In this five-part blog series, we discuss how to optimize the end-to-end sales planning process, including account segmentation and scoring, territory and quota, incentive compensation, sales forecasting, and deal desk. In this blog, we discuss the importance of an effective incentive compensation design.
Establishing the right incentive compensation structure is one of the largest challenges for sales leaders. Every sales manager needs to strike the right balance between recognizing top performers and incentivizing strong sales growth—all while ensuring the incentive compensation plan is fair, competitive, and profitable for the business.
With the complexity of sales commission structures, there is no single “right answer” for how to set up an incentive program for your sales team. Depending on your team’s performance, your company’s sales goals, and various other factors, sales compensation is always going to be somewhat of a moving target. But with the right incentive compensation plan, your sales team can align its compensation strategy with the overall enterprise performance management strategy.
There are a few key reasons why it’s important to find the right balance with your company’s sales commission structures and overall incentive compensation plan, which we detail below.
Top performers are the biggest drivers of revenue for your sales team, and they should be the primary focus of your incentive compensation plan. According to research detailed by Harvard Business Review, top performers respond to overachievement bonuses—so instead of implementing a quota ceiling, keep rewarding the best sales people for exceeding their quotas. One company studied by Harvard researchers saw its revenue increase by 9 percent once it did away with its quota ceiling. As the research suggests, give generous commissions for overachievement, and your highest-achieving sales people will keep selling hard, even after they’ve surpassed their quota.
Engage average performers
There’s a reason why the best sales performers tend to get the most attention from sales managers. However, it’s also important to acknowledge your average-performing sales people or “core performers.” By taking a closer look at your company’s incentive compensation design, you can devise the right combination of incentive-based commissions to reward your top sellers while also keeping your core performers engaged and stretching further to achieve their goals. Research shows that core performers tend to perform better when they are given multi-tier sales targets and respond better to non-cash gifts as prizes for sales performance.
Encourage the laggards
Lower-performing sales people are often viewed as a problem with no easy solution. No matter how much training and managerial attention they are given, it seems as though they will never achieve the same results as the top sales people on the team. However, with smart sales analytics and a well-designed incentive compensation plan, even your lowest-performing sales people can exceed expectations and contribute to the team’s revenue targets. One way to do this is by implementing quarterly sales bonuses. By having more frequent evaluations of your team’s performance, your lower-performing “laggard” sales people will have more frequent opportunities to raise their game and stay on track. The Harvard study found that removing quarterly bonuses (and keeping only the annual sales bonus) caused a 10 percent decrease in the performance of the lowest-performing sales people.
By devising complex incentive compensation plans with multiple levels and various types of bonuses—and not just rewarding your stellar sellers—you can get the best performance out of all levels of your sales team. But implementing a complex incentive compensation strategy like this isn’t an easy task—nor is it one for spreadsheets.
Want to learn more about how to improve your sales performance management with a smart incentive compensation plan? See how Anaplan can solve this challenge in our short three-minute demo.
Read our previous blogs in this series—including how to improve your territory and quota setting strategy. And check back for our fourth blog in this bi-weekly series, where we will discuss the importance of an accurate sales forecast.