic goals. Don’t blame your reps, blame the plan. Remember that not all business is “good business.” If you want to expand into new markets, grow existing accounts, or capture specific clients, be sure to reward the behavior that is important to your strategic growth. Here are four areas that can help improve your compensation plan.
Tie incentives to individual, group, and company performance – especially for non-sales people. At least 1/2 of the incentives should be tied to individual performance. However, we want to encourage team play. The only way to max-out is if your group meets its goals, the company meets its goals, and you meet your personal goals. This creates good peer pressure for an under-performing team member. It also encourages top performers to help less experienced team members. Having a bonus pool to reward across teams can instill a sense of “what’s good for the company is good for me.” – something that has been lost in many companies.
Split the Pie
There are several key steps to capturing business. It all starts with identifying an opportunity. And, for professional services and technology companies, that often is done by an on-site professional who may not be part of the business development team. Do not be afraid to split the revenue pie to provide a taste for those who play valuable roles in opening (not just closing) business. I generally split the pie into four segments (identification, buying vision, signed contract, and execution) – but be careful to clearly define the criteria to earn credit. Depending on your business, your relative percentages might vary.
Remember the Bottom Line
Let’s assume that your target gross margin is 50%. If you pay your sales rep 3% of gross, that’s 6% of the profit. However, for those who pay on top-line revenue, this can be dangerous as the amount the company loses from a discount can be much larger than the rep would lose in commission. So, tie revenue recognition to discounting. Sell at full price, get 100% recognition. As they introduce discounts, the revenue recognition falls. So, at a 20% discount, they may only get credit for 70% of the revenue. The goal is to ensure that reps battle to preserve margin. Of course, there is no substitute for good negotiating and selling skills. Being the low bidder is not selling.
Is the rep who nails their number quarter after quarter more valuable than the one who hits and missing in alternating periods? Of course. I encourage my clients to offer a kicker if you hit your number after having hit it in the previous quarter. It allows the reps to stay motivated and to not play games with the comp plan. Most importantly, never put a cap on incentive-based compensation for sales professionals. Provided that they sell “good business”, we know that the incremental revenue above plan is more profitable than the first dollars.
Finally, be sure that your incentives are easy to calculate. The best incentives are the ones that your rep can calculate before they leave a meeting. How do these keys and others keep your team focused on the right things?