How to build an effective sales incentive plan
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Why is a sales incentive plan important
- What would you like to strive for to support your strategy,
strategic goals and objectives?
- revenue growth to gain market share
- higher gross profits to have a better financial performance
- win new customers to mitigate risk from existing customer base
- shift to new products to be prepared for a product end of life
- order entry for future fiscal periods and the long term success
- What is the benchmark for a good compensation in your industry to attract talent?
- How attractive means aggressive would you like to model your sales incentive plan?
- Does your plan need to accelerate teamwork or do the sales reps perform on their own?
- What effects does a sales incentive plan have on your company culture?
- a variable salary of 20.000$ should not be split up in more than there to five targets otherwise the single target is getting too small, payment amount after tax becomes irrelevant and you loose focus. Three targets are ideal.
- if you have an account manager who runs an account which is good for 20 M$ revenue and 17 M$ are already under contract, do not incentivize from the first dollar onwards as the last million may only be 5% of the target. It becomes a rounding difference if you do 17 or 20 M$. Introduce thresholds.
- Think about your business and if you are on larger multi-year deals
and long sales cycles, you may not be able to incentivize on revenue or gross margin as your sales rep is working on a deal for eleven months and is closing the contract in December with no chance to create revenue. You still want the deal and reward the sales person. Hence you move to Order Entry. Order Entry
can be measured in Annual Contract Value (ACV, first year only) or Total Contract Value (TCV). To accelerate early closing, you can set a smaller revenue target from the new deal within the fiscal year. The incentives you pay this fiscal will generate most profits in future fiscal periods. Be aware that cost may not follow revenues.
| Achievement | Performance on 16 M$ Threshold and 20 M$ Target |
|---|---|
| 15 M$ | 0% |
| 16 M$ | 0% |
| 18 M$ | 50% |
| 20 M$ | 100% |
| 22 M$ | 150% |
| 24 M$ | 200% |
Do not cap performance rather be thoughtful with your target setting. Capping performance is normally not needed and not motivational. The incentive payment as a percentage of revenue is marginal if it is modeled right. You may need to live with exceptional high salaries on a great year for an individual but that would make your company overachieving targets.
Moving to quarterly or monthly targets may drive the performance for shorter periods in a better way and you can adopt targets more frequently. You may need to pay an upside factor such revenue times e.g. times 1.1 for revenues in Q2. Just splitting targets by four quarters and the incentive proportion the same way, will not drive performance for certain periods, as the sum of the quarters and the sum of paid incentives will be similar if you don't factor a favorite factor for a period in. Any focus setting can be accelerated by factors or a stronger weight on a target for a product set, time period or new customer revenues.
Area of responsibility - not first come first serve
Targets are depending on a territory and do not assume that a territory as a geographical area only. It could be a customer set, an industry, a product set, a region, the size of the bids or a combination of those. If the territory is changing within the target period, the target will change as well. If you add customers to sales rep, they need to take the additional potential as a target. Distributing leads by accident without clear territories will not allow a proper performance management and good sales team culture.
If you have two sales reps or two teams working on the same deal for a good reason, do not double incentivize rather do a teaming agreement before the deal closes and define how achievements will be counted for each team in case of success. Overlay quotas / targets can make sense if you want to support an indirect sales channel and do not let the direct sales reps compete with your business partners hence you count the business partner achievements to the achievements and the partner sales rep may have an overlay quota that enable teamwork. But it would mean as well that your team has more resources working on the territory and target will be higher.
Create target letters to document commitment for both sides
Target Letter for Jennifer Sales for 2021:
| Target | Weight of target | Threshold | Target Value |
|---|---|---|---|
| Revenue | 50% | 50% | 15 M$ |
| Order Entry | 30% | 0% | 5 M$ |
| Gross Margin | 20% | 40% | 4 M$ |
| The territory is defined as country wide for Product X |
A target letter is accompanied by the sales incentive plan as the framework which defines how performance is measured, what counts into the numbers, all the definitions, the calculation method, conflict resolution etc.
Final remarks
Depending on your country legislation you need to have your targets in place at the beginning of the target period. In some countries you even need to pass workers council approval on the sales incentive plan. Keep this in mind.
Finally your mindset should not be driven by fear and financial impact: 'what happens if they make 300%' - your company does well and you pay only a percentage of revenues and profits for great performers. Take the opposite approach make targets challenging and assume that everyone will make 100%, celebrate the ones who do more and let them earn the extra as they contributed to your success and overachievement. If your non incentive people ask what do I get and they get jealous, simply ask how much someone would take off his fix payment to bet on a target achievement in the next period. Not everyone wants to live on the risk of achieving targets for making the salary. Get the right people on the sales job. Enjoy the challenging targets, celebrate successes, that is inspirational and motivating.
