Sales Incentive Plan Design: Guiding Principles

3 min read

Sales Incentive Plan acts as a strategic tool to align sales behaviors with broader business objectives. It can act as a catalyst to motivate the salesforce and identify top sales performers and retain them. This blog covers key principles to consider to design a simple & fair incentive plan.

A good sales compensation plan needs to be simple and intuitive. It should clearly communicate the expectations from the salesforce. It is important to agree upon and adhere to key guiding principles before designing the plan.

Key design principles that need to be considered are:

Business Objectives Alignment

Clearly understand the broader business, brand, and channel strategy and ensure that the sales commission plan is designed to accomplish that using appropriate performance metrics. The plan should drive salespeople to target the right customer segments

Pay for performance

The sales compensation plan should be designed to pay salespeople for improved business outcomes and performance. The plan should pay salespeople not only for activity but for the actual impact on sales performance and growth. At a high level better performers should be paid more than lower performers. A general consensus is that the top performers should be paid disproportionately more.

Equal earning opportunity

The plan is considered to be fair when it provides equal earning opportunities to all salespeople irrespective of their territory size, geographical location or book of accounts. The sales commission plan should ensure that localized challenges are accounted for and hence removing any biases that may work against an individual salesperson

Financially responsible

The total incentive payout for the entire salesforce should be in line with the national performance. Ideally, a well designed IC plan should pay for itself and should allow sharing of failures and successes with the salesforce.

Competitive in the labor market

The plan components and total target pay should be designed such that it attracts top sales talent in the industry and enable retention of the top performers within the salesforce. Variable pay levels and a non-competitive sales commissions are listed as one of the main reasons for salesperson attrition.

Simple to understand and administer

Finally, the most important element is how you communicate the plan. It should be easy to understand for the salesforce and can be administered seamlessly without manual interventions. Salesforce understanding of the sales commission plan is critical to its success.

However this is easier said than done. Balancing the above factors in an effective, cost-effective sales compensation plan is both a science and an art. There are inherent counteracting pressures between these guiding principles that require IC plan designer to maintain a fine balance:

  • The incentive plan needs to be simple to understand but should also remain fair

  • The sales compensation plan should be motivating and should attract top talent but at the same time should be fiscally responsible

  • The incentive plan is desired to be fair but should also be easy to implement and cost-effective

Authors

  • Sujeet Pillai

    Partner

    Sujeet, an aerospace engineer from IIT Bombay, has over a decade of experience in managing Sales Compensation processes and analytics for various clients including Fortune 500 companies. He also has more than a decade long experience innovating with new-age technologies and developing complex enterprise systems and solutions.

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