Designing a Sales Incentive Plan That Actually Drives Growth

All sales teams strive for improved performance, but not all incentive plans can facilitate it.

In a growing company, management typically determines sales target numbers, calculates commissions, and hopes for improved sales performance. However, a sales incentive plan cannot simply be seen as a calculation. The salespeople focus on certain aspects depending on it.

It is for this reason that incentive design must not be viewed merely as a financial problem.

The Foundations of Effective  Sales Incentive Plan Design

Before we discuss commission percentages, accelerators, quotas, or SPIFFs, let us start by laying the groundwork.

A proper incentives program must be able to answer the following simple question: “What are we motivating our salespeople to do?”

In case the answer is just to “sell more,” the program itself is too vague. In a fast-growing enterprise, selling more can cover different activities, such as getting new clients, improving deal quality, raising the average sales price, minimizing discounts, expanding the client base, enhancing collections, or selling strategic products.

This is the reason why a proper incentive plan development must begin with clarification.

Alignment With Business Strategy

The most effective incentive plans are aligned with business objectives.

When the organization is looking for more enterprise customers, the incentive plan will reward enterprises’ wins. When the business strategy revolves around profitable growth, the incentive plan will value margin or discount discipline. When the organization seeks better retention, the incentive plan must consider customer success or renewal performance.

The common error is to expect salespeople to pursue one strategy, and yet use an incentive plan that motivates them towards another objective. For instance, when management says, “Our objective is to have more loyal customers,” but the sales incentive plan only focuses on bookings, then the sales team will go after bookings even though they will not be as profitable as expected.

Simplicity

A sales incentive scheme must be simple enough for a salesperson to describe without having to open up a spreadsheet.

This is not to say that the scheme cannot be sophisticated. Sales in an enterprise environment can become complicated. But the logic behind the scheme must make sense.

Fairness Between Roles

Fairness doesn’t mean that everybody receives the same system of incentives. Instead, fairness means every single role being evaluated according to how much influence it is capable of having.

It would be wrong to pay an SDR in the way one pays an Account Executive. Likewise, it would be wrong to evaluate a Customer Success Manager only according to his ability to generate revenues, when retention and expansion is actually their true responsibility.

Effective incentives recognize the differences between roles and reward people for their influence.

Transparency

Employees shouldn’t have to wonder till the month’s or quarter’s end how much money they made. They should have clear insight into their goals, achievements, eligibility for incentives, calculation process, and the income they are going to get.

Here is where many firms fail. The incentives scheme works fine, while transparency doesn’t work. Employees have to ask their manager, go through spreadsheets, or wait for the finance department reports in order to know their incentives. By that time, the performance period had already ended.

Transparency isn’t only about pay. This is about performance.

What Good Incentive Plans Optimize For

A sales incentive plan is not just about driving revenue. Revenue is important, but it is not all that will ensure healthy growth.

Below are the things I think an effective incentive plan should focus on.

Desired Sales Behaviors

Rewarding only successful deals will encourage poor deal flow, discovery skills, follow-up practices, CRM management, and customer fit management. Rewarding only high deal volume will encourage poor deal flow. Rewarding only short-term goals will encourage poor long-term sales relationships.

A good plan will identify those sales behaviors that need to be driven. These could include sales of new customers, strategic products, renewals, upgrades, proper handoffs, efficient collections, and appropriate discounting.

Time to Revenue

A proper incentive program motivates action. This means quicker follow-ups in prospecting, proposals, closing deals, transition into onboarding, and payment receipt.

However, quick action shouldn’t equate to careless sales practices. The program should foster faster action without harming the quality of deals, fit for the customer, and the bottom line.

Cross-selling & Upselling

Companies often invest vast resources in acquiring new clients but fail to fully capitalize on growing existing accounts.

Incentives can provide a helping hand here. If the organization expects account managers or customer success managers to facilitate expansion, the program must incentivize cross-selling, upselling, renewal deals, and product adoption.

For more mature organizations, growth through expansion revenue can be one of the cleanest ways to grow because of the established relationship. However, staff members will focus on this strategy if it benefits them.

Funnel Efficiency

A sales incentive program must incentivize the desired behavior throughout the funnel. For instance, SDRs may be incentivized for qualified meetings, but if they fail to convert, the program will be ineffective. Similarly, AE incentives may be based on closings, but neglecting the creation of the funnel can affect future performance adversely.

Good programs will have an emphasis on the proper funnel alignment, rewarding quality activities over quantity.

Customer Lifetime Value

If a client leaves after a brief period, takes a while to pay, requires excessive support, fails to upgrade their account, and does not renew, then their lifetime value is lower than expected.

Thus, businesses must have an incentive program that incorporates considerations related to the quality of the customer, rather than just the booking value. The goal here is not to make everyone liable for the lifetime value of a client, but to set up guardrails against churn, collections, discounts, customer fit, and renewals.

Predictable earnings

Sales personnel should be motivated, not confused or worried about earning money.

The right scheme provides salespeople with sufficient rewards that will keep them motivated without being too unpredictable. When sales earnings are predictable and prompt, it increases their motivation.

Predictability of earnings does not imply earning high amounts of money. It implies visibility of the results of their work.

Structure of an Effective  Sales Incentive Plan

Now that the basics have been established, let’s focus on the program’s structure.

A typical effective sales incentive program will consist of several key components. Every component needs to be well thought out since even a single poorly designed element may skew behavior.

Roles & Responsibilities

First, there must be an understanding of roles and responsibilities.

Before designing incentives, I make sure the roles within the organization have been clearly established. Who drives leads? Who qualifies leads? Who closes deals? Who manages renewals? Who drives expansion? Who collects receivables? Who drives distributor/channel performance?

Without clarity on roles, there is chaos in incentive design. People may get compensated for activities that they do not completely control, or they miss out on compensation for activities that they control.

Pay Mix

Pay mix is defined as the proportion of fixed salary and variable compensation.

If one has more direct influence on closure, one gets more variable pay. For those whose responsibilities require less involvement in closure, there would likely be fewer portions allocated towards the variable pay. Field sales position, enterprise sales position, inside sales position, and customer success position do not need to have an identical pay mix.

According to WorldatWork’s findings from their research on sales compensation, sales compensation programs are implemented precisely because they serve the purpose of motivating sales employees towards achieving their objectives, and this is why the proportion of pay mix cannot be generic.

Quota Design Strategy

Quota design is when incentive design meets reality.

The quota set should challenge while remaining achievable. Setting quotas that are too low will mean overpayment for average performance, and unrealistic ones will make people feel the program is not achievable anymore.

Many elements should go into a proper quota design, such as territory potential, past performance, market maturity, product portfolio, sales cycle, number of leads, and account size, among others.

Commission Rates

The commission rates determine how much the salesperson will be compensated based on his/her success at achieving certain milestones.

A commission rate needs to be effective but realistic. Besides, it needs to be proportional to the value of the sale that has been made. Depending on its margin, one product may warrant a higher or lower commission rate compared to another. Strategically significant products may deserve a higher incentive weight.

The commissions should not be arbitrary. They need to take into account business priorities, profitability, and effort on the part of the seller.

Accelerators and Decelerators

Accelerators serve as an extra compensation when the performance exceeds initial expectations. Decelerators help to limit the payment in case performance falls short.

For instance, a salesperson may get a commission of a certain amount until the quota is achieved, and then he/she would get a higher commission rate above the quota level. As such, top-performing people get the motivation to keep improving their results even after meeting their targets.

Decelerators have their advantages, too, although they need to be used with caution. If they are excessively stringent, the sellers risk becoming demotivated earlier than necessary.

Multi-Rate Tiers

Using multi-rate tiers may be beneficial when you wish to motivate your sellers in different ways depending on their achievements.

Example:

0-50% of quota: minimal incentive

50-100% of quota: standard incentive

100-125% of quota: enhanced incentive

Above 125%: special incentive

The scheme gives momentum to your incentive program. This makes it easier for salespeople to understand why it pays off to work harder than average.

Cap vs. No Cap

Having caps may help in maintaining a budget, but they can also restrict ambitions. If sellers know that their earnings will not increase regardless of their further success, they will stop striving when they reach a certain threshold. Conversely, uncapped programs can easily turn into costly schemes due to ineffective quota setting and deals’ unprofitability.

Personally, I tend to prefer uncapped or lightly controlled upsides with rigorous management of margins, discounts, collections, and deal quality.

Draws: Recoverable and Non-Recoverable

The draws are helpful in cases where the sales personnel require some financial assistance prior to receiving any commission payment.

Recoverable draws are prepaid commissions. Non-recoverable draws provide assured variable income for a particular period of time.

Draws play a crucial role in the case of new recruitment, longer sales cycle, or entry into the market. However, the draws must be time-bound and well-explained in order to avoid any complications.

SPIFFs and Short-Term Incentive Plans

Short-term incentive plans or SPIFFs refer to those incentives that help generate immediate attention.

SPIFFs prove very effective for various marketing campaigns, product promotions, seasonal goals, and pipeline management. Nevertheless, the SPIFFs cannot be considered as substitutes for a poor core incentive plan.

If used repeatedly, the SPIFFs will result in the diversion of attention from the primary incentive plan and, hence, must be short-lived and focused.

How to Design Incentives That Drive the Right Behavior

That’s where the design of an effective incentive system becomes crucial.

It must go beyond rewarding the output alone. Rewarding based solely on revenue will encourage sales teams to sell more at high discounts and low customer margins, while rewarding based purely on activity will encourage them to chase volume over value.

A good incentive design must find the balance between output and input. Revenue-based incentives, for example, could be combined with profitability targets, collection practices, customer acquisition criteria, and renewal efficiency, among other things.

Moreover, it should be designed to be straightforward. Using too many measures will overwhelm sellers and take away from the clarity of their priorities. It should contain one major measure of seller performance, some minor measures, and clear guidelines on how payouts will be made.

Above all, salespeople must be capable of monitoring their performance throughout the quarter. Otherwise, it’s too late to influence behaviors when the quarter ends.

Common Pitfalls in Incentive Plan Design and How to Avoid Them

Creating overly complex plans:

Sellers must know how they will get paid, or else the plan will fail. The program design should be easy to understand, featuring metrics, pay, and eligibility guidelines.

Discrepancies between the program objectives and the overall business strategy:

For example, if the business objective is a profit-driven strategy, yet the sellers’ commissions reward only revenue growth, the company can find itself facing many challenges down the road.

Inappropriate quotas:

Excessively high or inconsistent quota levels will negatively affect motivation. Quotas should be challenging enough to be effective while also accounting for territory potential and other factors.

The delayed communication of salespeople’s performance and commission payments:

If the team members do not know about the results until the end of the period, there is no way for incentives to work effectively. Real-time information should be available.

Ignores any unintended behavior:

When there is poor planning, there may be discounts, sandbagging, poor agreements, and quick selling. Check for loopholes in the plan before implementing it.

Changing the plan too often:

Frequent changes create confusion and reduce confidence. Review the plan regularly, but make changes in a structured and predictable way. 

How to Assess and Improve Your Sales Incentives Program

A sales incentive program cannot just be implemented once and left untouched. With changing market dynamics, products, goals, and even the sales team, the sales incentive program will also need an update.

The most effective way of assessing its performance is by asking straightforward questions: Are the high-performers making more money? Are their earnings tied to profitable business? Are the quotas realistic? Can they easily comprehend and manage the sales incentives?

In case the sales incentives program does not yield the desired outcomes, it can be modified, but in a systematic manner. Changes to the sales incentive program should occur infrequently and should not disrupt the sales team.

Conclusion

The right design of a sales incentive plan will go beyond making decisions about payouts; it will provide sales personnel with insight into what to target and how to perform better to deliver the desired results.

With the increasing number of sales teams, sales territories, product categories, and job responsibilities, incentive management becomes increasingly difficult without automation support.

It is here where the role of JOP EDGE comes into play to automate and improve sales performance, incentive management, and tracking.