Keys to a good sales incentive compensation plan

Developing an effective incentive compensation plan, along with choosing the right software, ensures that salespeople can be appropriately motivated and rewarded.

In a recent article, I provided an overview of the major components of sales performance management, which includes an incentive compensation plan, the focus of this article.

Incentive compensation is critical to sales. For salespeople, IC ties sales success to additional compensation. For sales management, incentive compensation can influence the achievement of strategic corporate goals. Without a well-structured incentive compensation plan, the expectations for salespeople may be poorly defined and sales results may be inconsistent with corporate goals.

The incentive compensation plan also is integral to the selection of IC software. Note the key role that IT plays here (and in all major planning efforts). In short, IT automates plans, and the IC area is no exception. A review of the incentive compensation plan provides most, if not all, of the required input to the IC software selection process.

Developing an effective IC plan

Your first step to creating an effective incentive compensation plan is to review what's already in place from a strategic point of view. Analyze the overall objectives of the historical plan and how well those objectives were met. Determine what worked well and where the company came up short. Provide a document indicating how updated objectives might be better targeted for the new IC plan and what the strategic results could be.

Review the historical incentive compensation plan from a sales point of view. In the historical plan, decisions were made to assign territories, quotas and incentive compensation by salesperson. Again, make notes as to what worked and what didn't. The IC plan should spell out the variety of IC calculation approaches required.

Review the historical incentive compensation plan from a technology point of view. Because we are dealing with compensation, security is critical here. Workflow should be organized to move data across disparate systems. Finally, IC systems depend heavily on reports and analytics. Review whether adequate technical support was provided to both salespeople and sales management.

Based on this extensive review, you can create a new plan. Create a set of strategic objectives to be achieved with the new IC plan. Clearly, you will want to hit some profitability goals. But the analysis must go deeper. Do you want to emphasize certain product lines? In certain regions? Is it the company's goal to bundle more service with product? Create a sales plan based on territories, quota and IC. The sales plan must meet the objectives described above.

Next, create an IC technology plan. Improvements in IC will require a review of intersecting systems, including ERP, HR, corporate performance management, sales performance management and IC, as well as intersecting technologies including business intelligence (BI), workflow and security.

Selecting appropriate IC software

Incentive compensation software revolves around the key IC business objects: the salesperson, the calculation of IC for each salesperson, the sales manager and, most importantly, the sale itself, and the impact on the IC system, the HR system, the ERP software, the order management system, and so on. IC software requires:

  • A rich data repository to store images of business objects, as well as metadata extensions for customization.
  • A calculation engine to compute IC by sales, territory, product line, etc.
  • Messaging among systems, as well as workflow to guide the relevant movements of data. In addition, because this data is quite sensitive, security must be very strong.
  • Ad hoc queries that are easy for salespeople and sales management to use.
  • Its own BI layer or built-in template for commonly used BI tools.

IC software success stories

The following case studies are illustrative, and taken from the marketing collateral of the vendors. Analysis of IC vendors is not within the scope of this article.

IBM, working with its consulting partner OpenSymmetry, implemented its IC software system for its automobile club customer AAA of Northern California, Nevada and Utah (AAA NCNU).

AAA NCNU has four sales organizations that sell insurance, travel services and membership products. The sales force is about 1,500 strong. In the past, all sales calculations were done using spreadsheets -- and sales management took too long to do the calculations.

With the new incentive management system, the salespeople have easy visibility to their data, the sales calculations can be done in minutes, and the team has time to work on new compensation plans.

The time to develop incentive compensation plans was accelerated by 66%, tens of thousands of dollars were saved on plan updates and payment calculations were done 20% faster.

Optymyze, a software vendor focused on sales performance management, worked with its customer, US Cellular, a regional provider of cellular services. The management team at US Cellular tried to keep up with the IC changes required to be competitive, and they were coming up short. Among the problems they faced were overpaying sales reps, lacking accurate data to see the extent of the overpayments, and lacking internal resources to find and fix the problems.

With Optymyze, new sales compensation rules were implemented. Managers could maintain accurate alignment of each salesperson by channel. Finally, US Cellular was able to develop a new national retailer sales channel.

IC software helps bring order to the sales process by rewarding salespeople for excellent work and ensuring that the excellent work meets the goals of the corporation. An incentive compensation plan is a necessary first step, and helps lead the way both to strategy and the tactical delivery of software for salespeople and sales management.

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