The Future of Sales Compensation: Individual Incentives?
Salespeople are a unique bunch. It is an exceptionally diverse profession, with individuals from all backgrounds and experiences.
It takes all types, as they say. And we can all agree that our motivations are unique; What motivates me may be completely different from what motivates you. Yet we still incentivize our salespeople — all from wildly different backgrounds, demographics, experience, and responsibilities — in the same way.
Why? Mainly because it’s easier that way. Sales compensation is already a complicated and resource-intensive operation without adding the complexity of individualization. So, the main element of individual choice in sales comp plans is: If you don’t like these incentives, you can always find another employer with a comp plan you do like.
But what if creating highly personalized incentive plans wasn’t as complicated as we think it is?
What if this is something we can begin to experiment with and integrate today — would you do it?
What makes individualizing incentive plans challenging?
There are two major obstacles to creating truly individualized compensation plans: Operational capability and Equity.
Sales compensation is already a challenging business process to manage. Most legacy Incentive Compensation Management (ICM) solutions are limited in scope and built to manage static incentive programs.
Yes, it is theoretically possible to create a custom plan for each sales rep. In theory, it would even be possible to create automation that calculates most of those plans. It would very be expensive and time-consuming to program all those plans using most existing ICM software. And it would be almost impossible to manage those plans day to day, let alone forecast their outcomes or measure their impact on performance. Not to mention that any time an adjustment or override is required (which is frequently), it would take significant additional resources to make and test each change without disrupting the wider comp program.
Small businesses could execute individualized comp plans much easier than larger businesses. But large organizations with hundreds or thousands of sales reps already struggle to administer and report on the plans they have now (which can number in the hundreds). And many of them are uncertain of the impact their current incentives have on revenue generation, making it very difficult to justify the cost of building and administering thousands of unique plans.
Equity & Fairness
The other challenge with individualized incentive plans is the equity and perceived equity of the plans themselves.
It is already a challenge to demonstrate that each sales compensation plan has a fair and equal opportunity to earn. As it stands, many organizations create plans with balanced targets but fail to assess the real opportunity that lies in a territory or region. We’ve also found that tenured reps tend to have either softer targets or fatter accounts on their books.
Even if it were possible to create equitable individualized plans that both HR and the legal team can approve, the actual perception of those plans presents another real risk to performance and contentment within the sales team.
Personalizing compensation plans involves giving sales reps a choice, either through 1:1 consultation or selecting from a basket of options. This creates several issues. For one, it can result in reps second-guessing — and later regretting — their choices, a form of buyer’s remorse. Some reps will take on more risk than other reps simply because of their personality. They should be rewarded more for sharing more risk with the company, but this could quickly result in a situation where reps who are taking on more risk are getting paid less than those who settled for less due to luck or differences in sales cycles.Interesting perspective on how to bring individualized incentives into your sales compensation program Click To Tweet
Taking Steps Towards Individualization
We are not suggesting that you rewrite your compensation plan from its current one-size-fits-all to uniquely individualized comp plans next week, or even next year.
Major changes like this are made through incremental innovation and improvement, so instead, how do we take the next step toward that improvement?
1. Start by gathering data
Gather data on your sellers and your customers. If you can get a better understanding of your customer’s buying behavior, you can customize nudges to your salespeople that are unique to them, their territory and their target accounts. The more you know about your customers and their decision-making, the more specific and potent those nudges can become.
2. Test out on small groups
Test out a selection of incentive plans for reps to choose from. Decide which parameters you offer flexibility on — start with base vs. variable if you’re not sure. You could also try offering flexibility on how the variable element is delivered as some sales reps will value time-off or family-orientated rewards, while others may only be motivated by cash.
Segment your reps into groups, as you would segment your customers based on what incentivizes them the most, so you can analyze the performance of each group later. This will help you identify how different personalities view risk and reward, respond to different incentives, and navigate behavioral challenges like buyer’s remorse or the “hot hands” fallacy.
3. Individualize smaller elements or components
Rather than reworking a core element of the plan like pay mix, start on a smaller scale with individualized SPIFs. These offer the same opportunity to personalize “earning potential” and incentives but with far less risk and greater flexibility to try out new rewards without disconcerting the sales team. Short-term sales incentives are also more controllable, with less commitment and no risk of getting stuck with the changes.
4. Find the right tools
A significant obstacle — if not the obstacle to individualize incentive plans is the administrative burden it presents. Traditional ICM solutions are not built to handle the level of complexity and highly custom, flexible reporting required to manage individualized comp. Most struggle to handle the current complexity of sales compensation plans. Look for a solution that can adapt quickly to changes and allows for fast and flexible customizable reporting.
5. Explore the human capital and legal risks
Creating an individualized incentive program is a significant organizational change. Engage your counterparts in HR and Legal from the start and lean on their expertise to anticipate any issues with the plans and ensure that your individualized plans steer towards more equity, not away from it.
6. Model the financial risks
Don’t forget your friends in finance. Engage them early and provide the data and resources to help them model and identify the risks and benefits of individualizing plans. This is unknown territory, with a lot of undefined risks, so it is essential to ensure those risks are identified and managed as early as possible in the process. Running small-scale and short-term promos to provide real-world data for your models will go a long way to proving the cost-benefits of individualization.
7. Monitor it continuously
The key to a high-performance incentive program is continuous monitoring. Not annual reviews. Not using lagging data. Real-time, multi-faceted analysis of the performance of individual incentives and reps will help you rapidly iterate and improve your program.
Continuous monitoring is even more important when embarking on experiments like individualization because of the direct impact on revenue and the performance of your revenue-generation team. We must be able to identify and adjust quickly if novel incentives turn out to produce suboptimal or unexpected outcomes.
Look out for:
- Are the plans driving the expected and desired behavior? (via rep activity monitoring)
- Are you getting more or fewer complaints or disputes?
- Are reps hitting quotas within the typical standard deviations before the change?
- Have the changes impacted pipeline numbers or transaction velocity?
- Are you receiving more positive or negative feedback from customers?
- How did the plan impact rep retention/turnover and employee NPS scores?
Stick to Your Strategic Guns
Notice that nowhere did we suggest changing the core of your compensation plan or strategic objectives. Don’t compromise on those for the sake of individualization — its benefits are yet to be proven. Your strategic objectives still hold.
What best incentivizes your team to accomplish those goals will vary depending on the individuals, so it is well worth exploring ways to optimize that. The key to doing that will be investing in technology with the agility and sophistication to manage and analyze performance data on-demand, A/B test incentives, and run models based on real-time data.
To see the technology making individualization incentives possible — Forma.ai — book a demo here.