Perspective - Summer 2009

Maximizing Sales Force Performance

Is your company using variable pay effectively?

By Simmi P. Mehta

CHALLENGING ECONOMIC conditions are putting pressure on companies to do more with less. Sales leaders are being asked to increase the productivity of their teams, with little or no additional budgetary or staffing resources. In this environment, keeping your existing sales force focused on key initiatives and motivated enough to meet their objectives is critical. However, while many companies provide some form of variable pay to their sales force, a surprising number do not fully take advantage of the potential that this investment can have in driving needed sales growth.

Sales roles are distinct from other employees in their ability to directly influence the top line. As such, companies have the unique opportunity to link variable pay to sales performance for these employees. To optimize variable pay investments, plans should provide adequate pay at risk and compelling upside opportunities to effectively drive behavior. To drive results, plans should also clearly align with the key selling actions and behaviors that support the company’s strategy. And to ensure variable pay programs support these objectives, companies should begin by reviewing the type(s) of plans they employ and how those plan are designed.

Sales Incentives for the Sales Force

In Asia, it is still common for companies to reward sales employees via company performance bonuses. For example, in Singapore, a recent survey by Watson Wyatt showed that 33 percent of surveyed organizations used bonuses as the sole variable pay vehicle for the sales force and 43 percent provided both bonuses and incentives to their sales employees. Although bonus plans can be structured to be forward-looking, the use of higher-level performance metrics and longer plan cycles often results in bonus plan payouts being reactive rewards for past achievement, instead of proactive drivers of performance. While using a bonus plan for true selling roles can be appropriate in a few unique situations, the broad use of a company bonus plan for the sales force can lead to missed opportunities.

In contrast, a well-designed sales incentive plan more actively directs your sales force towards the activities and opportunities of highest value. With articulated objectives, a clear link between payouts and performance and ample upside opportunity for high performers, a sales incentive plan can be an important lever in driving results.

If your organization currently employs a company bonus plan for roles directly involved in the sales process (e.g. lead generation, closing sales, maintaining client relationships), shifting to a sales incentive plan could help increase the return on variable pay investment by ensuring your program has a strong influence on sales force achievement. Offering employees both a company bonus plan and a sales incentive plan dilutes the impact of any one vehicle, so organizations who employ this approach should consider shifting bonus plan investments to the sales incentive plan.

Sales Plan Structure Should Support Sales Strategy
An important next step to ensure your sales incentive plan is optimized is to select an appropriate plan structure, or plan "platform".

Sales incentive plans using commission or piece-rate platforms are typically the easiest to communicate, have a strong link between pay and performance, and provide high to unlimited earning potential for top performers. When using a commission platform, target-setting at an individual level is not compulsory, and the rate of earning can easily be calibrated against profitability. As such, these plans are commonly used during the early-life phases of a company, when market opportunity is less clear and aggressive growth and gaining market share are key priorities.

Despite these advantages, commission and piece-rate platforms are not always ideal sales incentive plan structures. In situations where market opportunity varies by territory or book of accounts, commission plans may result in payouts that are not aligned with sales effort. For businesses with long or complex sales cycles, employees under these plans may see huge swings in earnings. And for companies with multiple products, assigning unique earning rates for each product can easily confuse employees and result in sub-optimal mix of product focus.

Because commission plans often treat all sales equally, these platforms constrain the company’s ability to control how employees bring in the revenue and restrict the ability to focus the sales force on "strategic" selling and teaming. While attracting and retaining the "right" customers are key business objectives, continuing to use this type of plan may lead to sales force misalignment.

Whereas commission plans do not typically accommodate strategic objectives, the goal-based target incentive platform can define an amount of "pay-at-risk" for both monetary and non-monetary metrics (e.g. service quality). Final payout to the sales employee is then calibrated based on performance against these metrics, thus ensuring adequate focus on strategic imperatives. The flexibility of the goal-based target incentive platform therefore allows companies to mitigate risk by balancing revenue generation with other selling behaviors.

Although goal-based target incentive plans require defining the amount of "pay-at-risk" (i.e. target incentive), goals/quotas can vary among employees and by performance period, and can therefore accommodate different business cycles and market opportunity levels. Linking payouts back to the target incentive level instead of defining a rate of revenue share also helps moderate cost of sales relative to profits. As this can lead to a reduction in earnings for top performers, companies shifting from a commission platform to a target incentive platform need to carefully manage their transition and communication strategies. And since goal-based plans require goal setting and explicit communication of expectations, organizations shifting to a goal-based target incentive plan should consider existing systems capabilities for forecasting and monitoring results. Although transition issues can be challenging, making changes to strategically align your plans can help focus your sales force on critical business objectives and drive results.

Key Takeaways

As you look to increase the return on investment of your variable pay plans, the type of vehicle you employ and the incentive plan platform you use can be important levers in increasing sales force productivity.

Shifting front-line sales employees from a bonus plan to a more motivational plan, such as a commission or goal-based target incentive plan can help drive results
Overly complex incentive plans (e.g. unique payout mechanics for more than 3-4 key metrics) can be simplified to drive better focus
Lower administration costs and more collaboration can be derived from bringing disparate plans onto a common platform.

Regardless of the type of incentives you offer to your sales force, regularly reviewing your variable pay programs for strategic alignment is a relatively low-cost, high-impact way to increase sales force engagement and drive business results.

CASE STUDY: Driving Growth by Re-aligning Sales Incentives with Sales Strategy

A well-established financial services company recently revised its sales strategy and needed to further promote teaming across the sales organization. The company hired a third party consultant to assess its existing plans, identify opportunities to harmonize and simplify plans, and develop guiding principles to streamline future plan design.

The company’s decentralized approach to incentive plan design resulted in over 50 "unique" sales roles across the various business units, each with their own incentive plan. A review of their incentive plans revealed arbitrary differences across similar roles, including eligibility (e.g. bonus, incentive, hybrid), incentive plan platforms, and plan measures, weights and mechanics. The lack of consistency was obscuring relative payouts and upside opportunities, adding unnecessary complexity and administration costs, and distracting sales employees from key initiatives.

In partnership with the consulting firm, the organization was able to consolidate its sales roles into a few role profiles, coordinate plan platforms and mechanics by role-type, and reallocate bonus dollars to the sales incentive plan for the true front-line sales categories. Shifting certain roles from their legacy plans to a common goal-based target incentive platform helped the organization achieve the objective of focusing the sales force on team-based selling. By defining plan design parameters and the permissible range of practices for each role category, the simplified framework allowed the organization to balance consistency with flexibility.

The resulting plans were better aligned with best practice, more easily communicated to employees, and more conducive to partnering across business units.

Simmi P. Mehta
Senior Consultant - Sales Effectiveness & Compensation
Human Capital Group, Singapore
simmi.p.mehta@towerswatson.com