Paul, a salesperson, applied for a job at a technology company; in the last round of interviews, he asks the sales leader the following questions:
“What is the commission plan you have in place for the employees?”
“How much does the plan pay for target realization?”
Payment of incentives to salespeople isn’t a new concept; almost every company that deals with selling products or services and paying employees makes use of this compensation plan. Added to the fixed salary of salespeople is a ‘variable’ payment section, the variable part is not defined and differs with each worker.
For a company to accurately decide on how much each salesperson should be paid based on this variable, there’s a system that can be implemented known as the motivation scheme.
THE INFLUENCE OF PERFORMANCE MEASURES ON A MOTIVATION SCHEME
A friend, who’s a sales manager, once reached out to me for assistance on how much he needed to pay his salespeople. As soon as he requested my help, a series of questions began to race through my mind. Questions like:
“Who should get paid” “How much?”
“Should I add an equal variable to the fixed salary of the salespeople?”
“Should I pay them with a bonus?”
“Should I assign payments based on a commission factor? And should I only pay above a specific minimum performance.”
After expressing these questions to my friend, he then asked:
“The variable to be paid will be based on which performance measure?”
He wants his salespeople to focus on selling a newly launched product, but he’s also having issues with preserving revenue streams from existing customers. He said he was clueless about which payment approach he needed to use. I promptly responded that he had provided an answer to his dilemma with the question he asked.
The measures to be incentivized constitute the main terms of an incentive plan presented to the salespeople. Usually, these measures are purely quantitative, like revenues or renewal amounts generated from existing accounts. By providing incentives on renewal revenues, you are adding a performance measure to efforts made by each salesperson in retaining substantial amounts of renewal revenue.
Now let’s review each step to exercising this approach:
- Step 1: Assign accounts to each salesperson
- Step 2: Calculate the yearly revenues generated by the assigned accounts
Step 3: You have two choices from here on; you can either conceive a payment based on a certain percentage of the total amount generated. For instance, if an account renews up to 90%+ of the stipulated revenue target, then the salesperson takes X amount. However, if the amount is 80%+, then the salesperson gets Y (a smaller amount). Anything below 80%, then the salesperson doesn’t get anything at all.
The second option is to pay a certain percentage of revenue generated from each renewed contract.
ALTERNATIVELY USING QUALITATIVE MEASURES
A company might decide to implement a different and more complicated strategy that isn’t based on simple factors like securing new revenue streams or yielding new accounts.
Using a case study, your salespeople might be responsible for increasing your profit margin, optimizing your customer relationships, or enhancing your service delivery. These scenarios can be a bit difficult to measure because they aren’t as simple as quantifying cases of revenue generation. Hence, this can make assigning payouts quite complicated because it is harder to set objectives and measure the performance of the salespeople towards these objectives.
So how can you make use of this approach? We’ll get to the answer later in the article, but for now, there are certain things you need to know.
Attributes of Qualitative Measures:
- Though they are measurable sometimes, other times, they often aren’t.
- These measures tend to be more related to the end goals of the company, not how those goals will be achieved. To clarify things: Let’s say a quantitative measure would be to set a target of 10 meetings each month for every salesperson to bring in. This approach is measurable, and a company can dispense small payments for each meeting set by a particular salesperson. Alternatively, defining or setting a qualitative measure could be for your salespeople to improve the quality of meetings being organized.
- Ultimately, a handful of these measures can be linked to specified procedures to abide by during sales, as opposed to just focusing on the results. Say, rather than setting a quantitative target of $120000 of new revenues for every salesperson each year; you can choose to set targets of specific amounts of qualified sales leads to be generated every year.
- In some scenarios, these targets are not short-term because achieving the target objectives can take some time before the results start showing. For instance, enhancing customer support and satisfaction isn’t something that can be achieved within a few months. Doing this requires proper planning and strategizing to get the appropriate results; these results can take about a year to become noticeable.
The Different Qualitative Measures a Company can Decide on
There are several measures you can integrate into your incentive plan for your salespeople. Each of the measures is to be picked to serve a specific purpose, and it must align with the goals of the company and how you intend to achieve those goals. Provided below are ideal qualitative measures based on different scenarios.
- Customer-related Measures:
- Redeem the interests of your customers in your company
- Optimize the service satisfaction of your clients
- Mix your product offerings and upsell your clients on them
- Aim to convert specific target audiences held by some of your competitors
- Raise the market share held by each customer
- Set and reach milestones for clients
- Industry-related Measures:
- Set a new industry to penetrate
- Target and procure new strategic accounts
- Enhance awareness about your company in the market
- Develop and launch a new product into the market
- Territory-related Measures:
- Aim for a partnership with a specific brand you can benefit from
- Convert strategic accounts in a territory
- Improve your brand presence in a territory
- Boost your market awareness in a geographical location
You might perceive a certain level of difficulty associated with setting performance standards for the qualitative measures listed above. How can you put a specific target on “enhancing brand awareness in a geographical area”? The answer isn’t a simple mathematical value because it can be quite arduous to quantify this task.
Even though the approach is hard to implement, why should a company still consider using such measures? What are its benefits?
There are three primary reasons behind making use of these measures; this includes:
- They are precisely defined and created to induce the salespeople into making efforts that align with the individual goals of a company. Such measures ignite the fuel behind the growth of the company.
- These measures are more strategic for companies to implement; by nature, they are more beneficial for a company in the long run
- These measures are more personalized and tied to the requirements of your company; hence, they tend to have a massive effect on the company.
Just as these measures have advantages, they come with their drawbacks which you need to consider before implementing them.
- As implied many times before, take careful note about how you measure the performance rate and how this is communicated to the sales team because they can become quite difficult to measure.
- Due to the complexity of the measures, it can be hard to relay information on how the system works to the salespeople. The entire incentive approach might come across as confusing to them. And when a system becomes too complicated for your team to understand, they start losing focus on the simple processes of the business.
For Curious Individuals On Whether Or Not To Apply Qualitative Measures Into Your Incentive Plan:
Our team at C4S holds the opinion that qualitative measures should be implemented by companies. Based on our experience, the companies that make use of such measures realize more favourable results than that of quantitative measures by an increase of at least 17%. Part of the main reason why we recommend that companies make use of these measures is that they provide support for each individual and specific objective.
You can make use of the following hints when you implement them.
- Make sure it’s not your key strategy, but you can still integrate them into your plan. You can make revenue generation your primary measure, but you should balance it with qualitative measures.
- Never apply more than two qualitative measures
- If you are managing a start-up business and the market is unstable at first, then you should set targets using a qualitative measure for short-term application, no more than a year.
- When making use of two qualitative measure, ensure the measures acts as a supplement to each other.
Deciding on which type of measure to use in an incentive plan is a necessary part of every company. Even though some companies make use of good quantitative measures, they don’t fit into their objectives and goals.