Why Incentive Measures Matter a Lot!

Instituting Incentives Measures as a central part of a Sales Incentives Plan:

An incentive plan exists as a technical sales management instrument which can be used as an accessory to sales management. A devoted team should work alongside an organization’s management to pinpoint the parts that can be used as a source of motivation in the objectives of a sales compensation plan.

There are distinct and discrete parameters included in the incentive plans and they are decided upon by following specific guidelines, thinking, as well as a decision process that is necessary for the formulation of the incentive plan. Not all the parameters that exist will be covered in this text but a few of them will be illustrated for the motive of understanding.

Such technical terms include the Total Target Cash Compensation (TTCC) which basically entails how much each sales role is open to earn in terms of cash income gains for every 100% of target accomplishment. 

The Pay Mix is another technical term that can be used to decide upon how much of the TTCC will be paid in basic salary and how much will be paid in incentives (bonus, profit sharing, commission, raises, etc.)

Incentives, also known as performance measures, is one of the key elements that constitute a commission plan design which can be used to highlight the targets and performance salespeople that will be incentive by the management.

An instance of incentive measures included within a sales compensation plan could be:

For each territory-assigned salesperson, current year 10 clients with any dollar amount, $200k worth of new revenues and $1million worth of the existing business will be required to be brought in by them. 

In this example, three separate incentive measures make up the incentive system and influence the sales targets of the sales plan. The measures are:

  • New revenues
  • New client names
  • Retaining existing business

Why specific measures are required in an incentive plan?

Leaving the performance measures up to the decision of the salespeople and leaving them to act and sell in a random manner can be consequential. What purpose exactly do the incentives measures serve?

It’s possible for scenarios, which are target-free and completely randomized, that are more suitable to exist. Such instances are found in cases where the sales are random, for example, a startup tests the water and implements a different incentive plan which suits the situation.

Such a scenario would work better with a different managerial style where the salespeople acquired by the company perform in a more entrepreneurial manner.

Salespeople, which can perform multiple duties, are what companies love and go for when choosing their employees. Such duties include bringing in new clients, protecting the existing revenues, reeling in new revenues, cross-selling new products to existing clientele, promoting new products among others.

Focusing on many different things at the same time is however unreasonable and proves inefficient. In such a scenario, the salespeople would be confused and not focused on prioritized things. 

Selecting the right measures is the first step

The first thing to consider would be to choose from a wide range of measures, there are four basic guidelines which enlighten this decision and they include:

  • The measures chosen must align with the objectives of the management.
  • The anticipated results that the company expects linking to the measures is highly important. Take, for instance, a publicly traded company that promises certain market profits and revenues is a perfect example that shows profitability and revenue are the two main measures to make use of.
  • There must be a reasonable method that can be used to distribute territories, whether geographical or otherwise, to salespeople. Without this, setting the target and performance measures can prove to be difficult.
  • If incentive measures are used, this infers that each salesperson must have a target on every one of these measures.

The weight that each one of these measures shall have is a question to consider. Will equal importance be assigned to each one of them?

As soon as the team picks the right incentives measures to be used in the incentives scheme, the next resolve would be to decide upon how important, and ergo weight, each one of these incentives’ measures will have in the incentives plan. These incentive measures are quantifiable and their exact weight in the system can be decided upon. 

Based on the weight, the payment that will be made to the sale people regarding these targets can be calculated.  The following example can be used for more clarification on the matter.

Let’s say the weights for the incentives measures in an incentive plan are:

  • New revenues – 50%
  • Cross-selling new product – 25%
  • New name – 25%

The overall weight sums up to 100%. 

The example above is a real instance of a new sales executive role whose position and objectives primarily entails making new sales in her territory. 

Say it’s decided that for 100% realization of the targets, the sales executive will earn $50,000 per year. What this means is that there is money allocated to each of the measures in the plan. In this situation, they are:

  • New revenues:  $25,000 (50% of the $50,000)
  • Cross-selling new product:  $12,500 (25% of the $50,000)
  • New name:  $12,500 (25% of the $50,000)

This all sums up to $50,000 ($25,000 + $12,500 + $12,500).

Having this in mind, how much per goal achievement will be paid to the salesperson can be precisely determined.

Moving on with the example:

Say the target for the salesperson in a year is to bring in 5 new clients, then the payment available for every client acquired by the salesperson will be $12,500/5 = $2,500. 

Of course, there are other ploys that can be chosen, for instance, the management can pay less for the first 3 clients and then more for the last 2 clients summing up to $12,500 in total, instead of paying $2,500 for each one of the clients. This strategy would pass the message across to the salespeople that more incentives come with more objectives achieved.

The weight of these measures or objectives is an important one because this determines where and how much effort can be exerted by the salesperson.

There are 6 integral rules about the weights, and they are:

  • A maximum cap on the amount of the measures, a number within the range of 3 to 5, will ensure that the minimum weight for each one of them is not too low. Having the salespeople focus on many different tasks will prove difficult and inefficient, so they must be made minimal.
  • Less than 10% of the weight must not be assigned to any of the measures. Doing otherwise and making the weight of the measure below 10% will make it seem ineffectual, and as such, the salespeople will ignore accomplishing it.
  • One or two of the measures will be core ones with more than 30% of the weight assigned to each of them. This is the area that will be mostly focused upon by the salespeople.
  • The measures being prioritized and given more weight are those that will have a significant impact on the organization and easy to follow.
  • Weight shall be given to the objectives that can be measured.
  • Revenue and profit type measures shall be given more weight and priority.

It is advised that the team run hypothetical exercises to test and ascertain how much the system should pay for each measure and objective in different situations, whilst showing how much of it will be achieved, before finally reaching a conclusion on the final weights of the incentives measures. 

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