How to link a sales compensation plan to company strategy

How to link a sales compensation plan to company strategy

Sales incentive plans should support the achievement of the company’s business objectives.  (That should be one of those blindingly obvious statements that shouldn’t ever need to get said).  Sadly the reality is many companies don’t make that tight link between objectives and sales compensation.

Here’s an example I came across recently.  The company was selling consumer goods to retailers.  They were selling a second tier brand, with reasonable advertising and branding support.  And the sales team were described to me as being unmotivated and not getting the results the company wanted.

The challenge – grow sales and profitability

My challenge?  Find ways to motivate the sales team to achieve revenue and profitability growth.

When I met with the sales team, there were things wrong, but nothing majorly so.  They knew their stuff, they were enthusiastic about their products and they were supported by good and well executed business processes.

The problem was the Sales Compensation Plan

The problem was the Sales Compensation Plan.  Backtrack to the company’s objectives.  The company wanted growth.  But the commission plan didn’t support that.  It supported the current sales volumes.  Here’s why:

  • Sales people were paid a basic salary that comprised 50% of their earnings, the variable component of their earnings being a flat rate commission based on the value of product they sold.
  • Most of the sales team had found their comfort level, and were living happily off their earnings, regardless of whether or not they achieved the company’s objectives.

What this sales compensation plan ignored was:

  • The company wanted growth – but the commission scheme didn’t reward that in any particular way.
  • The commission scheme paid out from the first dollar – so every sale was rewarded – even if the sale fell into the sales person’s lap with little or no effort on their part.
  • Selling in extra lines or promotions didn’t attract any special incentive treatment – though it was way more difficult for the sales people than just accepting another stocking order.
  • Profitability wasn’t a consideration – every sale was rewarded regardless of the profit it made.  The result of course was sales team took the easy route and happily discounted the products up to their assigned limits because it made their lives easier.

What needed to change?

So faced with that scenario, what did we need to change?  Here are the elements of the new incentive scheme we introduced:

  • Stepped commission rates.  No commission paid until 70% of monthly target achieved, then 1.5x the existing rate of commission to 100% of target, then 2.5x the existing commission rate for all sales beyond 100% of target, uncapped.
  • Commission based on profitability, not revenue.
  • Special incentives of new product introductions counting at 1.5x the normal commission rate for the first three months following the first introduction.
  • Accelerated payment.  The old scheme took three months to pay out.  That’s too long because it breaks the direct coupling between extra effort and reward.  So it was reduced to one month.

Sales incentives are linked to Sales Performance Management

On its own, that would probably have supported much of the change required.  But just to make sure, we also looked at the Sales Performance Management system.

To that we added a review of sales growth rather than absolute sales, a review of new product introductions, and a review of customer profitability.  As each sales person had a formal monthly review, it meant the three important activities were never very far away from everybody’s minds.

Did it work?

Three months in and the new sales incentive scheme appears to be a resounding success.

Interestingly, one of the longer serving sales people left – he said the new scheme was unfair.  Equally interestingly, his old customers are performing better than ever.  The old scheme had clearly allowed significant complacency to set in.

The rest of the sales team like the new approach.  They can see a direct link between more effort and more reward.  The new scheme is simple to understand, and it links their activities directly to the company’s strategy.

Would it have worked without the parallel changes to the Sales Performance Management system?  Maybe.  But why miss out on a regular monthly opportunity to ensure everybody is doing what they should be doing to support their own and the company’s success?

Also interestingly, the percentage total cost of sale was reduced.  Not paying for sales that were going to happen anyway had been costing more as a percentage of sales than the new scheme of rewarding growth.  So everybody was happy, even the Finance Director.

Sales Compensation Plans are one of my core specialities.  I run specific training courses on the subject – find out more about Sales Compensation Plan training.

Here’s what to do next

If you’re interested in how this could help you, or feel I may be able to help you with some of the challenges you’re facing, please get in touch for an informal discussion.

There’s no commitment, we’ll just discuss your situation to see if working together might be a good fit.  Contact me now.

Best regards

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