There’s no question: life moves smoother with incentives. When we receive rewards for the work that we do in any facet of life, it can encourage us to do more and try harder. For some, like a salesperson, incentives are more than just an occasional bonus — they’re an expectation.
But how do you create an incentive compensation plan that will delight your sales teams and encourage them to bring in more business? In this article we’ll discuss what incentive compensation means, different types of plans, and take you through the steps of creating your own sales compensation plan that works.
What Is Incentive Compensation?
While an incentive is a motivational concession that anyone can get, incentive compensation is a method of compensation where a person’s pay is at least partially connected to individual effort or team success. The most common position where this occurs is in sales. Sales team members are often paid a lower base salary and then have additional compensation added on top of that when they hit goals, or when their team succeeds.
When salespeople know that they can earn more or receive additional incentives based on their performance, it encourages them to work harder to meet or exceed quotas. It encourages them to work beyond the bare minimum and really try to close more deals and bring in more sales.
The responsibility of sales incentives falls on sales operations and management. These roles need to own the incentive compensation plan and create a system that works for employees — and for higher ups.
Incentive compensation is both a left-brain and right-brain activity. It requires the plan manager to understand what sales is looking to achieve — not only in terms of dollars, but also in terms of personal and professional fulfillment.
Types of Incentive Compensation
There are many different financial models and methods of incentive compensation. Let’s take a look at some of the different possibilities.
What happens if your churn rate rises unchecked? Revenue will drop, and you’ll see your customer acquisition cost rise as you spend more per customer on marketing to bring those new customers in.
Sales Commission Structure
A sales commission is the most popular way to create an incentive program. A commission structure will clearly define how a rep will earn money from every deal they close. Usually this is represented as a percentage of the total sales, such as earning 10% of every sale closed.
Sales Performance Incentive Fund (SPIFs)
A sales performance incentive fund, also known as a SPIF, is a short-term incentive that focuses on providing a commission over a specific period of time. This can be great for new product launches or important sales events, as they encourage and reward fast sales.
A bonus is a common incentive that can apply to more teams than just sales. A bonus is a set reward that is granted to a team after a specific goal is reached. For example, a company could say if their goals are met, each employee will get a $5,000 bonus.
Management by objectives, often abbreviated as MBO, is similar to a bonus in terms of it being a set amount. However, rather than being handed out after a company-wide goal, an MBO will issue a bonus after an individual goal set by a manager has been achieved.
Profit sharing is an incentive based on a company’s financial gain. This is typically shared throughout the entire organization. For example, if the company achieves $50,000 in additional profit, that amount is split among the employees.
Gainsharing is a similar compensation method to profit sharing, but rather than money being shared across the organization, it’s split among individuals based on their level of contribution toward achieving the goal.
A spot award is a small incentive, often non-monetary, which is offered to recognize an employee. For example, if an employee makes a record number of sales in a week, they might be rewarded with a trip or tickets to an event.
A retention bonus is a type of bonus paid out to employees as a way to thank them for staying with the company for a certain amount of time, and is typically an added percentage to the employee’s base salary. An employee might receive a retention bonus after every 10 years of employment.
Annual awards or annual incentives are one-time payments given to someone at the end of the fiscal year (or on another annual basis, such as their yearly employee performance evaluation or hiring anniversary). An example of an annual award would be a year-end bonus paid out as the year comes to a close.
Fundamental Principles of Incentive Compensation Plans
Creating an incentive compensation plan requires you to have an understanding of some fundamental principles that go into creating your strategy: organizational, motivational, and behavioral. These principles help you create a reliable, predictable plan that encourages your sales teams to work harder.
Organizational principles work to align an incentive plan with larger corporate and company goals. These types of principles determine the performance measures and KPIs that should be set with the plan’s creation. It’s important to be realistic in the expectations you set for your employees so that they aren’t overwhelmed by your goals. A great example of an organizational principle is a performance measure like a quota.
You’ll also want to ensure that your performance measures weigh less than 15% of the total target. You want your performance measures to mean something, and you don’t want your administrators to spend time on measures that the rep doesn’t think are important.
Different people are motivated by different things. For example, new hires are more invested in commissions that come for each sale they make, while a veteran employee might be more interested in an annual bonus or retention bonus that adds to their base pay. Understanding who is invested in what and what their motivations are is an important aspect of creating a compensation plan that works.
Behavior principles are the ways in which people behave. For example, consider how much the individual salespeople will contribute to the plan you put in place, whether team or individual performance is rewarded in your system, and how transparent your system is to the team members. This all impacts how your reps will perform once your plan is put into action.
Plan designers need to have these factors in mind as they create the plan so that they can account for human behavior and adjust the incentive plan accordingly. Once you consider these principles, you can begin to create your compensation plan.
Building Your Incentive Compensation Plan
It’s important to note that incentive compensation can be considered an “emotional play” from the sales rep’s perspective, since their livelihood is directly connected to sales, which inherently has a lot of ups and downs. Sales reps want to be paid for the commensurate risk they take, and it’s not always about money. There are other ways to incentivize, surprise, and delight with things like event tickets, gift cards, and professional development opportunities.
Sales reps want to grow their careers as part of the company they’re with. However, hiring and retaining is getting more competitive due to the Great Resignation, which is mainly affecting companies that historically don’t think about upward mobility and career development. Companies that tried to incentivize team members with “free lunches” are now finding out the hard way that it’s not enough.
Creating an incentive compensation plan is a big deal. It’s a plan that will guide many of your sales team’s actions and will become an important part of your managerial structure. Below are the fundamental steps needed to create a successful comp plan for your sales team.
Identify Relevant Metrics
The first step in creating a compensation plan is to identify the relevant metrics you want to track. A metric is a statistic like churn rate, customer lifetime value, or customer acquisition cost, that has an impact on your business. Statistics for an incentive program could include:
- ARR and MRR: Annual or monthly recurring revenue from the rep’s accounts
- Average Revenue Per Customer or Account: Average amount of revenue brought in by each customer or account
- Quota Attainment: Percentage of quota a sales rep has reached or how quickly they achieved it
Establish Consistent Reporting Procedures
Reporting is essential to an incentive compensation program’s success. Clear reporting will tell you whether or not a sales rep has met their goals or if they are still short of their goalposts. Unclear reporting can lead to upset employees or uncertain incentive payouts.
When you automate and standardize your reporting with the help of digital tools, you can quickly gather real-time data from your reps and get a clear picture of the performance of sales team members across multiple groups at once.
Practice Communication and Transparency
One of the most important things to keep in mind during your plan creation is transparency and clear communication. You don’t want to try and hide what your incentives are or how they are distributed among the individuals in your sales teams.
It’s important that you remain transparent about how people are getting paid and what they’re getting paid — don’t be a blackbox. Flexibility is important, too. You have to change the incentive compensation plan as the company grows, as you can outgrow your plan. Keeping your plan simple until you outgrow a standardized compensation plan can be a big help, especially to smaller businesses.
Another point to remember is that there’s a difference between equity and equality. The value of an incentive compensation plan will differ based on longevity, experience, prior companies worked for, and other factors. Similarly, things like salary bands show that two individuals in the same position can earn different compensation for various reasons. Just because two employees do the same thing doesn’t mean they need to earn the same. Clear incentive compensation helps facilitate fair differences in compensation.
Finally, understand that people talk about their compensation, so you need to be honest about the goals, where they come from, and why you’re using them. What is the rationale for increasing or decreasing quotas? What determined that movement? Were there new resources made available, new hires that were brought in?
Conduct Comprehensive Evaluations
After you make sure that your plan is clear, you’ll want to continually evaluate and monitor the program. You can check to make sure that team morale is up (not down), and that your KPIs were met after a period of time has passed. You can also consider changes in external economic factors and evaluate to see if your plan should change.
Collect Feedback and Iterate
Feedback is essential to understanding if your incentive plan is successful. Getting feedback from shareholders and the people that the program affects will help you identify any gaps in the program like outdated tech, a lack of transparency, or a lack of direction. Sending out surveys, holding meetings, and asking questions during evaluations can help determine if a change is needed.
Upgrade Sales Software and Tools
If the feedback you collect in the previous step indicates that new tools and software are needed, then it might be time to enhance your toolset. A modern sales process requires tools that can help sales reps with:
- Revenue segments
- Sizing and deployment
- Productivity quotas and metrics
- Performance management and rewards
Having the right tools by your side is essential to the success of your incentive compensation strategies. Manual tracking and methods of evaluation can’t compare to the features that you get through software.
Key Features of Incentive Compensation Software
Let’s examine some of the key features that incentive compensation software will have, including:
- “What-if” Scenario Modeling: This type of modeling will help you spot forecasting risks, changing market needs, and other potential changes. This can help you avoid having to change your plan mid-year, which can upset your sales reps.
- Rapid Calculation: Calculating complex computations is something that can’t be done manually — especially if you want it done quickly. Software can help you calculate exact payouts in seconds, allowing you to ensure that payments are made accurately.
- Real-Time Insights: Having real-time data is an important factor in meeting business goals. When you know where your teams stand at the exact moment, you can make better data-driven decisions.
Develop a Competitive Incentive Compensation Plan with Sales Assembly
Creating an effective sales incentive program is essential to your business’s success. Sales team members depend on incentives to help support them financially, and they help to encourage more work from sales teams.
Going above and beyond is an important part of running a sales team, and having the right tools is an essential part of creating such an important plan. Sales Assembly is a tool that helps you scale your business for growth and provide sales management support. To learn more about what Sales Assembly can do for your company, contact us to start a conversation.