A sales scheme is a complex system with many moving parts. For example, management must decide how much to pay sales staff, and how much of their pay will be from fixed versus variable salary. One of the key parts of an incentives scheme is the performance measures used by the system. In this article we’ll take a closer look at different performance measures and how to choose the right one.
Sales Schemes – A Complex Machine
A sales scheme should work to help a company achieve its aims in terms of revenues, market placement, and customer relationships. A correctly-designed scheme motivates sales staff and helps them reach and exceed targets that support those aims. An effective scheme is one that is challenging enough to be exciting, while still giving sales staff a decent chance of achieving their targets. A well-designed scheme fosters excellent performance and company loyalty.
On the other hand, a badly-designed scheme can lead to confusion, frustration, and lack of motivation. This in turn leads to under-performing sales people, and eventually a higher turnover of sales staff.
Because of the importance of the sales scheme, it is essential that management take their time in designing it. A motivation program cannot be drafted and implemented in a few hours. It needs to be unique to the organization and carefully designed to support its long and short term goals.
Even a seemingly simple sales scheme (such as one that plays a flat commission fee of 5% for all new revenues brought) must be carefully considered. The performance measure to be used (in this case new revenues) and the exact percentage (5%) cannot be arbitrarily selected.
What Is A Performance Measure?
Performance measures log how well sales staff are achieving their targets. They are tied to sales targets, and thus used to incentivize sales people. The team knows that if they meet their performance measures, they will get paid.
Performance measures must meet three criteria to be effective:
1. They must be measurable. There is no use in a performance measure that you can’t measure! If sales staff are told they will be paid for bringing results in a certain activity, then there must be a way to measure that activity.
2. They must be clear. For example, management needs to make clear whether the system pays for new sales only, and whether it pays for net or gross increase. Sales people need to know what exactly they will be paid for.
3. They must be in line with the strategy of both the company and the sales team. For example, if the company wants to increase profits for the next year to fix its low profit margins, there is no point giving priority to incentivizing cheap new revenues.
The Risks Of Selecting The Wrong Performance Measures
Selecting the wrong measures can lead to frustrating results for a company. The sales scheme drives the sales team’s behavior, and naturally they will gravitate towards the parts of the scheme that offer most credit and most money.
If the measures do not encourage sales people to pursue activities that are in line with the company’s aims, it is hardly surprising if the results are not what management hoped for.
One mistake I often see companies making is to blame the sales scheme for poor results without looking at other possible causes. If the performance measures do not seem to be working, it is important to investigate:
- How comfortable sales people feel selling a certain product over others
- How easy it is to sell one product versus another one
- How competitive the market is
- How clearly management communicated the scheme
- How well-trained sales staff are on both the product itself and the company philosophy and objectives
The performance measures can certainly cause problems – but it is important to take these other factors into account as well.
At What Point In The Design Process Should A Company Select The Performance Measures?
Many companies I have worked with want to jump in and select the performance measures straight away. This is understandable – management want to know what they are paying their team for. However, performance measures should not be first on your list when designing a sales scheme.
Before selecting performance measures, management should decide:
- Which staff are eligible for the scheme – the sales staff only, or supporting staff who help make sales, such as technical advisors?
- How much total compensation the company is prepared to pay its sales team
- How much compensation will be paid as basic salary, and how much as variable
Once these things are in place, you can decide the performance measures.
What Types Of Performance Measures Are There?
There is a plethora of performance measures for companies to choose from. They can be categorized into three main groups:
1. Quantitative measures. These can be accounted in dollars, or other currency amounts or items. For example, the acquisition of new clients (regardless of the revenues from them), the gross revenues each sales person brings, their profitability, etc.
2. Qualitative measures. These fall into two main subcategories. The first is increasing relationships with existing clients, such as by selling a newly launched product to an existing client. The second is customer retention, where the focus is on keeping customers satisfied so they renew their service every year. There is often strong competition in the market, and retaining new clients can be challenging, which is why some companies choose to incentivize client retention. There are other qualitative measures, such as increase of market share or customer satisfaction levels. However, these are rarely used.
3. MBOs (Management Business Objectives). These are milestones the company plans to reach, such as winning the first customers in a new industry. These performance measures usually apply to business development roles. They are used when reaching the objective holds more significance to the company than reaching a specific revenue level.
How To Select Performance Measures
Choosing a performance measure is a vital, and challenging, decision. The best way to approach it is with practical thinking.
First, understand and have a clear view of company objectives. The aim of the sales scheme is to motivate sales staff to reach company objectives after all, so a thorough understanding of those goals is vital. Think of it this way: Sales targets are company objectives translated into measurable goals. For example, if the main objective for the coming year is to sell a recently-launched product to existing clients, that can be translated into this quantifiable performance measure: “Revenues sold of the new product.” Now each sales person can be given an individual target for revenues coming from the new product. At the end of each commission period, the company assesses their performance in sales of the new product, and pays commissions based upon a formula.
In this example, targeting the specific measure of “revenues sold of each new product” supports the aim of placing the new product in the market and selling it.
Selecting the correct performance measures can seem dauntingly complex. However, if you stick with the simple maxim of making sure the measures support the company’s goals and steer sales staff towards meeting those goals, it becomes much easier.