Sales force compensation is the most widely used mechanism to control sales behavior. It is an effective tool for guiding the sales force when the targets are accurately matched to the company goals. However, whether variable incentives increase sales performance heavily depends on their complexity. Salespeople should not need a spreadsheet to calculate their earnings.
The chart below shows key findings from a survey of 180 U.S. B2B sales representatives conducted by Simon-Kucher & Partners in cooperation with the University of St. Gallen, the Ruhr University Bochum in Germany.
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Incentive plansare important… |
…but have significant potential for improvement |
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3 times more investment in incentive systems than in advertising 73% think that incentive systems control and motivate sales force behavior 73.3% believe that incentive systems support goal achievement |
28.6% wish incentive systems were simpler 43.4% do not reach 90% of their sales targets 50% of the incentive systems include five or more variables 76.6% adapt the incentive system at least once a year |
When designing sales incentive programs, companies are caught between deciding how many variables sufficiently and precisely reflect the company goals and how many variables are too many for the sales force to cope with. The question is not easy: 76.6 percent of sales companies adapt their incentive program at least once a year.
Frequently, incentive programs fail because they are too complex. An incentive program that forces the salesperson to assess — “To get this, I first have to sell this, plus these and not these” — creates a recipe for confusion, sales frustration and failure to achieve the sales targets. The sales force is simply not willing or able to invest the time and effort to understand and act upon excessively complex incentives.
When is an incentive program too complex? Here are three recommendations for successful sales incentive programs:
1. Narrow your company goals to three variable incentives.
Salespeople are able to cope with four variables in their incentive program. If they need to navigate through more, their motivation drops and they reduce their effort level. They know they cannot fulfill their targets anyway, so why should they even bother to try? Four variables are enough to see a drop in target achievement.
Sales performance, thus, peaks when the incentive program includes only three variable incentives. Yes, it’s difficult to combine the essence of the company goals in three variables and requires a significant time investment to create. Half of all companies use five or more indicators and 78 percent of sales managers believe their company’s incentive system is easy to understand.
2. Avoid conflicting, ambiguous and subjective targets.
Incentive program complexity is not only about the number of variables. Also important is how well each variable can be evaluated and estimated by the sales force. For example, evaluating customer satisfaction is much more ambiguous and demanding than reading the revenue in a sales situation. Calculating a percentage of product innovation sales is easier than vaguely estimating if the sales manager believes that you improved your sales skills. Ambiguous and subjective targets, thus, also contribute to the complexity of the incentive program because they require more effort to translate into practice. Do not make your sales force work towards a target that they cannot easily identify in a sales situation.
3. Facilitate your salespeople’s intrinsic motivation.
Money is not everything. The study reveals that although the least-complex variable incentive plan depended 100 percent on revenue, the sales force still mainly focused on profit. Sales people have an intrinsic motivation to work toward what is best for the company and the customer. However, this intrinsic motivation can be undermined by an excessive focus on financial rewards. If the incentive system becomes too complex, the sales force turns to the simplest and most impactful quotas (e.g. revenue) and disregards the remaining targets and company goals (e.g. customer satisfaction and margin).
To facilitate intrinsic motivation, simple incentive programs should be paired with transformational leadership behavior. If your employees feel empowered, responsible and trusted, they are more likely to identify with the company and are intrinsically motivated to reach the company goals.
Based in Simon-Kucher & Partner’s Atlanta office, Brad Soper specializes in sales force transformation and pricing excellence in the B2B sector. His areas of expertise include sales force effectiveness, go-to-market strategies, customer segmentation, pricing strategies and value-based discounting.
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