A long time ago, businesses realized they couldn’t motivate their salespeople to sell more if they didn’t give them a little skin in the game. Thus, sales incentive compensation was born.
Sales incentive compensation is a form of variable compensation that rewards employees for meeting certain sales goals. It’s a powerful way of motivating your sales team to sell more products or services—if they sell more, they make more money.
Sales Incentive Compensation Management—the very thing we’ll be covering in this blog post—is the process by which you plan, administer and optimize incentive compensation plans to meet your corporate goals.
The Sales Incentive Compensation Management Cycle
As hinted at above, three main functions make up Sales Incentive Compensation Management.
In best-of-class cases, these functions occur within an ongoing cycle that enables organizations to make continuous improvements to their incentive plans.
Your first step in effective sales incentive compensation management is creating a compensation plan aligned with your corporate goals.
Once you’ve established your corporate goals, you must then identify the behaviors you can motivate to help you reach said goals.
Think of yourself as a conductor and your sales incentive compensation plan as your control levers. You will only get the behavior you desire if you pull the right levers.
Learn how to design a compensation plan:
In this case, your levers are commission structure, quota, territory, bonuses, benefits, and other incentives. Together, these elements make up the design of your compensation plan.
If you’re stuck at this part, check out our tips on designing a sales incentive plan.
Day-to-day administration of your incentive compensation is just as important as the design of your sales incentive compensation plan.
This process is generally owned by one of two business units—SalesOps or Finance—who each have their own priorities that inform their approach and methodology.
That said, the goal of any incentive compensation administration team is to deliver commission payments accurately and on time, make rapid plan optimizations, and support data architecture that enables automation.
Still stuck in spreadsheets?
The quality of your sales incentive compensation management software, the integrity of your processes, and the skills of your administration team will ultimately determine your ability to just that.
And before you invest in a new sales compensation software, ask yourself these three questions.
Once you’ve deployed your compensation plans and established a strong day-to-day administration process, it’s time to track and measure sales performance so you can improve upon your plan.
This process lives or dies on the accuracy and timeliness of your data, the quality of your reporting, and your team’s ability to act on the insights they get from reports. Unfortunately, few companies are equipped to optimize their plans on an ongoing basis effectively.
The most common bottlenecks occur at the software level. It usually goes something like this: an analyst requests a plan change, the administrator attempts to make the change, but either the ICM software can not configure such a change, or implementing the change will require full or partial rearchitecting of the compensation plan (which can take weeks).
Thankfully, emerging incentive compensation solutions in the space, such as our own, “Sales Compensation as a Service (SCaaS),” are built to mitigate these bottlenecks and automate sales comp plan change administration.
The Objectives of Sales Incentive Compensation Management
A good coach always emphasizes the basics. It would be best to have these as a foundation before moving on from fundamentals like practice to study guides and drills. It’s no different with sales compensation plans—they must be built around foundational objectives for any successful program.
Keep the following objectives to help you develop and maintain an effective compensation plan.
1. Boost individual salesperson performance
A good sales compensation plan will help motivate your team members and give them a sense of ownership.
The result is more motivated sellers who are confident in their abilities and have the right expectations for what they can accomplish as individuals.
When you design your plan to reinforce individual success, it creates an environment where people feel like winners every day.
2. Align individual actions with organizational goals
The drive to achieve objectives comes from a sense of achievement, which is why it’s important for compensation plans to be aligned with company aspirations.
Successful salespeople know they’re on the fast track when their incentives lead them in the same direction as organizational priorities.
When you set clear expectations and create an alignment between corporate goals and incentives, everybody wins.
3. Retain the best salespeople
A company’s best asset is the talent on its sales team. It may seem counterintuitive, but a strong compensation plan can prevent turnover by making it easier for top performers to stay with your business.
Read the full post:
The goal should always be retention — not just recruiting and hiring new people.
If you want to retain the most valuable employees, ensure your compensation plan matches or exceeds industry benchmarks. This is also one key way to that HR can help to increase sales.
The Most Common Types of Incentive Compensation Plans
There are near-infinite ways to structure a sales incentive plan, but they generally fall into one of the following categories.
This type of sales incentive compensation plan rewards employees with a percentage of their total sales once they reach their goal (e.g., 10% after each sale).
Employers and employees alike prefer this type because it incentivizes the salesperson to close higher value contracts.
This type of incentive compensation plan offers an additional bonus if the employee reaches their goal within a certain amount of time (e.g., $500 after completing ten sales in two weeks).
Curious about commission structures?
This type of plan encourages sales volume over sales value. Naturally, this type is more common in sales environments with high velocity and generally low contract value.
Hybrid plans combine quota, time, and other incentives into one plan to optimize for urgency and contract value (e.g., 5% commissions on all first 12 days’ worth of sales; then earn 1% commission every day after that).
This type of plan can be adapted to suit a range of companies, including those with high sales volume and low contract value, or where there is an established need to drive urgency (e.g., in the case of limited-time offers).
This type of compensation plan gives individual employees incentives outside of their normal commission on completed sales. For example, spiffs are short-term individual incentives given as a reward for specific actions and sales.
For a more detailed dive into commission structures and other design elements that go into compensation plan design, read this simple guide to sales commission structures.
The Types of Sales Compensation Software
Now, with a clear understanding of what goes into compensation management and the elements that make up an effective sales incentive plan, it’s time to talk about software solutions.
Sales compensation software offers businesses a streamlined and automated way to administer compensation plans, calculate commissions, and model scenarios to make informed compensation decisions.
The software also allows sales teams to track their performance and earned commissions to date. With increased transparency, best-in-class software eliminates the need for shadow accounting and motivates reps with enhanced visibility of their earning potential.
Today, sales incentive compensation software can be broken down into three main categories:
Sales Compensation as a Service (SCaaS)
Major Player: Forma.ai
SCaaS is the newest category of enterprise-level software. These systems are tailored for enterprises and output-driven to provide a complete end-to-end solution that includes full automation of calculations, plan changes, and infinite scenario planning.
Using a combination of AI and in-house expertise, SCaaS fully automates formula-building—the most burdensome process of building a compensation plan—and guarantees commission output at the contract level. A huge point of value that no other vendor can offer.
Web 2.0 Incentive Compensation Startups
A young category of products improves upon traditional formula building with user-friendly design, slick formula builders, and enhanced data integration.
Get the full list:
Although this category offers an improvement from a user standpoint, players in the space generally lack the technical ability to meet the needs of enterprise clients. They are best suited for SMBs and Mid-Market sales organizations.
Legacy Incentive Compensation Management Software
The original sales compensation software came out of the SaaS boom of the early 2000s (thanks, Salesforce). These solutions were prized in their heyday for eliminating the need for a mountain of spreadsheets (granted, you still needed some), but not all have aged gracefully.
Today, legacy solutions are known for their expensive and resource-intensive upkeep and the fact that they’re almost entirely reliant on platform experts to maintain.
Sales Compensation Has Evolved
You’ve got a lot of work to do if you want your sales team performing at their best and aligned with the most important goals of your company.
To effectively manage sales compensation and incentives, you need best-in-class software that will support these needs from start to finish in an easy way for all stakeholders involved.
We understand it can be difficult to manage all this on top of everything else in an already hectic role, which is why we created a guide to help you choose the right sales compensation software for your organization.