When Should Salespeople Eat What They Kill?
A well-designed incentive plan is key to motivating the sales force.
But what is the appropriate plan design for your team?
One critical decision is whether the plan should be formulaic or discretionary – or even a hybrid of the two.
This impacts how the sales force interacts with your clients (and each other), and what they’re motivated to sell.
Formulaic designs usually consist of a straight commission.
You sell $100 worth of shoes, we pay you five bucks. Other formulaic designs use tiers, where there is a set payout for reaching a specified revenue level at each tier. Either way, each salesperson can calculate exactly how much incentive he or she will receive, based on the revenue brought into the company.
Formulaic designs are most effective when you want to drive velocity.
In this case there is a high transaction rate and the range of products offered is relatively simple. Bank tellers are often incentivized this way. If the salesperson can execute the sale largely on his or her own, and the number of products they can recommend is relatively small, then there is little need for discretion or teamwork in the sales process. Let them eat what they kill!
Discretionary designs typically consist of an incentive pool.
This is funded according to high-level outcomes, such as business unit revenue or net income. Leaders then allocate payouts according to individual sales performance, as well as other key behaviors, such as teamwork, risk management, and client selection.
Discretionary designs are more effective when the sales process is focused on relationships.
A great example of this is commercial banking relationship managers. Commercial RM’s work with their clients to understand their business strategies and advise them on their long-term goals. They can refer a broad array of products. Sometimes the right product is a simple line of credit, while in other cases it may be a capital markets instrument, which requires temporarily handing over the deal to a trader.
A discretionary design ensures that there is a minimum level of incentive funding available to retain your best salespeople, even when the market cools off. Conversely, the market may heat up, driving payouts far above fiscally responsible levels. A discretionary design allows you keep payouts within a reasonable range.
Sales can be feast or famine, particularly when introducing a new product.
In some cases, a hybrid model is preferable, especially when you want to drive velocity, but you don’t have much sales history to predict payouts. Once you establish a consistent sales history, gradually decrease the discretionary portion.
Other key points in incentive design:
- When implementing discretionary designs, be sure that you have established a culture in which leaders are willing to differentiate high and lower performers. A “peanut butter” allocation process negates the effectiveness of a discretionary design.
- Survey the sales force regularly, to incorporate their input into plan design. Plan participants are often the best people to point out what is working and what isn’t.
- Above all, ensure that your incentive design supports your business strategy. The plan should simply and compellingly communicate the outcomes and behaviors you want to drive.
MPI consultants are experts in incentive design and employee engagement.
We are available to provide the best training for your frontline managers, executives and HR teams.
MPI Consulting is based in Blue Ash, Ohio. We offer research-based, proven methodologies that have been implemented and tested with organizations of all sizes and industries. Each of our services is led by seasoned thought leaders and industry veterans that empower our clients to implement programs that move their organization forward.
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