Incentives - Following the Money and Growing Profits

June 14, 2019

Following the money

Incentives for sales personnel are a powerful driver of results, but our inherent biases may be leading to sub-optimal results. 

How does your organisation think of sales incentives? Are they considered to be a cost, or an investment? 

It seems strange that this should matter at all, but in our experience organisations that treat incentives as a cost will tend to manage them like other costs. What is the right thing to do with costs? To control them and keep them low. But this mentality risks making the incentives pool smaller than it should be and thereby limiting its effectiveness. This is what we call the framing effect. 

For example, we often see incentive caps of say, a maximum bonus of 100% base salary. What is the rationale? Obviously the idea is to manage and minimize costs. But the message you're really telling your star sales personnel is that once they've got to their maximum bonus, there's no need to sell more. 

On the other hand, if your incentive is self-funding (i.e. the bonus or commission is smaller than the contribution of the incremental revenue) it will always be profitable to the business for the salesperson to sell more. So, in general, it doesn't make sense to have caps. 

Let's look at another example of the power of an ROI mindset in defining incentives. We know that sales incentives can drive volumes, but what about margin? 

A simple example can illustrate thee power of a profit focused incentive. Imagine a product with a base price of £1,000 and a gross margin of 35%. Let's say our sales team sells 100 of these products a month with a corresponding revenue of £100,000 and gross margin of £35,000. 

In this case, an incentive that resulted in a 10% uplift in revenue would be great. It would produce a revenue increase of £10,000 and a margin increase of £3,500.

But what about pushing your sales team to deliver a 5% price increase in their negotiated deals? 

That would result in a £5,000 margin increase, a 42% better outcome than simply adding volume. That's something worth managing and incentivising effectively, right? 

Some of the most successful incentives that we recommend are based on price quality or price increases whereby the salesperson keeps a percentage of the higher achieved price. 

In short, it's key to think of incentives as an investment, not as a cost. And with this outlook we have the right starting point to thinking about effective incentives that profit both the business and the salesperson.

If you want to learn how much your business could benefit from improving sales effectiveness, consult our free Sales Opportunity Self-Assessment tool