Tag: incentive compensation

13 ways to reshape sales compensation plans during a pandemic Amit Jain September 23, 2020

 


2020 is turning out to be one of the worst years in recent history, with a significant impact on global economic health. The primary reason for this has been restrictions imposed to contain the spread of Corona pandemic while there have also been several localized natural disasters in different geographical areas that have further worsened the situation.

With COVID-19, the sales environment across industries has shifted to virtual selling resulting in a lack of in-person access and physical time. Organizations have tried to take this problem head-on and have implemented several digital platforms and channels to continue to engage stakeholders despite physical restrictions. Managing, motivating, and ensuring remote sales forces are effectively engaged during such a period has become challenging.

Organizations are actively working towards assessing the level of impact on their business while working towards short-term and long-term measures to adapt to the “new normal”. Incentives make up a significant portion of total compensation, and reduced sales due to unforeseen circumstances may see a huge drop in total payout leading to a risk of lack of engagement and attrition of high performers. This has forced sales operations teams to refine their sales performance management approaches, adding a new dimension to the overall complexity of variable/sales compensation management. The balance between fairness to sales reps, budgetary constraints, and revenue performance is constantly sought. Moreover, another level of complexity arises from the fact that different parts of the countries follow significantly different infection and recovery trajectories, resulting in the further need for local adjustments.

Sales compensation plan design is already a complex process because of a need to consider several parameters such as geographically diverse business environments, company culture, labour regulations, market constraints and innovation, customer engagement and selling process, level of impact and control on sales, data availability etc. The desired plan adjustments further force organizations to rethink their IC philosophy without compromising on key plan design principles.

Following are some key sales compensation plan design strategies and adjustment ideas organizations can deploy in case of such unforeseen situations to ensure that representatives continue to be motivated and engaged while preparing themselves for future growth. These options can be bundled based on specific needs and can be implemented for results in the short-term as well as long-term basis:

1- Pay Target or Better

Pay target sales compensation to affected sales, service, and support representatives for the most impacted period where-in they are not able to achieve their targets. Organizations can also choose to go beyond and allow high-performing reps to earn more if they manage to beat their targets despite prevalent economic turmoil. This reinforces organizations’ commitment towards outcomes without compromising on their employees’ well-being and keeps them motivated and away from any distractions

2- Guarantee / Draws

Pay a fixed % of target sales incentive, guarantee amount or a non-recoverable draw for the impacted period to strike a balance between field motivation and fiscal responsibility. Organizations can also choose to go for recoverable draws, where-in incentives are paid upfront and adjusted once sales have picked up. Like “Pay Target”, guarantees and draws instil a sense of security and keep the salesforce motivated and away from any distractions

3- Performance Period Adjustment

Increase the performance period timeframe to ensure that the sales representatives get an opportunity to make up for the lost opportunities by putting in additional efforts in the latter part of the performance period. In certain cases, organizations may decide to reduce the performance period to contain the impact within a shorter period

4- Revising Commission Rates & Introduction of Payment Accelerators & Kickers

Organizations can choose to temporarily increase commission rates or positively revise kickers and accelerators (telecom and insurance) to boost sales representatives’ earnings. On the lower side of the spectrum, they can choose to remove or ease decelerators to ensure performance earnings are positively reinforced for sales and deals closed during the impacted period

5- Re-balancing KPI metrics & weights

Reviewing KPI weights and balancing them out to align with emerging business needs, like an increased focus on customer centricity. Customer centricity and customer success help organizations and particularly sales representatives, to temporarily move away from the product mindset and focus more on customer well-being which in the process helps in developing long-term relationships

6- Goal Adjustments

Provide relief by adjusting quotas to account for activity and market challenges. These adjustments also need to be tracked for future goal setting to ensure that appropriate baseline adjustments are made once the business gets back to normal. Organizations can also choose for goal adjustments specifically over guarantees and other direct pay adjustments as these are pro-rated and aligned with actual performance impact at the individual level. This also helps from an annual computation standpoint as organizations are saved of any true-ups, retro calculations, and plan updates to account for the impacted period

7- MBO type plan

Pay incentives based on specific activities instead of outcomes to keep the engagement high while ensuring that existing relationships are being maintained remotely and sales pipelines are being created for the future

8- Team Performance

Explore options of teaming up sales forces across product/business portfolios to encourage and explore cross-selling and up-selling opportunities

9- Relative Performance

Index territory or individual performance within a broader impacted area or complete market to factor in local variations as a part of rationalization of performance

10- Payout Curve Modifications

Lower performance threshold or ease out qualifier metrics like past dues, retro collections (manufacturing), and removal of penalties (channel distribution) to allow reps to be “in the money” at lower performance levels (know more about payout curve designs)

11- Pay Mix Change

Change the pay mix to reduce the proportion of incentives in the total compensation. While this is a complex and long-term solution, organizations can leverage the opportunity of looking at the overall compensation structure and modifying it to align with changing selling environment in the longer term

12- SPIFFs

Give higher leverage to spiffs & seasonal contests. Avoid including peak COVID-impacted performance during calculations. This allows reps to make up the lost opportunity cost by cashing in more during festive seasons or seasonal sale spikes

13- Annual Trip/President’s Club

Provide a cash-out option for an annual trip or at least postpone it indefinitely unless the situation is more conducive to travel.

To summarize, organizations are evaluating the situation based on their product portfolio, selling environment, sales process complexity, and level of impact and are deploying different adjustment strategies. Organizations are trying to leverage and analyze data across periods to better understand the overall impact and utilise this information to take fair decisions. We do believe that sales incentive plans can be designed to be reasonably stable, motivating and fiscally responsible. There are inherent counteracting pressures between these design principles, with significant complexities being added due to such unforeseen situations but with the help of comprehensive data analysis and leveraging market intelligence, appropriate steps can be taken, which ensures that sales incentive plans continue to be motivating and engaging.
Please feel free to reach out directly to us at Incentius to know more about how you can leverage our advanced analytical expertise to take data-driven decisions and stay ahead of the curve.

 

A framework to design your salesforce incentive compensation plans Amit Jain May 26, 2017

[Image Source-www.flickr.com]

Incentive schemes act as a strategic tool to align salesperson’s behaviour with business objectives. It acts as a catalyst to motivate the salesforce. Incentive Compensation is the primary tool to differentiate between salespeople based on performance and helps retain top performers by clearly calling them out. It also plays a significant role as part of the total compensation structure and acts as a lever to attract top talent.

Guiding Principles

What are the guiding principles that drive the structure and definition of an incentive plan?

  1. Is it aligned with the desired business objectives? For example, does the plan drive the right customer segments to be targeted?
  2. Does it pay for performance? For example, are the salespeople being paid for activity only or for capturing market share/volume growth?
  3. Is it fair insofar as it provides equal earning opportunities to all salespeople irrespective of their geography, market potential, etc.? For example, are the salespeople with larger geographic territories inherently at an advantage?
  4. Is it financially responsible? For example, Is the final payout expected at the national level in line with the expected achievement with respect to the national forecast?
  5. Is the pay competitive in the current labor market? For example, does it retain top performers?
  6. Is the plan easy to understand for the sales force? Can this plan be executed using existing IT infrastructure and can a fully automated process be defined for successful operations?

There are inherent counteracting pressures between these guiding principles.

  • Need for the incentive plan to be simple to understand but also remain fair
  • The Incentive plan should be engaging but at the same time it should be financially responsible
  • The Incentive Plan should support underlying business objectives but at the same time be manageable
  • The incentive plan should be implemented with flexibility for future needs but the implementation should be fast and cost-effective

Design Framework

Given these guiding principles, what design framework components are important to consider while defining an Incentive Plan?

Total Target Compensation

How much should a salesperson be paid in total? What should be the total compensation structure including base salary and potential incentive payouts? The organization’s compensation philosophy, in general, has a large bearing on this element. Defining the TTC depends on how much the organization weights compensation as part of its value proposition to its employees. It is also important to review industry TTC benchmarks for competitiveness and clearly define the organization’s desired market position. This will help ensure that organization is able to attract and retain the right type of people.

Salary-Incentive Pay Mix

What should be the ratio between base salary and incentives viz. the pay mix? The pay mix depends on the extent to which the salesperson is responsible for the final sale. For eg. Real Estate agent pay mix leans towards higher incentives because the sales are almost fully determined by salesperson capability. Sales Support roles usually tend towards having a higher base salary in the mix because of their lower ability to impact the actual sale. Organizations that don’t have adequate availability of data or confidence in the measurement of performance also tend to weigh incentives less. The pay mix should ensure that the total expected compensation remains motivational and yet financially responsible. The pay mix also plays a big role in signaling the type of salespersons to attract to that role.

Portfolio Definition

What portfolio of brands should you focus on for each salesforce? One may choose to group all brands sold by that salesforce into one basket and measure on that. Alternatively, one may choose to provide one incentive scheme to certain key brands that need special focus and one incentive scheme for all brands sold by that salesforce. Some organizations may choose to focus on certain individual brands sold as well and measure each brand’s performance separately to maintain higher focus. The portfolio definition decisions are driven by the organization’s business strategy, the brand focus they’re hoping to achieve. Fine-tuning portfolio definition helps sharpen the focus on which brands the organization wants to push more.

Performance Metric Definition

Once portfolios have been appropriately defined, the next step is to define the metrics that define performance. What are the KPI’s that the business manages around and how can those KPIs be rolled down to sales performance metrics? Should a combination of metrics be used? The metric should be chosen such that it supports the desired business strategy. Factors that affect the type of metric chosen are the sales channel, the reliability of sales data and brand maturity. Ideally, one incentive plan should have no more than three plan metrics. A good metric should be clearly measurable and specific with significant weight associated with it (>15% of total target). There should be clear guidelines in terms of expectations from primary product as compared to other products in the portfolio. For example, a growth stage brand may be assigned a volume growth metric but a mature brand may be assigned a volume metric based on the organization’s business objectives.

Plan Type Selection

What sort of an incentive scheme should you choose? Should it be goal-based to measure against predefined targets? Should it use a matrix type scheme type to measure performance against two metrics simultaneously? The selection should be based on the organization’s specific needs and the way it prioritizes the different guiding principle. For e.g – fairness vs. simplicity, motivation vs. financial budget. Other factors that need consideration such as data reliability, confidence in national sales forecast, variation in territory potential etc. For example, if the confidence in national sales forecast is low, a goal-based scheme is not ideal. If variation in territory potential is high a commission against volume plan type is not ideal.

Payout Curve Definition

What should the design of the payout curve assigned to the component? Curve aspects like the threshold, cap, kickers and multipliers should be considered? For example, Does your organization believe in paying incentives starting at 80% target achievement or only at 100% target achievement? At what performance should you consider a multiplier to motivate top performers more? How would my curve perform financially against an unexpected higher national performance? Should I cap top performer payouts at a point to guard against outlier performances? Industry standards also play a role to some extent in defining the upside and downside risk depending on organization’s market positioning.

Performance Measurement Period Definition

The incentive period definition also plays an important role in incentive plan design. What is the measurement period I should use for my incentive plan – Annual, quarterly or monthly? How often should I pay my reps? If a rep underperforms in earlier months, should I offer a chance to catch up by the end of the year? When should I run incentive calculations with respect to the end of the measurement period? These depend mostly on data reliability, expectations from the salesperson, system capability and the importance of meeting shorter-term national forecasts vs. annual national forecasts. Another important factor to be considered is the application of interim payout caps in case the performance measurement period is larger than the payout frequency.

All the above attributes play a significant role in the overall success of an IC plan. The qualitative impact of an ineffectively designed plan is well recognized but companies fail to take into account the financial implications (of increased attrition rate, lower morale, lost selling opportunity due to higher shadow accounting and dispute resolution time, higher administration cost) of poorly designed incentive plans and don’t put enough emphasis into balancing the inherent counteracting pressures in the guiding principles.

Sales contests definition – Design & Analysis Amit Jain November 21, 2014

Sales Contests and SPIFs are a medium to accomplish specific short-term sales goals. They can be quite effective motivationally if used well because of the additional cash/non-cash-based incentives over and above the normal IC plan. Team-based sales contests can also bolster salesperson teamwork by exploiting healthy competition. However, sales contests should not be used as a method to account for gaps in the base IC plan. Also, ensure that there aren’t too many contests running for a particular salesforce within a year, as they may start to act as a distraction to the base IC plan. Some scenarios where contests are a good tool are:
  1. To temporarily motivate salespeople to react appropriately to external market events. E.g., In the case of the launch of a new competitor, the focus should be on maintaining market share.
  2. Give sales performance a shot in the arm. E.g., Several companies run contests mid-year when performance to budget needs to catch up.
  3. Provide temporary focus to a lagging product line.
  4. Sometimes sales SPIFs can be used as a base IC plan for a new product that went to market very quickly, and the base IC plan is still playing catch up.

At a high level, the process below should be followed to ensure that content is effective:

Define a clear contest Objective

Define the contest objective clearly, along with the desired business goal. As far as possible, try to define the business objective in numeric terms as well. This helps judge the success of the contest more objectively. For e.g. Improve air conditioning sales by 25% YOY during the summer months.

Budget, Budget, Budget!

Next, decide on the budget for this contest. What investment are you willing to make to achieve this desired business goal? The success of a contest is defined as achieving the desired business objective while remaining within budget.

What are the details?

Once the problem statement is defined, the next step is to design various aspects of the contest:

  1. Design methodology – As far as possible, the SPIF/contest should complement the base IC plan and should not send out a conflicting message
  2. Performance Metric – Pick a performance metric that is clearly aligned with the business objective, along with a definition of data sources being used for calculations
  3. Period – Communicate the effective start and end date of the contest and the payout timelines for the contest/SPIF
  4. Applicable Rules – Define the rules in as detailed a manner as possible. Specify at least:
    1. Eligibility – Who is eligible to win the contest and who is not
    2. Competing for pool – In case of competitive contests, clearly define the pool within which your performance will be compared
    3. Number of winners – Define the number or percentage of winners from each pool.
    4. Reward – Cash, Non-Cash, Recognition, Commission per unit

How much is this going to cost us?

Perform cost sensitivity analysis based on various sales performance scenarios to understand cash outflow better and avoid the risk of facing cost overruns. Use this model to tweak the contest parameters to achieve acceptable spending. This model can also help you build a business case for contest implementation.
This model should also be used to ensure that the performance metric is unbiased to any specific geography/group and that the contest will not create any undesirable behaviour from the participating salesforce.

Communication

The most critical step for the success of a sales contest is communication. There should be clear messaging about the underlying business objective, eligibility, associated business rules, the competing pool and the reward associated with the contest. The participating sales team should clearly understand the performance metric (sales performance or activity based) and perceive the metric as fair. Be open to offering additional training to engage the broader salesforce, especially for new launch products.

Your contests will be more effective if they are exciting!

Ensure that you inculcate excitement in your contest communications as well. Using sports or entertainment analogies in contest communications can help here. The aim should be to get your salesforce excited about your contest.
Create a buzz around the program by utilizing multiple communication channels:

  1. Second-line manager – direct communication
  2. Company Intranet
  3. IC Scorecards (via notes/comments)
  4. Email blasts
  5. Social Media

How are we doing?

Along with the contest detail communication, the focus should be on creating effective reports and dashboards to communicate feedback:

  1. Dashboard with performance measurement and clear contest standing
  2. Ranking Report
  3. Additional section in existing IC Scorecards or sales performance reporting

Let’s build and run this thing!

Ideally, you should use your existing ICM system to implement your sales contests. This will ensure that data sources and rules applied for your contest are consistent with the base IC Plan definition of those rules. Timely progress reports to management and participating employees on the contest standings and projections will help maintain salesforce focus on the contest.

Ok! Was it worth it?

Once the contest period is over, go back to the contest objective and desired outcome identified in the first step. Measure success in comparison to the assigned business objective. Analyze improved sales performance and success metrics and the cost of the contest as compared to the budget allocated. Slice your contest winner’s performance in many ways to analyze the overall impact of the contest. As part of this step, it’s also important to seek feedback from the participating team on their experience so that contests can be made more effective in future.
This blog post discussed how to make the contest design and management process more streamlined and effective.
Below is a visual framework of how Incentius can help design and manage sales contests for your organization. Get in touch with us at info@incentius.com