Why sales compensation plans fail and how to fix them

| min read
sales compensation plans

Sales compensation plans are a great tool for raising motivation and improving selling behavior. However, the results often fall short of management's expectations. We interviewed sales expert Marie Verdier to learn more about the concept.

Marie, companies often call you in when compensation systems fail to deliver results. What, in your experience, are the key reasons behind this?

Incentive programs are crucial for sales strategy and should align with a company's main goals without causing harm. Sales teams in the real world often fail to apply this advice, even though it sounds standard.

In fact, we recently asked sales executives to name their most potent issues regarding sales productivity. Compensation and incentives were by far the most frequent challenge. The reason is that their overall strategy did not align with the sales incentive system.

Can you provide some examples of what this might look like?

Yes, in fact, I always recommend companies look out for three of the most common mistakes:

1. The system is complex, with many variables and layers, confusing sales reps who struggle to understand it. Sales teams perform best with just three variables. If there are more than four, their enthusiasm drops, and they give up. Less is more.

2. Reps receive a yearly bonus based on their performance. This bonus allows them to adjust their sales deals. They can make up for weaker results with stronger ones. Regular payments boost motivation as reps can directly observe the impact of their performance.  

3. Not all metrics are equal. Yes, one price point has the same effect as one volume point, but not at a margin level. Metric weightings need to reflect your price and volume strategy, and reward reps where they have an impact. Let us take margin – often the one and only KPI (key performance indicators) used to trigger incentives. If the plant's operations improve significantly because of a project, there is no need to reward sales. If procurement costs increase, we should not penalize sales.

Could we consider labelling certain compensation plans as "disincentive systems"?

Yes, the company can punish some reps who fail to learn how to navigate their (flawed) system.  

Let’s imagine a company lists profit as its number one target. However, it exclusively structures the incentive system around generated revenue. The revenue hunters quickly resonate and decide to ignore the target. They give substantial discounts, which hurt profit, but they make more money and get rewards from the system.

We punish reps that focus on profit (but generate less revenue). They receive small bonuses, but we should reward them for following the set prices and meeting their profit goals.

What about the different levels of compensation? Based on your experience, does it make sense to put a “cap” on sales compensation plans?

Setting an upper limit has pros and cons. On the one hand, a compensation system that motivates sales to go higher will drive up personnel costs. That’s why many companies play it safe and have a cap. But getting rid of the maximum limit also has several benefits.

Maximum limits demotivate top performers and prevent them from reaching their full potential. But, once they are on the receiving end of the surplus profits, they start exceeding their targets.  

Even scientific studies prove that revenue considerably increases when we remove maximum limits. What’s important here is the economics: Higher compensation must directly translate into higher profitability for the company.

Does this always work?

It varies, so we suggest using different methods to motivate the reps on your team. Weaker sellers perform better with frequent payments. Top sellers are more motivated when there are no earning limits.  

Average sellers, who make up most sales teams, react well to multi-level targets and sales competition. Sadly, companies don't use unique systems, so they're not fully utilizing the sales team's potential.

What are the most important success factors when differentiating a sales compensation system?

Firstly, consistency is still important. Individual targets increase motivation, but reps with similar roles should ultimately get the same opportunities. If a worker earns significantly less than another despite performing equally, it can decrease motivation and create tension within the team.  

In addition, you need to be realistic about what is in the sales rep’s sphere of influence, and what is not. A supervisor often overrules the sales rep in granting discounts. In that case, price implementation shouldn't be a component of this sales role. An employee finds it frustrating when they have remuneration targets that they cannot personally influence.

What if a company reading this realizes they’re making some of these common mistakes? How can they start making changes for the better?

If companies don't practice it, even the best remuneration system will be worthless. So, before you make any adjustments, put supportive change management in place to gain acceptance from the sales team. Involve sales managers to spread the word about the new system and start building trust and acceptance.

Furthermore, we will accept the new system only if we understand it. Analyzing the before and after-effects on profits for employees and highlighting the expected benefits is useful. Simple guidelines help sales team members understand how to impact variables and reach their objectives. For example, if the price goes up by x percent, the profit margin goes up by y percent.

Once the stakeholders accept and understand the new system, we must ensure that they use it correctly in daily business. Make sure to allocate enough time for IT adjustments and create fair transition plans. These plans will help employees accept the new system.

Finally, do you have any recommendations on how companies can better monitor success?

To begin, the company needs to successfully launch or adjust the remuneration system. The next step is to check if they've achieved the targets or if they need further adjustments.  

Regularly checking for optimization potential is wise, even if your system is already functioning well. If a remuneration system fails to meet its targets, we should adjust it. That's why we need to design a remuneration system with flexibility.

Different functions will require different degrees of detail in their reporting. The sales manager monitors all sales representatives and prioritizes the overall success. On the other hand, a seller concentrates solely on their own sales and compensation. So, it’s crucial to differentiate reporting by preparing the relevant information specifically for the recipient.

Ideally, you show the impact of possible sales decisions in real time, with sales reps supported by tools while they are making the deal. However, the cost of frequent and detailed reporting should never exceed the value the reports provide.  

Intuitive and understandable IT solutions, such as extended personnel and pay calculation systems (e.g., PAISY systems) or pay modules from corporate software (e.g., ERP systems) can help here. These solutions allow sales controlling to create individual reports in real time without high costs. 

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