Thoughts For Incentives
Incentives are one of the greatest challenges most sales
organizations face. While many start with the age old adage that
"incentives drive behavior", they still find it difficult achieving a
plan that drives business.
One of the core challenges is that many organizations do not clearly define the behavior that they are truly trying to drive. While it is easy enough to say you want your incentive plan to drive sales, sales are not a behavior, they are an outcome. An outcome is a set of actions and client interactions that lead to a sale. Successful organizations have a clearly defined sales process that helps them in mapping out the actions that reps have to follow to be successful. Their goal is to have a process that lays out the steps for their reps and clients to have a value add relationship.
Their ultimate goal is not so much the sale, but having a road map that will allow their reps to consistently repeat the steps with each client that will lead to a transaction. If they have this map, they can use it when one of their reps seems lost, (declining sales, lack of prospects, etc.). They can also use to evaluate new candidates and ramp up their new reps by giving them a step by step map for the actions that will drive on going success.
Many of these organizations reward not just the outcome but the successful implementation of the process. After all, if you can follow a structured plan, reinforce it with skills and talents; the outcome is more likely than in an environment where you seemingly have to make it up each time you set out with a new prospect.
To achieve this, incentives may take on two additional forms to the traditional commission payment. First, some actually incent specific actions being taken. For example, in a high volume transaction based sales force, where prospecting for new names is key to achieving numbers, you can reward people for actually prospecting and pursuing new clients rather than relying on existing clients or marketing generated leads. While it is not advisable to pay for the act of prospecting, you can take advantage of methods such as scorecards, KPI, or MBO.
Second way is through investing in your staff, not just through skills development and training, but systems and tools to assure their success. What you may notice is that your best sales people respond to training most. As part of the manager's coaching activity she can define those areas that will support the process and drive sales, and invest in training to directly impact those areas. When you bring on new systems, say a CRM, don't just train them on features and functionality of the system, but also on what is in it for them when they use the system. Often tools are not used not because they are difficult, but there was no connection made to the direct benefit the rep will get from using it. Said another way how it helps them more sales in less time with less effort.
With both the above examples communication is key, not only as to why things are taking place, but the direct impact on their ability to earn tangible rewards.
Another effective means of mutual benefit from incentives is focusing on margins, while has been a standard in some industries, it is new to others. More and more companies I work with are paying commissions based on a percentage of margins rather than gross revenues from a sale. The advantages for the company are clear, and they can be for the rep too when done right. Where it has been successful, companies introduced it as a means of involving the rep in the health of the business, and getting them to accept greater responsibility and accountability for their actions. Of course greater responsibility and accountability goes hand in hand with greater autonomy to make decisions that impact the outcome. While many companies talk about "empowering" their sales reps, this provides an opportunity to put some teeth in to the mantra. Since the amount of commissions earned will be a direct result of the margins, give the rep greater flexibility in pricing. Shift their view from discounting and going straight to price in a sale to developing value. The better job they do in leading with value and validating the price, the more commission they will earn.
To ensure success, some companies are adding a couple of elements to the mix. Some pay a higher scale for higher margins. So if at list there would be 25% margin, and the average sale is fetching 15% margin, they add more incentive for sales coming in at 21% margin or higher, where a bulk of the gain above 17.5% goes to the rep, allowing him to more directly benefit, and more importantly driving the behavior that consistently results in higher margins.
Another way companies are ensuring long term relationships with their best reps and clients is to also measure reps on over-all territory margin in addition to sale by sale margins. This again empowers the rep to decide which client he may want to sell at a lower margin this time in order to secure an otherwise profitable long relationship. If the rep feels he can manage his territory and make up for the margin elsewhere, and is showing good judgment, both you and he benefit from taking a holistic view.
While margins are one aspect, another is pay back period. Many companies understand that it may take over a year before a relationship with a client begins to show returns. Most reps are ready to talk to the client about the ROI of their product, using any number of models to prove their products value. Often however, the same reps do not calculate the ROI for their own company, the pay-back period for that client, which often extends to 18 months plus. Many companies have a claw-back policy; this has a number of negative effects. Least of them is the cost of maintaining the plan, there costs associated with tracking, applying and administering the process. There is also the negative sense it leaves the reps with. Many of them feel that they have done the work when they sold the client, and that they are not directly responsible for the loss, especially if they can point to pricing issues with a competitor under cutting you to win the business.
Over the long term there are those who question if clawing back really delivers results or shapes behavior. Most reps work the incentive plan and find ways to deal with this issue, not always to the benefit of the company. They build in allowance for churn and manipulate timing, etc.
Some have turned to a more inclusive and positive means of addressing the balance between motivating reps and attaining strong ongoing business. Some split the potential incentive between growth of revenue in the territory and commissions paid for new revenue stream. This works in some cases, but runs into trouble in a mature market where the number of customers is not growing at the rate high enough to satisfy corporate growth. Market growing at 5% a year and the company is looking to achieve 8% growth. Add a strong competitor, and the pressures of market share, and you run the risk of encouraging discounting and reliance on commissions as reps work the plan and focus on new sales to out pace loss of revenue in their territory. Resulting in discounting, no growth in revenues and increasing payouts; how many of you paid more in incentives last year, but lost revenue?
Another alternative spreads the incentive over the life of the relationship. After all you don't receive all the benefit in year one, why pay out the cost of the revenue streams all at once? In all other aspects of the business you accrue to match related revenues to expenses why not here. It is not a cap; the rep will earn full incentive as long as the company realizes full benefit. In fact, done right, as long as the client continues to perform for you as a customer, the rep will continue to receive incentive. After all, a new customer is much like an annuity that will pay-out over a period of time, why not have a reciprocal incentive plan that works in reverse. It's amazing how the reps take a different view of the client and ongoing relationship.