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In today’s challenging business environment, sales is a vital component in any company’s success or failure. To chase higher sales, business leaders seek sales incentive compensation plans to keep their teams motivated to deliver more. They are ready to invest thousands of dollars in sales expenses.
What is a sales incentive compensation?
Incentive compensation is additional money sales representatives earn on top of their regular base salary and bonuses whenever they close a deal or achieve a specific business objective. A representative might be earning a commission or a bonus, but mostly this is given out as cash and forms a part of his existing compensation plan.
On the other hand, sales incentive compensation is designed to stimulate certain behaviors in the sales teams, which undoubtedly enables higher sales and serves as a tool for motivation and recognition. It has an intrinsic value that extends beyond monetary worth. Recipients view this compensation as celebratory, with a sense of appreciation and recognition, making them more memorable.
This incentive can take many forms and may include noncash rewards like prizes, tickets, annual family holiday packages, team holidays, etc. With a properly designed and delivered sales incentive compensation plan, salespeople maximize their rewards, and the organization maximizes revenue. The best sales incentive plan for your organization should be simple enough for the sales reps to understand its working so that they take necessary actions to hit their goals.
How are sales incentive compensation plans designed?
Typically, in most organizations, sales leadership and sales operations teams create and manage the sales incentive compensation plan. They take valuable inputs from functions like finance, marketing, IT, and HR on other important parameters aligned with organizational goals and sales metrics. During the designing and adoption process, the plan may be revised multiple times and re-assessed basis disputes on buy-in from the wider sales team, business environment, and overall effectiveness.
With so many metrics to track, complex calculations, the inclusion of a variety of customizations, designing an incentive compensation is no doubt a daunting task. Add to it the need for real-time visibility, easy to understand dashboards, and insights, the incentive design team is in for a tough ride. It helps to take note of these three basic principles mentioned below while designing an incentive compensation plan:
Organizational principles
These principles are about linking incentive plans to larger company goals. It involves
- Allotting adequate weightage to each goal and measuring them accurately
- Including flexibility to adapt the incentive plan to any changes in the market, or change in business objectives
Motivational principles
These principles link incentive plans to personalization in value and the role in the organization. These may include
- Providing incentives that are more emotional (sense of achievement, social status) than just utilitarian
- Using predictive algorithms to estimate individual sales targets than just the same percentage increase for everyone
Behavioral principles
These principles link incentive plans to encourage desired behavior in individuals and teams. It leads to
- Incentivising for improvements in quality of leads rather than just chasing target numbers
- Metrics like decrease in customer complaints as compared to the last quarter
Once finalized, the sales incentives compensation plan needs to be communicated well within the organization. Poor communication of a great plan is worse than good communication of a mediocre plan. There is a need for online training, FAQ documents, and an open channel for answering doubts of the sales team once the rollout of a sales incentive plan is done.
Since high cost is involved in any incentive compensation and its great potential to drive sales behavior, maximizing Return on Investment on Incentive compensation is critical for businesses. But ROI on incentive plans is a higher financial return on capital expenditure but an overall impact on the organization, ranging from strategically motivated sales teams to lower attrition to timely pay-outs and even better business predictions.
It is not an easy task to calculate the ROI that an incentive plan generates. To calculate in monetary terms, you can look at an increase in revenue (and/or market share gained, number of customers acquired, inventory turnover rates, etc.) and subtract the overall cost of implementing and administering the program. But for non-monetary impact, you need to set the efficacy measurement metrics at the beginning while creating your incentive plan. For example, some intangible factors like training adoption, absenteeism, employee satisfaction scores in surveys, cost of losing or gaining a new customer can provide the perceived value of the incentive plan and impact salespeople's motivation.
Many studies done by Incentive Research Foundation indicate that there is absolutely no doubt that incentives need to be designed around your best assets- people. When people identify with the organization and feel a sense of belonging and being heard, they are intrinsically motivated to perform well in their duties and place higher value and a deeper appreciation for incentive compensation plans' rewards.
Sales best practices to increase ROI for sales incentive compensation
To increase your ROI for Sales Incentive Compensation, here are four sales best practices to follow:
1. Automate to eliminate errors
2. Bring operational efficiency to reduce cost
3. Use digital insights
4. Improve timeliness
Let’s explore each of these sales best practices in detail.
1. Automate to eliminate errors
It is not an easy task to design an incentive compensation plan. With many roles to assess, large calculations, time spent gathering information across teams, managing digital trail of changes and events, etc., the manual process is bound to be erroneous.
Inaccuracy in calculations is a double-edged sword – in both cases of overpayment and underpayment of compensation, the business pays a hefty price. Overpayment leads to direct financial loss for the organization and a reduction in ROI. In contrast, underpayment leads to reduced employee trust, decreased sales performance, and even cost of the legal battle if an employee files a lawsuit for inaccurate payment!
When sales representatives doubt the payments being made to them, their time, which ideally should be spent selling and bringing more business, is wasted on shadow accounting. Many organizations provide automation of sales incentive plans and can help make the process efficient. Consider investing in an automated incentive compensation management solution if you plan to keep your sales teams motivated and achieve accuracy in payments.
2. Bring operational efficiency to reduce cost
When a sales incentive compensation system is automated, there is a reduction in the number of resources needed to make the manual calculations and reduce calculation time, which otherwise extends to many days each month.
Now, by automating workflows, there is an improvement in the system's efficiency with reduced time spent on data entry, lower risk of potential down-the-line disputes, and cost-savings in terms of the requirement of lesser resources.
3. Use digital insights to boost performance
Manual incentive calculations cannot provide advanced digital insights both to sales leaders as well as sales reps. With a digital representation of his personalized performance data and variable compensation on an automated sales incentive compensation model, a sales representative can easily understand the results, so he invests time improving his metrics and is more satisfied and less likely to leave the organization. Sales leaders have better insights in struggling areas for their sales reps and can coach their marginal performers better and personalize their coaching, leading to improved performance.
In a competitive world, companies shouldn’t ignore digital tools that their competitors are benefitting from. An automated sales incentive planning and insights tool is one such tool. This tool provides valuable data insights on the overall business, which helps in better future planning and leads to an increase in sales numbers.
When a large sum of money is already being spent on sales reps compensation, it is imperative to benchmark your incentive and sales compensation plans with competitors to understand if you are getting an adequate return on the investment and learn best practices. Digital insights enable a quick and easy comparative analysis to apply learnings to business in no time.
4. Improve timeliness
Your sales incentive compensation program serves as a single version of truth for sales information on calculations scattered across the organization. It helps provide an accurate financial picture to make better decisions for the business.
A digitized incentive compensation program automates complex computations, makes access to information faster, sharing information cross-functionally easier, and enabling agility in decision-making. The finance team doesn’t need to wait till the end of the month to get compensation cost data, but it’s now available on-demand. This increases forecasting speed and accuracy for organizations.
No one wants to invest cost in incentive compensation and still be at a disadvantage. Advanced incentive compensation technologies enable organizations to better ROI on this huge expense, keep their sales force engaged and motivated with adequate incentives, and align sales strategy for business growth. They enable fact-based clarity and employ algorithms that learn as more data is being entered, enabling better future predictions.
Consider using an automated sales incentive compensation program for your organization if you haven’t done it already. You’ll live to see the many beneficial results it can give.
