How to Incentivize Your Incentive Plans

November 1, 2010

Do Fair Incentive Plans Exist?

One common issue for almost all expansion stage software companies is the need to create an incentive plan that’s going to fairly compensate and motivate its employees. The key word there is fairly, which can vary depending on the company, the salesperson, and the incentive plan’s objectives.

Companies at the expansion stage can’t simply offer their employees a base salary and hope it provides enough motivation for those employees to meet and exceed expectations. They need a carrot for those employees to chase, rewarding effort with a base salary and rewarding results with incentive compensation.

It’s a philosophy that Carl Moe discusses at length in an article he wrote on Salesopedia.com. Moe, if you didn’t know already, is the author of Sales Revenue System 2.0 / Your Chief Revenue Officer B2B Success Model and an expert in revenue system restructuring. His company, CRO Success, helps executives set up revenue systems that allow for sustainable growth and optimized performance — two very important things for expansion stage companies.

First, it’s important to understand Moe’s definition of the CRO, or Chief Revenue Officer.

It can be a company’s president, CEO, COO, owner, or VP of Sales. More or less, it’s the person or position within any business whose responsibility it is to make certain that revenue is generated.

“It’s an emerging ‘C’ level position in businesses based on the understanding that revenue is a system-level process just like other core business systems (quality, production, accounting, information, etc.),” Moe writes. “Regardless of title, every business today has one CRO.”

It’s the CRO’s role to translate the company’s strategic and operating plan objectives into performance-based measurement and incentive plans. Incentives are the most underutilized tool available to those companies and by using Moe’s general structure of “Recognizing Effort” and “Rewarding Results,” CROs will be able to better define their sales compensation philosophy. Here’s how he defines the two:

Recognize Effort

“Compensation paid to the salesperson for executing the required sales behaviors: sourcing referral introductions, making cold calls, scheduling and attending appointments, qualifying prospects, submitting forecasts, providing proposals and quotes, attending trade shows, etc.  In essence, the salesperson’s engagement in the behaviors necessary to achieve sales goals.”

Reward Results

“The incentive paid to compensate those who translate their efforts into the company’s desired revenues.”

 

Of course, those are simply two building blocks for a company’s incentive plan. The ratio between base salary and incentives depends on several variables. Companies need to first evaluate their market model by asking these questions:

  • Is the business strategy based on pioneering new customers and markets or expanding existing account relationships?
  • What are the critical performance thresholds and related economics in your business model?
  • What is the industry profile regarding base compensation, commissions, bonuses, and other performance-based incentives?
  • What is the revenue mix between individual sales contributors and account teams?

With those market model questions answered, good incentive plans will then take in to account the following incentives:

New vs. Existing Business

There needs to be a delineation between attracting new accounts or markets and renewing existing business.

Companies should do their best to recruit and motivate the Hunter/Business Development profile that makes the phone ring and attracts those new customers, while recognizing the value in the Farmer/Account Manager profile that answers the phones and manages existing business. Their incentive plans should be different and need to reflect the value that each brings to the company.

Threshold Performance Incentives

Progressive plans that pay higher incentives for higher thresholds of annual performance are more effective than straight-line incentive plans for all levels of performance. For the Hunter/Rainmaker sales profile, the possibility of making more at each threshold will offer significant motivation.

Consistency Incentives

Companies should put what Moe calls a “treadmill” platform in place to help that salesperson become more strategic about consistently reloading their prospect pipeline. If a sales rep performs above quota over the course of several consecutive quarters, there should be incentives in place for their consistent success.

 

Margin Threshold Incentives

This incentive assumes that a company’s sales force has pricing or margin responsibility. Salespeople inevitably become better at sticking to those margins if an incentive is in place and their own money is on the line.

Team Incentives

If a sales person’s goals are dependent on the performance of multiple team members, a company should have

a plan in place to allocate incentives based on contributions to the following criteria: prospecting, qualifying, closing, and providing post-sale support.

Companies need to be aware of potential incentive pitfalls, too. There are certain incentives that do more harm than good and they can send the wrong message to your salespeople and ultimately harm their performance.

  • All business earns the same incentive. New account business is always worth more than renewal business and companies should train their sales teams to continually grow their book of business instead of simply relying on dependable existing business.
  • Capping a salesperson’s earnings. By establishing a ceiling to the salesperson’s earning potential, it discourages them from working beyond their cap and hurts a company’s chances of attracting the best sales talent.
  • Allowing the finance department to design the incentive plan. A company’s finance department doesn’t have its thumb on the pulse of a company’s sales force and thus shouldn’t be allowed to structure that departments incentives. Effective incentive plans are designed to reinforce both critical behaviors and desired results. The finance department may not consider the value of new business over repeat business or the incentive for attracting an account from a totally new segment.

A company will know that it’s incentive plans are succeeding if there’s competition among its reps to reach higher thresholds and an obvious focus on how to maximize their individual incentive payouts. If you’ve designed an incentive plan that’s got the sales team motivated, lead generation will be a hot topic at every sales meeting.

There are several variables that go in to designing an effective incentive plan and there is no blanket approach that will work for every company. I think Moe’s framework is one that almost any company can use.

The process can be complex. But, ultimately, companies need to make incentives straightforward and achievable. If the incentives are impossible to reach, there will be little motivation to shoot for them. But they shouldn’t be too easy to hit, either. An incentive, after all, should be a reward for exceeding expectations.

SVP Marketing & Sales

<strong>Brian Zimmerman</strong> was a Partner at OpenView from 2006 until 2014. While at OpenView he worked with our portfolio executive teams to deliver the highest impact value-add consulting services, primarily focused on go-to-market strategies. Brian is currently the Senior Vice President of Sales and Marketing at <a href="http://www.5nine.com/">5Nine Software</a>.