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How to Structure Sales Incentives That Actually Work

02 June 2021

How do you create enough of an incentive for your sales staff, to ensure you are always adding to the value of the business, as well as rewarding them for good performance? This week I wanted to outline a couple of frameworks you can use as a basis for your incentive structure and start to implement a strategy to improve business performance as a whole.

If you haven’t read our article on how to ensure you are hiring the best salespeople, this is the perfect follow-up to that topic, so you can catch up on that article below:

ReadKey Characteristics of a Sales Superstar

Financial Incentives

There are two factors you should consider here; ‘pay level’ and ‘pay mix’:

Pay Level

  • Ensuring the team is being compensated at the levels attractive compared to the industry
  • Focuses on retaining key talent and limiting shareholder costs

Pay Mix

  • Providing a total compensation with a healthy mix of incentive and base pay
  • Focuses on providing an incentive to perform and increase business value

Pay Scale vs Talent

It is hard to disregard your personal feelings on whether or not you have to pay big to get more talented employees. The best thing to do is to consult studies that have been done in this area and, luckily, we have done that for you!

One study looked at a scenario in which the same job was advertised at two different levels. Firstly at a low-mid level position and secondly with a 6 figure salary. What was found was that the applicants for the lower paid job were in the hundreds, whereas for the higher paid job, there were only a small number of people that applied.

This is interesting because it could tell you more about how people think about the role, rather than the talent of the people applying, suggesting these two factors may not be connected as closely as you might expect.

As an SME, you should be aiming to find someone who is performing in the top quartile of the industry. Realistically you shouldn’t necessarily be looking to bring in an industry-leading candidate.

An incentive framework can come into play to make your offering much more attractive, whilst keeping base pay reasonable.

Incentive Framework 1

Base Pay + Base Target + x% of overachievement of Target

The first framework we have for designing an incentive is to link it to business performance. So the easiest way to do this is often to link it to gross profit. You could also have a target based on revenue alongside gross margin but what you want to avoid is having a purely revenue-based target, as you could come across a scenario where loss-making sales are being made, just to make up the revenue target.

The key thing here is that you have a base salary as well as a base target, which acts as a cut-off. They have to meet that to get any of their incentive pay. This essentially sends the message that if the business doesn’t meet targets then you won’t get paid any extra but if it does then everyone wins. There is no cap on incentive too, so overachievement is also rewarded accordingly.

Something you must be sure you are doing here is to review the targets if staff are consistently achieving or underachieving. If a target is always being missed, either the target is wrong or the people are wrong. As the first point of call, you should look at the system and determine whether that is not working well enough. Targets should be a slight stretch but not unobtainable. If a target is too easy then it just means that it only acts as a demotivation if it is not achieved.

Incentive Framework 2

Where an employee’s performance is based on less financial-based KPIs, you need an incentive that allows you to measure performance as well as reward performance based on a set figure.

One way to do this is to set scores for each KPI so that when you look at their achievement overall, you can judge it based on what percentage of their objectives were met.

Example:

<50%                   =          No incentive

50% – 75%       =          50% of incentive

75% – 90%       =          75% of incentive

>90%                   =          100% of incentive

 

By setting the incentive like this, you are changing the conversation to focus more on what KPIs were met, rather than how much you are paying them. You don’t want to be speaking about bonuses in your appraisal meetings, you want to be speaking about whether or not their objectives have been met.

Team performance

Sometimes the goal of incentives is to create a bit of competition but, on the whole, you need your team to work well as a unit. That means everyone pulling their own weight and contributing. The culture you should be aiming to nurture should mean that when a single person is underperforming, you ideally want the other members of the team to recognise that their performance is pulling the team down and point out the weak link to you. In a manner of speaking, this puts the pressure back onto you, as the business leader, to get the hiring process right the first time around.

The aim is always to ensure that when the business does well, that is when the staff benefit. For different roles in the business, you could be looking at reviewing their KPIs at different frequencies. For example, for salespeople, it is usually good to review regularly, on a monthly basis but for non-sales based roles you could opt to review on an annual basis, only touching base and discussing progress with them on a quarterly basis. Find a system that works for you and your team in order to get this balance right.

Ultimately, you want a team of motivated superstars. In order to ensure this, you need to make sure that there is a healthy, achievable incentive for your sales staff to reach for and to keep pushing themselves and the business forward.

I hope this article helped give you an idea of how you can start to form an incentive structure in your business and how that can then propel you onwards and upwards as one.

If you would like further details on this or any other aspect, please feel free to get in touch, we’d love to hear from you.

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