Guest author: Nicholas Jackson, remuneration specialist, founder and chief executive of Jackson Advisory
Sales Trend 10 from our 12 Sales Trends for 2016 is “The evolution in sales incentive plans”.
With the growing complexity in many markets and the rise of selling in complex solutions, this sales trend tells of the shift towards more customised variable Sales Incentive Programs (SIPs) taking into account team selling, complex solutions, longer sales cycles, and so on. Meanwhile, “Lone Ranger” commission schemes, which have an extrinsic appeal because they are simple, are primarily on the way out as they are only suitable in very limited circumstances these days.
Sales incentive programs (SIPs) constitute a major cost in many companies, but the research indicates that a well-designed SIP can be a worthwhile investment . Certainly, SIPs are becoming the norm in many sales settings.
Designing the right sales incentive programs for your sales strategy and team
Most companies tend to hire sales staff who are competitive and achievement-oriented by nature and variable pay programs are aimed at matching these profiles with appropriately designed incentives to reinforce intrinsic motivation.
SIPs are primarily used to drive sales, reduce sales costs, increase profitability, develop new territories, and enhance margins. They are a business tool to motivate and compensate sales staff to meet goals or metrics over a specific period of time, usually broken into a plan for a fiscal quarter or fiscal year.
A SIP is similar to a commission plan, but it can incorporate sales metrics other than goods sold (or value of goods sold), which is traditionally how a commission plan is derived. Sales metrics used in a SIP often include sales quotas, new business opportunities and/or management by objectives (MBOs).
SIPs are often used to motivate sales staff where total dollars sold is not a precise measure of sales productivity. This can be due to the complexity or length of the sales process or where a sale is completed not by an individual but by a team of people, each contributing unique skills to the sales process. SIPs are used to encourage and compensate each member of the sales team as he/she contributes to the team’s ability to sell.
SIPs are preferred over commission plans in sectors where salespeople have limited impact on immediate, short-term purchase decisions and instead are intended to position their company as a long-term supplier. Businesses are more likely to offer commission plans in circumstances where:
- Sales are determined primarily by the skill and effort of sales staff and are not substantially affected by factors outside their control;
- Selling success is primarily the result of an individual sales person’s effort (rather than a team effort);
- Carryover sales resulting from past sales staff efforts are low, so that commissions reward recent sales effort. (Commissions paid on carryover sales are “automatic” income for the salesperson, and thus are actually a “hidden salary;”)
- Selling cycles are short and performance measures are straightforward, allowing frequent performance measurement and incentive payments.
The affordability of SIPs can be safeguarded through reference to gross margin. A trigger or gateway can be established where by no payment is made until a gross margin profit target is met. Alternatively, gross profit can be used as a multiplier to shrink or grow the incentive pool available for distribution. The latter approach is slightly more complex but it avoids a binary outcome that can be demotivating in the event of a near miss.
Commission plans are sometimes based on revenue, but gross profit can be a more prudent measure of success. It’s easy to sell more by simply dropping the price, but revenue doesn’t always equate with profit. Gross profit or gross margin can be a better measure of a sales person’s contribution because it takes both selling price and cost of goods sold into consideration.
The design of a commission plan or SIP can send a loud message to salespeople about the priorities of the business and how they can best support those priorities. It therefore makes good business sense to think carefully about that design, determine the best option, document the plan and communicate widely and often about the intent of the plan, how it will operate and what it offers participants.
Remember everybody lives by selling something.
 See, for example ‘Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans’ by Doug J. Chung, Yale School of Management, Thomas Steenburgh, Harvard Business School and K. Sudhir, Yale School of Management, October 2010