The incentives system is one of the most vital tools in a sales company’s toolbox. The incentives scheme motivates the sales team to reach their goals and give their best performance. As such, it’s vital that the scheme is properly aligned to the business’ overall strategy.
Each company has a unique strategy and plan. For example, a company that has just launched a new product will likely have a strategy in place for increasing brand awareness during year one, strategically gaining customers in year two, growing their market share in year three, and becoming a leader in their field during year four.
A company’s strategy can vary depending on:
- Their business goals
- The maturity of their business
- Their turnover and profit
- The time of year
- Their market share
- Public awareness of their brand
These are just some of the factors that affect business strategy, and in turn, the sales compensation scheme.
In this article I’m going to hone in on sales staff who achieve more than 100% of their target, and why sales managers should plan their sales compensation scheme so it rewards staff who go above and beyond.
Where Incentives Scheme Meets Sales Strategy
At its most basic, the incentives program exists to promote desired sales behaviors, and keep the sales team motivated.
At the start of each new sales period, sales managers allocate targets to their sales people. These targets should, if they are well thought out, be in line with sales strategy for that year, and for the future. Managers usually inflate sales targets to increase the scope for outstanding performance by their team.
Sales targets must be manageable, or the staff can become discouraged. However, they need to be challenging and not too easy to reach, or they don’t act as a motivator.
In an ideal world, all sales people will meet their targets. Territory and target allocation both play a role in how well the sales team performs. However, even with perfect territory and target allocation, not everyone will meet their target. Some will reach their target, while others will under-perform, and some others will over-perform.
Leverage – The Reward For Exceeding Sales Targets
Leverage means the potential (and often high) earnings that are paid to those who perform beyond their targets. In short, leverage refers to how much a company wants to pay its very best performers (typically the top 5% – 10% sellers in the whole company.)
Leverage is the amount of money a sales person can on top of the variable part of their total compensation package, if they perform exceptionally. Leverage is often expressed as 2x or 3x or 1:1 or 2:1. For example, say a sales person is on a compensation scheme that has a top target of $40,000. If that scheme also pays 2x leverage on top of the compensation, then the leverage is another $40,000 on top of the original payout, for a total of $80,000, or 2x the original amount of $40,000.
Before deciding on leverage amounts, the sales managers must ask themselves two questions:
- Do they want to give their top earners the potential of earning large amounts of money on top of the existing sales incentive scheme?
- Do they want to make their top sales earners an example for the rest of the team?
Paying leverage to the highest earners shows the rest of the sales staff what is possible for high achievers, thus motivating to do their best to reach those lofty heights.
The function of leverage is more psychological than financial. The actual payment should only go to the top 5% – 10% of the sales force, so in many cases the dollar amount is not exceptionally high. However, on a psychological basis leverage motivates both the top earners and the rest of the team by showing them how much more they can earn by reaching the top tier.
Why Include Leverage In A Sales Compensation Scheme?
Even if leverage is only paid to the top 5% – 10%, it’s still an extra burden on the sales scheme. However, I believe including leverage in the incentive program is important for these three reasons:
1. Some sales people simply do not meet their targets. Top performers are therefore picking up the slack for those who under-perform. Leverage is a concrete way to reward the extra effort of the top earners and recognize their contribution to the company.
2. Leverage sets high expectations for sales people and encourages them to aim high. For example, if compensation is only available for up to 100% of the target, many sales people won’t put in the effort to reach 100% and will plateau around 90%. Show sales people that there are rewards for those who reach 120$ or 130% of their target, and many more of them will reach 100% in their efforts to aim higher.
3. People are much more motivated by seeing where they could go, than by where they already are. Leverage lets sales people know that they have the potential to go even further than they already are, and that keeps them motivated.
Let’s look at another practical example. Say for example a sales scheme pays 7% compensation up to 100% of the sales target, but pays 15% for anything over 100%. This clearly lets sales staff know that they will be handsomely rewarded for over-performance, and gives them a compelling reason to keep bringing in sales even when they reach their target.
Some people believe an incentives scheme exists only to make sure the sales team reaches their targets. In my years in the field, I’ve found that the most effective incentives schemes are those that encourage staff to not only meet their goals, but to stretch beyond them.
Questions To Ask Before Designing A Leverage Scheme
Whether or not to reward those who exceed their targets is a personal decision for each company. At the least, I’d recommend every sales manager make that decision now so that when the situation arises, they know what to do.
Sales managers must ask themselves:
- What do they want the sales team to do once they reach their sales targets?
- Do they want them to stop selling?
- Or do they want them to keep selling?
If the answer is yes, they want them to keep selling, it is time to decide how to reward those who sell beyond their targets. The easiest and fairest thing is to build such rewards into the sales scheme so everyone knows what to expect.
Let’s look at an example.
If someone is reaching 60% of their sales target, then the role of the sales incentive scheme is to motivate them to reach 100%. But what if they meet that 100%? Then it’s time to look at how to motivate them to reach 120%.
Of course this depends on the company’s objectives, and in fact some sale schemes are designed so that earning over 100% of the target is not possible. However, many companies find that the best thing is to build in payments for those who perform over target. That’s where leverage comes in.
Downsides Of Paying Leverage
It’s clear by now that I believe paying leverage is a powerful motivator for any sales team. However, as with anything in business, there are positive and negative sides to it. Being aware of the downsides of paying leverage means you can plan your scheme carefully and mitigate potential risks.
There are three main drawbacks to be aware of – and what to do about them:
1. If the leverage scheme is not planned carefully, there is a risk of that the company will end up paying huge amounts of leverage and even impacting their financial health.
What to do:Be careful when assigning targets. If targets are too easy to reach, many people might reach and exceed them, and the company will need to pay large amounts of leverage.
2. Paying a lot of money in leverage for those who reach over 100%, but paying very low amounts for anything up to 100%. This is very demotivational to sales staff who know that not many will reach over 100% and so don’t see the point in trying.
What to do: Design a sales compensation scheme that offers fair remuneration for all staff who reach or get near their targets, not just the over-achievers.
3. Sales people might try to manipulate the compensation system. For example, a sales person might delay closing a sale until the next sales period if they think they are not in a position to get a leverage payment in the current period, but will be able to in the next period if they save that big sale.
What to do: Be mindful in the design of the sales compensation scheme to try and discourage “gaming” the system. Keep an eye on sales records and watch for any patterns of sales people saving up sales in order to win leverage.
I believe leverage is a vital part of any sales compensation scheme. The psychological power of leverage cannot be underestimated. Leverage lets sales staff know that extra effort is recognized, valued, and compensated. The key is to design the scheme carefully so it is only achievable by the very top 5% – 10% of earners, while still offering good compensation to those who are not likely to exceed 100% of their targets.