Incentivizing Sales Performance
by Matt, on 10 Mar 2020
Many startups and early-stage businesses focus a majority of their time on product development and testing. That’s great, up to the point where proof of concept is achieved but can be a fatal mistake if continued longer.
Once a viable product has been developed – we’re fans of the Minimum Lovable Product moniker – it becomes all about attracting customers. Without customers, all you have is a product; with customers, it becomes a business.
In our work we find many – in fact, most – entrepreneurs are biased toward technology over business. They are more CTOs than CEOs. They take comfort in managing the technology, crafting the user experience, and tinkering with the product design – but none of that counts for much without customers.
In this edition of SPT, we focus on incentivizing your sales team to help drive revenue growth and make sure your recently launched business gains enough altitude to survive the inevitable ups and downs of its early stage life.
MOTIVATE, MOTIVATE, MOTIVATE
Motivating your sales team is a never-ending process. As a sales leader – which, in most small companies, means the Founder/CEO – you must constantly think of new, more effective ways to keep the sales team focused on closing deals.
Historically, sales managers have found many creative ways to motivate their people, from bonus programs to sales contests. But when those efforts fail to deliver real sales growth, they throw out the compensation plan and start over.
Meanwhile, at an executive level, we tend to view sales incentives as an unwelcome expense to be avoided or minimized.
For good reason. Almost a decade ago, a Harvard Business Review study identified sales staff compensation as the largest marketing investment for most B2B companies. At that time, US companies were spending over $800 billion on sales compensation each year – three times more than they were spending on advertising – and we have no reason to believe that ratio has changed much in the eight years since.
Most companies pay their sales team a combination of base salary, commission, and bonus. The variable components are based on the belief that at-risk pay motivates people to work harder towards hitting sales targets.
In reality, a lot of those commissions and bonuses aren’t truly at risk, produce little extra effort, and fail to deliver the desired sales results.
A ratio of 60% fixed pay (base salary) to 40% variable pay (incentive or at-risk pay) is the average compensation mix for US sales teams, although it varies quite a bit across industries.
A more aggressive mix – up to 100% variable – is common when companies use independent contractors as sales agents. A much less aggressive mix (say 75% salary) is typical where salespeople face long sales cycles and have to educate the customer a great deal. For technical sales, that involves creating complex solutions.
There is also a school of thought that advocates a more variable mix (50% commission) for salespeople “hunting” new customers but a less variable mix (30% commission) for those in “farming” account management roles, encouraging the latter to focus on cultivating long-term relationships with existing customers.
Many companies struggle with salespeople managing territories or products at different levels of maturity. This leads to issues with “franchise sales” and carryover sales from previously won business.
Franchise Sales occur when customers buy because they are already familiar with the company’s brand and products or receive previously negotiated favorable pricing. This becomes even more prevalent when customers are socially influenced and therefore less dependent on salespeople when making buying decisions.
Carryover Sales include purchases made under long-term contracts and repeat buyers who purchase out of loyalty and a reluctance to switch away from the status quo, rather than making a true choice that might be influenced by sales effort.
Such sales can result in one salesperson easily hitting a large sales quota while another, not benefiting from prior business, struggles to deliver even a fraction of that number.
To combat this, consider setting payout thresholds where incentives only kick in once a certain sales level (or percentage of quota) has been achieved. Alternatively, use a low commission rate until the quota has been reached and a higher commission rate for sales beyond that point.
SALES PERFORMANCE INCENTIVE FUNDS (SPIFs)
There’s an art to getting sales performance incentive funds right. They can be a great way to push for higher performance, but the trick is knowing which incentives to use to drive specific sales behaviors.
Some keys to getting SPIFs to work include:
- Know Your Goal – You and your sales team need to understand what the SPIF is trying to accomplish. Be very specific about it and focus on the behavior that will lead to goal achievement.
- Use SPIFs Infrequently and Unexpectedly – Predictable SPIFs result in salespeople easing off at other times in order to reap the benefits once the SPIF kicks in. Use SPIFs in moderation and when they are least expected so that your team strives for high performance all the time, then kicks their effort into an even higher gear when a SPIF is announced.
- Set a Clear Deadline – Give participants a clear deadline for increasing their performance, with enough time to reap the benefits but not so long that it becomes routine.
- Keep it Simple – Like most aspects of business, simplicity is key. Your salespeople should be able to easily see how their efforts translate into potential rewards. They should be focused on closing deals, not trying to understand the SPIF!
- Measure and Improve – Compare the actual results to those you predicted, assess effectiveness, and tweak before you introduce another SPIF. Incentives require experimentation.
NO MONEY, NO PROBLEM
Non-cash rewards can be just as effective as financial rewards when it comes to motivating employees. They introduce something unique – often a tangible prize – that employees will give a little more to obtain.
One benefit of non-financial rewards is that they are usually consumed, often as some form of memorable experience. This means that employees who earn and enjoy a reward associate a positive experiential memory with having worked hard for the opportunity, further inspiring them to tackle the next challenge.
Additionally, non-cash incentives can become a tradition and help to shape company culture. Annual prizes – especially substantial ones - become something to which everyone looks forward and works to win.
Some proven ideas for you to consider are:
- Travel at the Company’s Expense – pick up the tab for the winner and their family to enjoy a weekend getaway. Pro tip: Be sure to take care of all the major travel expenses. It’s no fun winning a vacation if you have to pay extra to enjoy it.
- Event Tickets – typically to see a local sports team, concert, or theater production. Pro tip: make it special by choosing VIP tickets, back-stage passes, or providing transportation to and from the venue.
- Reservation at a Nice Restaurant – preferably somewhere the recipient wouldn’t normally afford, and for their whole family. Pro tip: without the winner knowing, arrange to pick up the whole tab rather than just sponsoring a fixed amount.
- Special Bottle of Wine or Spirits – preferably tailored to the recipient’s preferences. Pro tip: Sign them up for an annual wine club membership or a wine tasting to which they can invite family and friends.
- Parking or Transportation – unless it’s already a standard employee benefit, give the winner access to preferred parking or a year-long pass for public transport. Pro tip: since employees commuting habits often change with the seasons, be flexible and agree to reimburse whichever combination they decide to use on a monthly basis.
- Latest Technology – pay attention to trends and pick up new gadgets as soon as they are released. Most employees have a hard time justifying the cost of the latest and greatest, which makes it a great prize. Pro tip: Get on the waitlist for coming-soon tech so that it is truly new – and probably hard to come by – when you award the prize.
- Industry Events – although this might sound a bit lame, many employees never get the opportunity to travel to trade shows and enjoy the learning and networking experience. Pro tip: choose an event that’s being held in a touristic location, allow the winner to take their spouse along, and pick up the cost of a couple extra nights’ stay.
You can download even more ideas here.
As with many aspects of life, treating people as individuals rather than part of a homogeneous group can prove highly effective. In this case, recognize that salespeople require different levels of attention, different kinds of support, and appreciate different types of incentive.
According to Harvard Business Review, accounting for individual differences in your sales compensation plan can stimulate the performance of all types of salespeople.
A growing body of research indicates that superstars, laggards, and middle-of-the-pack performers are each motivated by different types of compensation.
Interestingly, most incentive plans focus on rewarding superstars and trying to rev-up laggards, without paying much attention to the rest. This means that steady-Eddie performers are often overlooked for recognition or promotion.
TIERED INCENTIVE SCHEMES
Some sales incentive schemes feature multiple layers in an attempt to progressively reward increasingly stellar performance. For example:
Lowest target - set at a level that most of the sales team will typically achieve
Middle level - set where a smaller but still meaningful fraction of the sales team will land
Highest level - set where only a few, if any, of the top performers can reach
Studies have found that layered incentive schemes are effective at nudging middle-of-the-pack performers to exert a little extra effort. The superstars don’t change because they focus on the top tier, regardless. Laggards are the reverse, unfortunately, and will typically aim at – and settle for – the lowest-level target.
Contests with multiple winners boost overall sales effort and performance better than winner-take-all contests.
The biggest problem with sales contests is that the superstars almost always win them. Increase the number of prizes and you increase the chances that a laggard or mid-level performer will win one instead of a superstar, which motivates the superstars to work even harder.
If you offer lower-level prizes that middle-of-the-pack performers are more likely to win, try to offer prizes that are seen to be equal, or even superior, to the top-level prizes because they have some quality that the higher-level prizes do not.
A salesperson’s performance can lag for many reasons, including a lack of knowledge (actually, a need for more training), complacency, less ability, or simply less motivation.
For those who need help staying focused and motivated, quarterly targets and bonuses can help them keep pace without detracting from others’ performance.
The effectiveness of pace-setting goals has been demonstrated in other domains, notably education. Weaker students benefit from more frequent quizzes throughout a semester to help keep them on track. Like superstar salespeople, stronger students don’t need intermediate goals (they are already making enough effort to hit higher-level targets) but don’t suffer any negative consequences either.
THE BENCH EFFECT
In many sports, the performance of first team players (often known as "starters") has been shown to improve when they are challenged by strong second-string players.
This is known as the “man on the bench” effect, where the presence of competitive peers naturally puts social pressure on lower performers.
The same effect can be applied to salespeople by regularly recruiting new, high-potential talent and, when appropriate, releasing chronic under-performers.
Hiring “bench” players before they are needed also avoids the dilemma of creating a vacant sales territory whenever an under-performer is let go.
REMOVE THE CEILING
Superstars are the most efficient generators of company performance, but incentive plans are frequently capped. This is usually attributed to cost control, with the finance department fretting about unlimited bonuses and commissions getting “out of control”.
This is, of course, absolute nonsense. Whenever the superstars over-perform, the company does as well.
Results show that capping your top performers’ incentives is detrimental to both individual and company performance.
Instead, set over-achievement commissions that kick in after individual quotas have been met. This will keep your superstars grinding as the year-end approaches, even if they’ve already blown by their annual goals.
The benefit to the company can be especially handsome in sectors where customers engage in fourth quarter buying sprees to deploy leftover budget that can’t be carried into the next fiscal year.
Many companies employ specialist salespeople to help handle complex sales, as well as solution architects to provide technical input for digital or otherwise complicated products. There are also pre-sales specialists whose deep industry knowledge is used to guide customers on what product or solution they should buy and customer service experts who provide after sales support.
You should identify which roles are most important to your customers’ buying journey, the goals and desired behaviors for each role, and what motivates each type of team member.
Then, tailor your incentive scheme to appropriately motivate and reward performance in each group.
Whenever more than one salesperson is involved in winning a deal, conflict can ensue over how credit is given and how incentives are calculated.
For the company, it’s obviously important for everyone to work in a collaborative and efficient manner. Incentive plans that promote competition between erstwhile collaborators can have negative unintended consequences.
This has become increasingly complex as marketing strategies – especially those on digital channels (see Digital Demons, below) – play a greater role in influencing the buyer’s decision.
Make clear how and when your team members are expected to collaborate and how each person will be credited for their work. You will need a process for assessing each team member’s contribution and refereeing any disputes over who gets the credit.
THE LONG HAUL
As customers spend more and more time evaluating alternatives, extended sales cycles are becoming the norm. This can make it difficult to keep salespeople motivated for the long haul.
One approach is to reward interim progress by allowing reps to collect commissions based on progress along the sales funnel - i.e. before the sale has closed.
Patience and continued effort can also be encouraged by offering a disproportionately large incentive when a long cycle deal finally closes.
If possible, try to balance each salesperson’s portfolio with both longer and shorter sales cycle deals, so that they have visibility to some amount of near-term rewards.
Alternatively, separate your team into dedicated long cycle and short cycle hunters, based on their individual styles and preferences. Long cycle salespeople should receive a higher ratio of base salary to commissions but still be rewarded with a healthy payoff when a long-term deal finally closes.
Many buyers are now using both human and digital channels when making their purchasing decisions. This means that salespeople are sometimes cut out of the process.
The key to overcoming this issue is to make online sales a positive asset for your salespeople by rewarding their involvement in the online sales process.
Ask your online customers whether they interacted with a salesperson during the process (using a dropdown list, if practical) and, if they do, give credit to the salesperson they named.
Also, don’t forget to make full use of your CRM system. With the right marketing technology in place, you should be able to see when and where an online customer has interacted with the company – including events, webinars, and phone calls.
Whenever they make a purchase, give credit to anyone who was involved in the preceding contact points. After all, it takes many interactions (known in the marketing business as touch points) before a prospective buyer becomes a client and each of those interactions deserves a shared of the credit.
We’re strong proponents of John Elkington’s Triple Bottom Line framework for evaluating corporate performance. Also known as Stakeholder Capitalism, it recommends that companies focus on Planet and People, as well as Profits.
We prefer Purpose, People, and Profits because superior environmental performance is only one dimension of a broader universe of purpose-driven enterprise.
Increasingly, successful sales teams focus on the purpose of the product or service they sell, their role, and the impact they have on customers.
And, compared to middle-of-the-road performers, sales superstars typically share a strong sense of purpose.
To foster purposeful sales, focus on building long-term relationships. Reward behaviors that benefit your clients and relationship-building activities.
Celebrate contract renewals just as vigorously as new sales. Do this consistently throughout the company to help solidify purpose, communication, and transparency.
Whenever you recruit and hire new salespeople, take time to educate them on your company’s purpose, mission, vision, and core values. It’s also an opportunity to involve existing sales team members in helping demonstrate purpose- and people-driven behaviors to their new colleagues.
While commissions and bonuses are important sales incentives, purposeful recognition and rewards can be even more impactful.
Think about prizes that employees will use often, reminding them of their accomplishment and lending renewed purpose to repeating that success.
PUTTING THE WORDS INTO ACTION
Beware – your existing sales culture can’t be replaced overnight! If you try to implement a completely new incentive structure, you’re likely to meet resistance and hit a few potholes.
Unless your existing system is completely inappropriate and deserves to be ditched, a better approach is to design and test one or two changes at a time.
Decide which group of salespeople you are most keen to influence, what behavior you are trying to promote (tied to a specific company goal), and what type of incentive you think could work. Then, trial the new approach and measure what happens.
Finally, as the popular catchphrase goes: Keep it simple, stupid!
Focus on a few of the elements we’ve discussed and implement them carefully. Having an overly complex incentive plan risks confusing the participants and causing unintended consequences.
FOOD FOR THOUGHT
- How effectively does your sales incentive structure motivate the sales team?
- Are some members of the team incentivized more than others?
- Which salesperson or group of salespeople would you most like to influence?
- What sales behavior would you like to promote?
- What type of incentive do you think might be most effective?
Design and implement a new approach and measure what happens. Then, revisit the questions above and keep improving!