Nearly every organization evaluates the effectiveness of its sales incentive compensation system at the end of the year. Leaders question whether the system generated the right outcomes, whether it was fair and whether practices supported the company’s strategy. But rarely do they address these kinds of questions in a systematic way. Most compensation evaluations are too intuitive, too reactive and draw conclusions that are neither carefully reached nor actionable.
Given the typically fixed windows for making pay changes, this absence of a careful, well-defined and regular evaluation of incentive systems often creates situations where the systems start to fail before leaders can make meaningful changes. The result: the sales team underperforms, top sellers become frustrated and turnover increases.
By annually reviewing actual results from an incentive plan using a standard set of criteria, companies can avoid these kinds of problems and the quandary of wanting to make big changes in the midst of a plan cycle. A defined process for evaluating the incentive plan also makes it easier to identify root causes of issues, identify possible solutions, and have executive-level discussions about pay practices based on a shared understanding of objectives.
At Blue Ridge, we find the most effective incentive systems perform well in four areas: significance, simplicity, immediacy, and alignment. With 10 questions about the performance of their incentive compensation plans across these four areas, executives can ensure strong returns from investments in incentive compensation as business needs and strategy evolve.
- Did overall payout levels reflect the business’s level of success? A common area of discontent with sales incentives is that they don’t align with overall company success. When a company misses targets or executives do not earn bonuses but sales people have rich paydays, there is a problem. A disconnect between overall incentive compensation payouts and a company’s headline performance level demands urgent attention, both to ensure investment in sales compensation is earning a return and to forestall potentially damaging effects on culture and morale.
- Did the largest rewards accrue to team members who delivered the most important results? It’s usually clear which salespeople contributed most to overall success in a given year. Did they also have the best paydays? If not, there is a misalignment between what matters and what gets paid. Investigation will often yield an easy-to-explain reason why the mechanics of the plan produced unexpected results, but this is something to be fixed, not rationalized. These situations are often healthy, early signs that what matters most to company success is changing, and compensation systems need to evolve to keep up.
- Does the incentive plan encourage reps to reduce selling effort due to payout caps or out-of-reach goals? Good commission plans create a sense of urgency, always offering the possibility of a payout for delivering realized sales. No period of time should consistently be considered “lost” or “maxed out” in the course of normal business. While thresholds and caps play important roles in many incentive plans, if too many reps often find themselves well below the payout threshold or capped out before the end of the period, you may want to revisit the plan’s parameters to restore your growth trajectory and sales rep performance.
- Does the incentive plan reward sales reps in a timely manner when they deliver? Incentive plans typically strive to create a pay-for-performance culture: deliver results and you’ll receive your incentives. The best incentive plans typically recognize that a dollar today is worth more than a dollar tomorrow, both for the company and for sales rep. Creating a sense of urgency and a strong linkage between action and reward can have a big impact on sales rep motivation and, consequently, on your company’s performance. If reps cannot remember what deals drove their payout in a period, you may need to rethink how frequently you measure performance and pay out incentives.
- Does the incentive plan create meaningful differentiation between the top and bottom performers? Good incentive plans reward the best performers, but great plans motivate lower performers to either improve or seek other opportunities that better match their talents. Having a plan that creates meaningful differentiation between top and bottom performers ensures your variable incentive plan retains top talent with competitive rewards while offering a promise of significant gains to those motivated to deliver strong results. If you see signs that low performers may not be inspired to improve, or you find your top performers departing for other opportunities, take a look at how your total compensation package differentiates between your top and bottom performers.
- Does the plan have enough leverage to drive out low performers? Low performers who occupy otherwise productive assignments can silently erode your company’s growth. Without sufficient turnover among low performers, it can be difficult for a sales team to bring in and develop new talent. A compensation plan that delivers uncomfortably low compensation for low performance helps encourage the right kind of voluntary turnover. When voluntary turnover among low performers is not significantly higher than the sales force average, evaluate your plan’s overall mix between guaranteed and incentive compensation.
- Is the incentive plan a selling point of the job? Given the extensive time and effort that goes into finding and evaluating new talent, it is critical that the incentive plan be a key selling point. For companies that struggle to sign top talent, the issue may be lack of a competitive incentive package. To determine if this is the problem and better understand the competitive landscape for talent, keep an open communication channel with your candidates during their decision process. Monitor public message boards and other online job satisfaction forums for candid feedback on representatives’ perception of the incentive plan. And analyze your own retention levels to determine whether your incentive plan warrants a closer look.
- Does the incentive plan support the company’s objectives in recruiting managers from the sales force? Career progression comes up often when we work with sales forces. Locating quality sales managers for the organization can be difficult as talented reps do not always make great managers and vice versa. Having both sales representative and manager incentive plans that are aligned with each other as well as structured to make manager promotions possible and attractive ensures you can keep strong talent in the management levels.
- Do sales managers and leadership frequently make interventions in your incentive plan? When sales leadership intervenes in a sales incentive plan, it can create the impression that an otherwise well-structured plan is in fact arbitrary, eroding much of management’s efforts to create a pay-for-performance culture. If your plan frequently requires interventions to across-the-board targets or payout rates, you may want to consider reevaluating the overall plan design. Similarly, if management has developed a culture of making spot-adjustments in response to significant customer losses that are allegedly out of the sales representatives’ control, the issue may be partially with the plan and partially cultural. Addressing frequent spot-adjustments typically requires both a plan change and a cultural change to be fully effective.
- Does everyone with a role in driving sales have some pay linked to their sales outcomes? Increasingly, it takes a team effort to deliver a successful sale. Industry segment leaders, technical sales, and implementation support all may play a significant supporting role in successfully closing and executing on a customer sale to deliver profitable revenue growth. We find when sales support roles receive incentive compensation linked more directly with their selling team’s results, they tend to perform better. It is also helpful to provide support roles with a clear prioritization framework, similar to that given to sales reps, that signals which sales are most valuable to the company. That way, supporting roles can devote their time to the most valuable sales rather than to those reps with the loudest voices or the most political clout.
Businesses are continuously challenged to prove they are making sound and well-reasoned investments. Managing a clear, consistent and timely annual incentive review process is critical to ensuring a sales incentive investment is delivering the results a business needs. To be effective, this process cannot be haphazard. Instead, by applying a consistent set of evaluation criteria each year, companies can create a quality data set that lays the foundation for making informed decisions about the incentive plan and drives improved and sustainable business growth over time.