Sales incentive plan design requires a lot of thought and attention to detail to be successful. It can be the difference between a motivated, highly-productive sales team and an unmotivated, disengaged workforce.
This blog post is going to give you some best practices and top tips for designing your sales incentive plan.
Top Incentive Plan Design Best Practices
There’s no one best way to design an incentive plan for your business, but following these best practices that can help you avoid the most common pitfalls and mistakes.
1. Make sure you involve all stakeholders
Far too many enterprises take a total top-down approach with their sales compensation planning, which is a mistake. Involving all the stakeholders at the start avoids misunderstandings, misalignment, and administrative bottlenecks over the year.
Far too often, sales compensation analysts and sales are left out of the conversation. If you want your incentives to increase productivity across the organization, make sure everyone involved in the process is involved in the planning.
2. Align incentives to roles
Sales has always been a relationship-driven process, however, the manner in which that relationship is formed has changed a lot.
“Start with the sales role and its responsibility in executing your organization’s go-to-market strategy. If you start with the mechanics of the comp plan, you miss the big picture and will end up misaligned.”Kyle Webster, VP Customer Ops – Forma.ai
The rise of Product-Led Growth companies and the switch to service-based software (particularly for B2B) has brought other roles into the equation too. Make sure to account for the different, often more customer-support activities that are now a critical part of the selling process for many enterprises.
3. Align incentives to goals
One benefit of bringing other stakeholders into the conversation early is that they help keep incentives aligned to overall business goals. It’s easy to get lost in the numbers when designing a sales incentive program in isolation.
Regularly check that your incentives are driving the right behavior and that the outcomes that produce align with long-term goals and strategy.
Our Top Tips for Sales Incentive Plan Design
1. Bring all the stakeholders in the comp plan together at the start
Sales compensation touches a lot of departments, so make sure you involve everyone in the conversation from the beginning. Otherwise, you’ll spend ages going back and forth to iron out a final plan.
Here’s a list of people or functions you might need to include, depending on your organization’s structure:
- Sales Operations
- Sales Compensation Analysts & Admins
- Senior Sales
- Human Resources (HR)
- External Consultants
2. Get reps involved in the conversation
The majority of sales reps believe that their incentive plan should be personalized to them. Some executives may scoff at the idea because it sounds like an impossible task for a large enterprise, but even just asking for feedback can go a long way towards helping reps feel ownership.
3. Design different incentive plans for different roles
We mentioned this one already but it’s right here again at the top of the list because it’s crucial to an effective sales compensation plan.
Different roles have different impacts on the sales process, and this will vary in each organization. Modern PLG or usage-based SaaS companies should be looking to incentivize very differently from traditional models because of the greater role that customer support has in the buying process. Technical expertise, and the ability to identify opportunities to increase value for the customer — and thereby usage — are different from a traditional “one & done” sales process.
Handpicked related content:
Many other factors to consider here, including the customer journey. Determine which roles drive the most valuable behavior at different stages of the customer journey. Ensure that incentives for sales support roles (like technicians and customer care) aren’t put in direct competition with frontline sales. If possible, consider creating hybrid teams of sales, customer success, and technical support folks who can work together to increase value for their own portfolio of customers over time.
4. Analyze your historical data for opportunities
Although we don’t know the future, the past can help us identify patterns that we can either replicate or work to avoid.
The caveat here is that you need a reasonable handle on your data management to be able to cross-section and analyze information in a meaningful way, and the bandwidth to deliver.
When analyzing historical sales data, look for points where acute or external issues have reduced sales temporarily, and identify seasonal periods of low sales. These are all opportunities to optimize for performance with tweaks to your compensable factors and SPIFs.
One major reason companies struggle to analyze their data is the tools they use. Legacy SPM software left a lot to be desired. Next-gen solutions like Forma.ai’s AI-powered sales compensation automation solution are capable of much more robust and accurate reporting.
5. Use compensable factors to create variable incentive plans
Compensable factors impact total compensation for every employee in the company, but it’s easy to overlook them when planning out the incentives. Consider factors like experience, track record, time at the company when determining how the variable portion of compensation is delivered.
Location, territory, and market saturation should still form the foundation of your plan. But the more you tailor commission structures to individual performance and potential, the more motivated and engaged your salespeople will be.
6. Ensure planned incentives will drive the right behavior
It’s easy to get lost in the numbers and forget that these are humans we’re dealing with. Humans whose livelihood depends on their earned commissions. Naturally, they will attempt to get the most out of the compensation plans, for the least amount of work.It's easy to get lost in the numbers when designing a your IC plan. Try to remember these are real people whose livelihoods depend on the plan. #sales #incentivecomp Click To Tweet
Reps will game the plan to increase their earnings; that’s business. Don’t waste time or energy policing this behavior. Instead, design a compensation plan that drives the right behavior to reach your business goal — whether that’s more leads, more revenue, or more profit.
7. Benchmark your incentive plan against the industry
Benchmarking is an important step in the incentive plan design process and part of your responsibility to be as cost-efficient as possible. But far too many approach benchmarking with the wrong mindset.
Unless you want a miserable sales team, don’t keep their quotas and commissions out of reach. Instead, determine the average sales compensation for your industry and then beat it in the most efficient way possible. You’ll get better sales and reduce turnover, leading to bigger gains in the long term.
8. Consider non-financial benefits
Not everyone is as motivated by money as others, especially lower and average sales representatives. And as much as you may want to manage them out, it’s more efficient to improve their performance. Lifting the bottom raises everyone.
Work incentives like family dinners, travel discounts, gym, health, and wellness benefits can be great add-ons to your compensation plan. Stock options and other bonus benefits can also put a cherry on top for your best performers, and may even come with tax benefits for your business.
9. Budget 3-5% of the plan for short-term sales promos
No matter how good you think this year will be, there likely be a lull or a missed target at some point. Analyzing your historical data can help identify opportunities for short-term bonuses and accelerators to close the gap during these periods.
Handpicked related content:
Even if you’re not sure what those will look like, it’s safe to assume you’ll need at least 3% of your total incentive comp budget for SPIFs. Bumping up to 5% will leave ample room to experiment and for additional SPIFs should the need arise. You can always give out a surprise end-of-year bonus if you need to use the budget.
10. Budget for fun incentives
Adding a fun or random incentive can add some excitement to your plan and can be surprisingly motivating: raffles, lucky dips, and spot prizes can be a very cost-effective way to get your sales team energized.
Fun bonuses and leadership forfeits are also a great opportunity for natural team-building activities: golf, vacation trips, cool technology, dinners, a night out for the team, etc. These work particularly well when you can have everyone involved in working towards a moonshot top-line goal.
11. Weave in some group incentive bonuses
People always work better in teams, unless the team is poorly managed. Group incentive bonuses beyond fun and token prizes can meet a lot of business goals at the same time.
Try working in team incentives or even competitions between territories, verticals, stores, etc. to drive a healthy competitive spirit that boosts sales.
Group incentives are a good opportunity to foster cross-departmental relationships and team bonding. They’re particularly useful when used in combination with SPIFs to close the gap to a target.
It’s worth mentioning that competition is something that needs to be managed to avoid HR issues, so involve all departments when planning them, as arduous as that may seem.
12. Experiment with your incentive plan levers
The fact is, you’re not going to get your incentive plan 100% right the first time. Even if by some miracle you did, the same incentives may not work next year.
Constant tweaking, experimentation, and analysis is the only way to drive ongoing success. A great incentive plan is an ever-evolving thing and even when you get it right, there’s never time to rest on your laurels for too long.
These are the most common incentive plan levers to experiment with:
- When you pay (Every time? Quarterly? At milestones? Yearly?)
- The amount you pay
- Payout thresholds
- Activity/behavior-driven elements
- How you pay (Cash, trip, points, cryptocurrency, etc.)
- Long-game behaviors and activities vs. rewarding just for transactional sales
- Payment levels or multipliers
- Segmentation by customer type, territory, product, etc.
- Point to dollar ratio
- Combinations of sales, behaviors, training, and certifications
- Team-based goals
13. Perform a compensation risk analysis
This might seem obvious but many large organizations don’t attribute the correct risk to their incentive compensation plans, even if they perform a financial risk analysis as part of their planning process.
Everyone likes to believe they don’t make mistakes but enterprise incentive management is a tricky and fickle beast.
Use historical and industry data to perform a compensation risk analysis before setting anything in stone — or better still — pay an accountant to do it for you.
14. Communicate the incentive plan clearly
Many incentive plans are so overly complex, it’s like they’re designed to be hard to communicate, which is a mistake.
If people understand the incentive plan better, they’ll likely respond to it and produce the desired results. And the better sales reps understand the plan, the less likely they are to make a commission dispute.
Handpicked related content:
Reps don’t really care how the plan works. They care about making money — and not getting cheated. Trying to hide things or prevent them from earning money doesn’t make any sense for the business either.
Use frameworks like SMART goals to help reps understand how to maximize their earning potential. Give reps access to real-time data so they can see what commissions they’re earning and what they need to do to meet their quota or reach a bonus before their next paycheck.
Give reps the information they need to go out and make more money through the incentive plan. There’s no such thing as a sales rep taking advantage of a sales compensation plan, there’s only a poorly designed plan.
A Perfect Sales Incentive Plan is Impossible
There’s no such thing as the “perfect sales compensation plan.” Motivating your employees through incentives is an ongoing, organic process that requires a great understanding of finance, math, and behavioral psychology. And a lot of trial and error too.
For larger organizations that are looking for ways to optimize and squeeze the growth they can out of a saturated market, optimizing sales compensation becomes a key growth lever.
For more tips and advice on designing your enterprise sales incentive compensation plan, request a free consultation with Justin Lane, our resident sales compensation expert.