What Should Your Sales Incentive Plan Actually Reward?

Ask ten executives what their sales incentive plan is designed to accomplish and you’ll likely hear ten different answers. You’ll hear everything from “increase revenue” to “bring in new customers” or “sell higher-margin products.” These answers aren’t wrong. But many incentive plans attempt to reward all of them equally.

Rather than throwing mud at the wall and hoping something sticks, an effective sales incentive plan needs to begin with one simple question:

What business behavior do we want to encourage?

Revenue isn’t always the best measure

Many organizations reward salespeople almost exclusively on revenue. It is easy to measure and easy to explain. Unfortunately, it can also produce unintended consequences.

Salespeople may discount prices so they can close more deals before month-end. They may pursue large but low-profit opportunities while ignoring smaller, more profitable business. Existing customers may receive unnecessary discounts because their sales rep is focused only on increasing sales volume.

Revenue should rarely be the only performance measure.

And what about profitability?

Suppose one salesperson generates $5 million in sales with a 12% profit margin while another generates $4.5 million at a 25% margin. Who actually contributed more to the company’s success?

Many executives would correctly choose the second salesperson, yet many compensation plans would provide a higher incentive to the first.

If profitable growth is part of your strategy, your incentive plan should recognize and prioritize it.

New business versus existing

Some companies desperately need new customers, while others depend heavily on expanding relationships with existing clients. These are very different business objectives.

If acquiring new customers is critical to your growth strategy, your incentive plan should reward prospecting and new account development. On the other hand, if customer retention and account expansion create greater long-term value, then incentives should encourage those behaviors instead.

The compensation plan should reflect where your organization wants to grow, not simply where sales happen naturally.

Strategic products need strategic rewards

Many organizations introduce new products or services with great enthusiasm but continue paying salespeople exactly as they did before. Not surprisingly, their sales reps continue selling the old products, which they know best.

If your organization’s leadership wants greater emphasis on strategic offerings, the sales incentive plan needs to reinforce that objective. Temporary bonuses, higher commission rates, or special incentives can help move selling behavior toward organizational priorities.

Customer quality counts

Not every sale is a good sale. Customers who frequently dispute invoices, require extensive service, or generate low margins can consume valuable resources.

Some organizations have begun considering customer quality alongside sales volume. Rewarding profitable, sustainable customer relationships often produces stronger long-term results than rewarding every dollar equally.

Keep it understandable

One of the biggest mistakes companies make is designing incentive plans that are so complicated no one fully understands them. If a salesperson cannot estimate next month’s incentive payment with reasonable accuracy, the plan is probably too complex.

Effective plans motivate because employees clearly understand how their actions affect their rewards.

Review the plan regularly

Your business priorities change and markets evolve. Likewise, products mature and customer expectations shift. Yet many incentive plans remain unchanged for years.

Your sales incentive plan should be reviewed annually to ensure it continues supporting current business objectives. What worked three years ago may no longer encourage the behaviors your company needs today.

The bottom line

Sales compensation is one of management’s most powerful communication tools. Every incentive sends a message about what leadership values most. That message needs to correlate with your business strategy.

When incentive plans reward the right behaviors, salespeople understand where to focus their efforts, managers spend less time correcting unintended behaviors, and organizations achieve stronger long-term results.

The best sales incentive plans do more than pay for performance, they guide performance.

Questions to guide your next steps

• Does our incentive plan reward the behaviors that are most important to our business strategy today?
• Are we rewarding revenue when profitability, customer quality, or strategic growth are more important to our business strategy?
• If we were designing our sales incentive plan from scratch today, would it look the same?

Don’t go it alone

Tap the HR and compensation expertise you’ll find only at D. G. McDermott Associates. Contact us today for a complimentary initial consultation. 

FAQ

1. What is the most effective metric to use in a sales incentive plan?
There is no single metric that works for every organization. The best sales incentive plans reward the behaviors that align with your business strategy. While revenue is important, many organizations also include profitability, new customer acquisition, customer retention, strategic product sales, or customer quality to encourage the outcomes that create the greatest long-term value.

2. How often should a sales incentive plan be reviewed?
At a minimum, sales incentive plans should be reviewed annually. As business priorities, products, markets, and customer expectations change, compensation plans should evolve as well. Regular reviews help ensure incentives continue driving the behaviors that support current organizational goals.

3. Why do some sales incentive plans fail to motivate employees?
Many plans fail because they are either too complicated or reward the wrong behaviors. If salespeople don’t understand how their actions affect their earnings, or if the plan encourages activities that conflict with the company’s strategy, the incentive program is unlikely to deliver the desired results. Simple, strategic, and clearly communicated plans are typically the most effective.