Sales performance management: The rules of incentives

18th Feb 2016

Such is the intrinsic link between sales and incentives that there are countless studies covering the pros, cons, psychology and science of rewarding staff.

Considering the average company spends roughly 11% of their revenue on incentives, this is unsurprising. But despite the sheer diversity of research, sales leaders could be excused for lacking clarity on best practice, with the approach of standardising bonuses not necessarily the most straightforward, or a guarantee for workforce harmony.

This wasn’t always the case. As Viviana A. Zelizer, a professor of sociology at Princeton University explains in her potted history of the topic, incentivising sales people used to simply involve handing out turkeys at Christmas.

But as monetary rewards became more of the norm in the early 20th century, this quickly evolved in large-scale organisations to the point that by the 1950s, the bonus was no longer a gift but a payment separated from the regular salary, and a standard expectation among anyone involved in sales.

Yet with the speed of technological change creating a digital-first approach among both businesses and consumer in the last 20 years, the waters have steadily muddied to the point that only 28% of employees actually understand the compensation structure in their business.

Such is the dramatic shift in purchasing journeys for both B2C and B2B customers in recent times, that most people have made a decision about a product via online research before they even come into contact with a salesperson. This is further complicated in B2B, where there are said to be an average 5.4 decision-makers involved in any sale. With so many stakeholders and such a shift in the salesperson’s communications with customers, there are some theories, such as that outlined in A. Kohn’s book, Punished by Rewards, that suggest companies might need to consider doing away with reward systems altogether.

“If you’re responsible for crafting a sales compensation plan, you have a lot of choices to make,” says Anthony Sills, a sales expert on the HireVue Accelerate Blog. “Setting target pay, selecting the right performance thresholds, establishing quotas, determining the mix and upside opportunity, and constructing the right formula are just a few items you need to consider.

“But all too often, the issue gets boiled down to ‘all you have to do to keep your sales rock stars and rainmakers motivated is implement the right [compensation] plan’…like it’s that easy.”

It’s not. In fact, the reality is reward schemes are and will almost always be one of the more complicated aspects of sales performance management, and there is no silver bullet. However, there are rules of thumb that sales leaders can adhere to, in order to ensure the structure they come up with is designed for the right reasons and bring a little more clarity and harmony to a sales team.

As Sill explains – “You should start with your revenue goals and objectives and work backward. You should consider factors like:

  • the company's strategic goals
  • the sales strategy
  • the type of business and the stage of growth the company is in.”

And as World at Work's Compensation Programs and Practices guide states the following areas also need to be ticked off by a sales leader, in the process of developing an incentives plan:

  • An understanding of company demographics (by sector, industry, region, etc).
  • Compensation philosophy (its history, employee understanding of it).
  • Competitive positioning (labour market comparisons, relative value of jobs).
  • Variable pay options (types of possible variable pay plans, the current variable pay market).
  • Base salary determination and design (deciding formal salary structures, multiple salary structures, pay grades, typical ranges based on hourly or salaried positions).
  • Pay for performance (by employee performance rating systems, typical variation in salary increases, method for determining increases, number of performance ratings, employee distribution across performance categories).
  • Continuous evaluation of all of the above and regular assessment of global practices.

The waters have steadily muddied to the point that only 28% of employees actually understand the compensation structure in their business.    

But while the reality is most sales leaders will have to work through the minutiae of all of the above areas over time, there is one fundamental aspect on this list which determines whether an incentives programme is built to last.  

“It’s really all about company philosophy,” says Vernon Bubb, EMEA sales solutions leader for LinkedIn. “Values and culture are the key things to measure people against. Leadership, leverage and results. But results are just one part of that measurement. Yes, salespeople are motivated by money, but that’s irrelevant if they don’t buy into culture, vision and values.”

Indeed, one study states that 91% of sales professionals are driven by financial compensation, yet increasingly, values and purpose are becoming central to measuring business performance as a whole – 75% of businesses, according to a study from Radley Yeldar (RY) – with the sales team often the most direct embodiment of a company’s purpose, given their proximity to the customer.

Andy Hough, director of the Association of Professional Sales believes that ethics are ultimately what tie values and financial motivation together:

“The bridge between sales performance management and rewards and incentives is how you do it ethically. Ethics are the centre of business and should be at the centre of your rewards system, too. Over time, what you really want your sales team to do is drive forwards, be successful, overachieve targets.

“A lot of people have a problem because they believe this means paying people for doing the wrong thing. Hitting targets at all costs. That’s where sales performance management comes in – if you see someone over-performing, but doing it unethically, not presenting information correctly or hiding things from customers, not being communicative with internal teams and support networks, then you have to do something about it and correct those measurements for achievement.”

Getting it wrong

There are many high-profile examples of what happens when incentivising staff is done for the wrong reasons. In the UK, the recent PPI scandal brought the chicken home to roost when compensation claims became an industry in themselves, yet in most instances it could be argued that this was a case of unethical practice being driven down to reps by sales leaders. In the US, the recent crises that surrounded Enron, WorldCom and the financial market collapse are all commonly routed back to unethical incentive schemes, driven by business leaders who encouraged win-at-all-cost corporate cultures.

“The good results generated by financial incentives need to be weighed against the bad: encouraging unethical behavior; creating pay inequality that reduces performance and increases turnover; and decreasing intrinsic interest in the work,” wrote Wharton management professors Adam Grant and Jitendra Singh, in their 2011 article The Problem with Financial Incentives — and What to Do About It.   

“To limit the negative effects, financial incentives should be (a) used primarily for tasks that are uninteresting to most employees, (b) delivered in small sizes so that they do not undermine intrinsic motivation and (c) supplemented with major initiatives to support intrinsic motivation.”    

This may seem counter-intuitive, but this, adds Andy Hough, is exactly how incentive schemes can remain balanced without encouraging unethical behaviour.

“As a sales leader, you can get it wrong in two ways – the first way is over-quoting people because shareholders want aggressive growth, and the second is to under-quote, and some people make too much money.

“What is a realistic target? Someone might overachieve in one customer. And while that is great and the customer is happy and no one has done badly, that’s where, as a sales leader, you might have to manage the performance of that individual for the overall good of the sales force. You might have to go to that sales person and pay them their reward for that deal but then reset their target at the half year, because you can’t have them earning multiple millions more than the rest of the sales force because it causes an imbalance and inequity with the rest of the sales team. It’s a virtous circle, but what people have to understand is, paying for a good job and then rewarding for overachieving isn’t a bad thing, as long as an ethical balance is struck and the sales team are aware of it.”                  

Getting it right

Keeping a happy, motivated and ethically-minded team is undoubtedly the Holy Grail for many sales leaders when outlining their incentives plans, but as Christopher Cabrera, the founder and CEO of Xactly states, this doesn’t always mean planning solely around financial reward. Indeed, sometimes the different demands of your team – families, health issues, pets, long commutes – should also factor into the equation. It’s also suggested the following accomplishments should be considered alongside sales targets:

  • Client/customer feedback.
  • Years of service.
  • Community service.
  • New employee referrals.
  • Bringing in new clients.
  • Increasing efficiencies at work.
  • Reducing company costs.

“Managers who take a flexible approach to both employee needs, and how they attain rewards, inspire higher levels of loyalty and greater transparency within the team - in this way you can ‘dangle the right carrot’ for each employee,” he adds.

And if the right carrots are dangled, sales leaders are likely to be a step closer to having a fully-focused team, with clearer and relatable metrics that don’t veer too far away from the perfect balance most people crave.

Incentives are still relevant – sales is a difficult job,” adds Vernon Bubb. “If it was easy then we’d be called order takers. Salespeople have to work hard; they have to be legal experts, finance experts, product experts, delivery experts. They have to be many things to many people, and you only have to walk into the business section of a bookshop and see how many books there are on sales to realise that there is no right or wrong answer on how to go about it. It’s a varied job and every sale is unique. That’s why salespeople create a lot of value themselves and should be rewarded for it.

“I think one of the reasons that bonuses exist is because it’s still relatively easy to measure the end-value of a sale. If anything, sales pay plans are becoming too complicated – they need to be made much simpler and should relate directly to the output.”

But despite this crave for a simpler process, it's unlikely we'll return to the turkey at Christmas reward scheme any time soon.        

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