"Everything should be made as simple as possible," Albert Einstein once said, "and not one bit simpler." This may be a universal maxim, but Einstein could easily have been talking about sales incentive plans.
Sales incentive compensation plans need to be simple enough so salespeople understand exactly how their performance correlates with pay. Overly complex plans that make it difficult for administrators to calculate payouts—and for salespeople to understand their payout structure—will result in wasted money and frustrated, less productive salespeople.
According to the 2009 Incentive Practices Research study, a multi-industry survey conducted by ZS Associates, sales compensation managers named incentive plan complexity the second most important incentive issue (right behind quota setting, a perennial winner).
Frustrated with complicated plans that are difficult to explain, impossible for reps to understand, and challenging for sales operations to administer, managers are looking for strategies to develop more comprehensible and effective incentive plans—ones driving the right behaviors and delivering results.
Before delving into the solutions, however, it's important to understand just how sales incentive plans can grow overly complex both at their conception and over time. There are four primary factors driving this complexity:
1. Lack of guiding principles in plan design creation.
2. Too many "chefs" creating or influencing the incentive plan.
3. A "vending machine culture" in the sales organization, whereby the company believes that if you want to encourage a certain behavior, it has to be paid for in incentives
4. "Tweaking" of the incentive plan over time, often to meet short-term needs.
The most common reason for plan complexity is "tweaking." At their conception, plans are often reasonably simple and easy to understand. Over time, however, the plan is tweaked in response to short-term problems. For example, if product A is not hitting the goal, the plan might be changed to put more weight on product A. If the upside on product B is so rich that they can afford to ignore product A, the upside opportunity for product B may be linked to product A's performance.
Another example is if someone in management notices inconsistent performance and mandates the incentive plan be changed to reward consistent performance. Finally, someone wants "balanced selling" or cross-selling, and the plan is tweaked yet again.
Individually, none of these changes is likely to have a significant effect on the plan. But the aggregation of these changes over a few years often results in a compensation plan that is unrecognizably complex.
Another reason for plan complexity is the fact most companies have many different functional areas represented in the plan design area—including marketing, sales, HR, finance and sales operations—and these groups have different (and sometimes conflicting) priorities.
For instance, each brand team within marketing may want their product as its own component, as they are allocated a portion of the cost of the sales force. Finance may want to pay on gross margin, include a component based on maximizing average selling price (ASP), improve the pay for performance relationship, or lower the overall cost of the plan.
These competing interests make it difficult to create a cohesive and simple plan that maximizes sales force motivation and boosts profitability.
One of the primary ways to bring some much-needed clarity and objectivity to incentive plan design and upkeep is to instate a strategic process, as well as a design team that can systemically evaluate all competing interests and requests against a clear set of guiding principles.
Best-in-class companies use a set (anywhere from eight to 12) of guiding principles that help guide their incentive plan design process. These principles often include simplicity in design, a maximum number of metrics, and upside earning opportunities for top performers.
Without these principles, the design process can be unorganized and dominated by influential people with the loudest voices…but not the best ideas.
After establishing the guiding principles, companies should then begin to develop several plan options that meet all or most of the principles. As the plans are presented to the design group, they should begin with the simplest plan possible that achieves the majority of the guiding principles.
As more complex plans are developed, the group should continually ask itself if the incremental business results generated by the additional complexity more than offset the downside of the increased complexity. This rigorous process will force the design group to add complexity to the plan only when they can make a business case for it.
Once the plan is designed and in the field, companies should establish a compensation committee to govern the plan and approve tweaks. Each change to the plan should be evaluated against the guiding principles and considered for its long-term impact on the sales incentive plan.
Technology, overlay sales forces, and increasingly complex products make the sales job more complex today than ever before. Companies can't afford to add to the complexity and frustration by implementing a compensation plan salespeople don't understand.
By adopting a strategic, thorough incentive plan design process, companies can create a comprehensible sales incentive plan that will ensure a high level of sales force motivation.
Chad Albrecht is a principal and a sales compensation practice leader with ZS Associates, a global management consulting firm specializing in sales and marketing consulting, capability building, and outsourcing. He can be reached at firstname.lastname@example.org.