Sales compensation seems like a straightforward proposition. Dangle a few carrots, give the best sales representative a trip to Europe and cash incentives and sales will increase. Incentive compensation (the proverbial carrot) is often the first place where management makes adjustments in an effort to improve sales productivity.

The reason this strategy has stood the test of time is because compensation is near and dear to every sales person's heart. Although some employees may be motivated by the glory of being number one or surpassing their quota, most are still driven by money. An effectively designed incentive scheme benefits both the salesforce and the support groups responsible for planned administration.

While companies often use incentive programmes to motivate their sales forces to perform better, if designed incorrectly, these types of programmes can wreak havoc instead. Studying how some incentive schemes have gone awry is useful for any HR manager seeking to design an effective sales commission plan.

Designing effective sales schemes
There are many variables to consider and the best mix will differ from business to business.

1 Ask your sales people for input. The best plans allow sales people to participate in setting the mix of commission, base salary and other components. The plan should also include an upfront "draw" for new sales people until commissions can kick in. If you have different types of sales jobs, create a unique compensation plan for each.

2 Commission structures should be flexible enough to change based on your business priorities. For example, you can help jumpstart sales of a new product or service by paying a higher commission. Or build your market share by paying higher commissions on sales to new clients. However, you must create the mix with caution to avoid rewarding salespeople for selling products that cannibalise other, more profitable ones. The plan needs to align with the company's growth strategy, company culture and goals. And be aware that the average "shelf life" of a sales compensation plan is a mere one to three years, depending on how rapidly your business is growing and changing.

3 Companies must keep the incentive programme sweet and simple and attainable. Often, incentive programmes fail miserably because of innate complexities either in their recording and reporting systems or in how rewards are won. In the end, the incentive programme becomes a disincentive! Difficult or complex commission plans might hinder recruitment efforts. Plans that require a higher level of effort than expected to achieve the baseline payments will result in elevated attrition, leading to a vicious cycle of endless recruitment.

To design a compensation plan that maximises sales of your most profitable products or services, you can include incentives that compensate sales people differently based on:

• Profit margin of the product or service: more incentive for selling what's most profitable to the business.
• Discount percentages: adjust commissions based on discounts being offered to the customer.
• Accounts receivable: commissions can be adjusted if clients pay late or not at all.

It is important to set realistic and attainable goals for the sales force. Often, managers use "stretch" targets in order to push employees towards the upper range of achievable sales levels. High sales numbers are always desired, but companies must understand how sales representatives respond to such incentive quotas. Without realistic goals, incentive programmes can result in higher sales variability and have a negative effect on profitability.

Incentive horizons need to be extended to align with the natural sales cycle and selling environment of their industry. By extending incentive horizons to a longer period of time (three months or more), companies can allow sales representatives to weather a slow month and take advantage of a busy month to achieve sales targets. As sales representatives begin to believe that their sales targets were attainable, they are willing to ramp up their sales efforts to pursue a commission.

Incentive systems should be created for a specific product rather than to a wide array of products. For example, companies using one sales target for all products may unintentionally create an incentive for sales representatives to sell the product that would make it easier for them to achieve their volume targets. As a result, the variances in sales from products to products and from month to month increase as sales representatives push different products at different times. By using incentive programmes that have a different sales target for each type of product, sales variance for specific products can be reduced.

In addition to the strategies mentioned above, sales organisations can also turn to sales contests and non-cash reward programmes as a way to motivate specific selling behaviors. Contests can quickly motivate reps to sell a lagging product or service, and can be turned on and off as needed.

At the end of the day, sales staff will act in their best interests. It is up to the companies and compensation & benefits managers must create incentive programmes that fully support and motivate their sales.

Case study

Motorcycle sales off the rack

Consider the example of a motorcycle sales company. In an attempt to increase sales, the company offered its sales representatives a "stairs" incentive plan. For sales representatives, the company specified a monthly sales target. Sales staff were then offered commission for achieving different percentages of this target, such as 80%, 100%, and 120%. The sales representatives would not receive any sales commission for the month if they did not achieve at least 80% of the month's sales target.

The company thought the sales representatives had every incentive to climb these stairs and sell more motorcycles. Instead, sales dropped and the company was left with the painful choice of piling up motorcycle stocks or idling capacity, none of which is good for the bottom line.

Why did the plan fail? When sales representatives realised they could not reach their monthly goals, their sales efforts plummeted. Employees would wait for the next month - a new target - rather than push motorcycles in a month for which they knew they would not be able to achieve the quota.

As a result, company sales fluctuated. Sales representatives ordered fewer motorcycles during months in which they felt they could not reach their quotas, but more motorcycles during months where they felt they could. The result for the company was an increase in the variability of sales numbers, as well as increased stock costs which eroded profits for the motorcycle sales company. Lessons of this case study motorcycle sales company may offer insights to reduce such incentive-driven sales variances. 

Cedric Ng Mong Shen

Compensation and benefits manager

cedric_huang@yahoo.com