Selecting effective sales incentives to motivate your team

You can find incentive systems that steer and reward employee performance in all areas of business. However, they are essential in sales, where performance and target achievement directly impact revenue and company success.

This article discusses what a sales incentive system needs to cover to ensure top sales performance.

Types of sales incentives

• Commission structures. Salespeople often receive a percentage of the sales revenue they generate as commission. Higher sales volumes or achieving certain milestones may result in higher commission rates.
• Bonuses. Reps may receive bonuses for reaching specific targets, such as exceeding quarterly sales quotas or acquiring new clients.
• Performance-based rewards. Sales incentive systems may include rewards based on performance metrics such as customer satisfaction ratings, sales growth rates, or the number of new accounts opened.
• Recognition programs. Acknowledgment and recognition of top performers within the organization can be a powerful motivator. This recognition may take the form of awards, public praise, or inclusion in prestigious groups or clubs.
• Non-monetary incentives. Incentives such as trips, gift cards, merchandise, or exclusive experiences can motivate salespeople.
• Training and development opportunities. Offering opportunities for skill development, training programs, or career advancement can improve performance and achieve higher levels of success.
• Clear goals and targets. Well-defined sales targets and goals are essential for an effective incentive system. Salespeople need to understand what is expected of them and how their performance will be evaluated.
• Regular performance evaluation and feedback. Regular feedback and performance evaluations helps salespeople understand where they stand in relation to their goals and allows for adjustments to the incentive system if needed.

What are the main challenges with sales incentives?

One of the primary challenges is finding the right balance between various performance metrics and incentives. Companies often have multiple goals they want to achieve, such as revenue targets, customer acquisition, and product penetration. Designing a scheme that adequately rewards all these aspects without overcomplicating the system can be tricky. While aligning sales incentives with company objectives is essential, it's equally crucial not to overwhelm sales teams. 

In addition, if the criteria for earning incentives are unclear or constantly changing, it leads to frustration and demotivation. Sales incentive programs need to be clear and transparent to avoid confusion and dissatisfaction. Incentives should strike a balance between rewarding short-term results and fostering long-term growth.

Therefore, when designing a sales compensation scheme, you need to combine multiple variables carefully and correctly. Companies often try to include many variables that reflect every single one of their corporate targets. But while it is important to always keep company goals in sight, these systems shouldn’t become too complicated either.

Are your sales incentives too complicated?

If you hear your sales people saying, "To reach my targets, I have to sell product X first and then service Y, but I can’t sell them in conjunction with product Z,” you have probably crossed the line with your sales incentive plan. Sales managers shouldn’t have to perform mental gymnastics to juggle the criteria. Too many variables only lead to confusion and frustration. 

In our experience, sales teams perform best with three variables and are generally able to deal with a maximum of four variables. If they have to consider any more than four, their motivation fades, and they stop trying. Ultimately, target achievement decreases after that.

We also know that salespeople do want to succeed. They are intrinsically motivated to achieve their company's and customers' best results. So, as well as paying attention to the number of variables, it's important to avoid conflicting, ambiguous, and subjective targets. 

Sales reps need to be able to easily evaluate the variables, particularly during sales pitches. If the sales incentive program becomes too complex, the sales force will primarily consider the simplest and most effective variables, ignoring other goals, such as customer satisfaction or margin. 

Pairing simple incentives with clear leadership can significantly enhance employees’ intrinsic motivation. As salespeople earn more trust and responsibility within their department, they identify more with the company and feel a greater sense of personal satisfaction with their performance.

Revenue or profit-based sales incentives

While remuneration committees usually want to increase profitability, profit-based incentive metrics can seem complicated. Substitution for a revenue-based metric seems like an easy option. However, this assumes that salesforce behavior will remain similar.

The reality in most cases is that this gives little reason for the salesforce to fight for higher prices. Sales reps start closing deals  through discounts in order to move on to the next prospect quickly. As price is every company’s strongest profit lever, this discounting behavior results in a damaging effect on profitability.

The scenario below shows the dangers of revenue-based incentives on profitability. Alan and Lucy are account managers who are both working on a similar deal with different customers. 

Alan closes his deal with an agreed discount of 10%. Lucy negotiates a bit harder and closes with a 5% discount. They are both paid a 1% commission on net revenue. 

Look at the difference in terms of outcome for the company and for the salesperson. Lucy makes her company £5,000 more profit than Alan (100% higher.) However, she receives an extra reward of only £50 (5.6% higher) for the effort she put into achieving that outcome. The incentive to negotiate harder isn’t really there .

Another company was surprised when we ranked their account team by profit, rather than their usual ranking on revenue. When ranked on revenue, Josh, Daniel and Esther were the top reps and life was pretty uncomfortable for Martin, Kirsty and Steve. 

But look at how the situation changes based on profit. Now Paul comes out top (+14 places), with Josh and Esther maintaining the top 3 positions (in yellow). The bottom 3 (in red) changes too, as now their “worst rep” Steve has shot up to a highly respectable 6th position. Kirsty is up in the middle of the pack at 14th, and Martin is struggling even more at the bottom.

Finally, take a look at Dave. When he was struggling on his numbers he’d offer big discounts to bring in the deals. This kept him in the middle of the pack and off the radar. 

Once his profit performance became transparent, he earned the nickname “Discount Dave.” (He has since worked hard to reverse this, showing that peer comparison can also be a strong motivator.)

How much should you pay out for sales incentives?

How does your organization think about the money used to pay the salesforce? Do you think about it as a cost, a budget or an investment? We’ve come across lots of schemes where companies aimed for double-digit growth but the budget requirement was cost-neutral.

How you view the money used to pay the salesforce can lead to different approaches in designing incentive plans. 

For example, viewing sales compensation purely as a cost implies that the primary objective is to minimize expenses. While controlling costs is important for maintaining profitability, this may lead to incentives that overly focus on short-term savings. Such schemes may fail to attract and retain top sales talent or adequately motivate them to achieve sales targets.

Alternatively, you manage sales compensation as a budgetary constraint, and must set limits on how much you allocate. Of course, budget constraints are necessary for financial planning. However, rigid budgetary approaches may restrict the ability to invest in competitive incentive schemes that drive growth. You may miss out on opportunities to capitalize on market potential and outperform competitors.

Treating sales compensation as an investment shifts the focus from mere expenditure to strategic value creation. Here, you acknowledge that the money spent on compensating the salesforce should generate returns in the form of increased revenue, market share, and customer satisfaction. 

By considering sales incentive programs as investments, you adopt a more strategic and forward-thinking approach to compensation design. This reinforces the alignment between incentive plans and your company's growth objectives. It also encourages you to evaluate the return on investment (ROI) of your incentive plans. 

But is the sky really the limit?

A remuneration committee will be able to monitor the exact number of really big individual pay-outs. Too often though, the evidence is anecdotal. These occurrences are easily remembered, while the bulk of more moderate cases don’t stand out. 

This fear can cause a watering down of the scheme, often resulting in a pay-out cap. The outcome: a demotivated salesforce, the exact opposite of an effective incentive scheme.

Sales incentives and behavioral economics

As businesspeople, we’d like to think that our decision-making is wholly rational. Unfortunately, studies of how people make decisions show that this is often not the case. We are heavily influenced by a range of biases that can cause irrational and often detrimental actions.

For example, people generally dislike losing things more than they like receiving them. If used wisely, this loss aversion can be a powerful ally. In addition, “present bias” tells us that people place more weight on things that are happening now compared with at some point in the future. 

We’ve helped numerous companies deploy incentive schemes where the more discount the salesperson uses, the more of their pay-out is sacrificed. We also incorporate the incentive calculation into a salesperson’s quoting tool. That way, as they vary the parameters of the deal, they see live what their return will be.

Effective incentive scheme design requires a deep understanding of both traditional economic principles (such as supply and demand dynamics) and behavioral economics (such as cognitive biases and decision-making heuristics). By integrating insights from both disciplines, you can design incentive schemes that not only align with rational economic incentives but also account for the psychological factors that influence salesperson behavior.

Data-driven sales incentives

While many sales incentives are based on rules of thumb or gut feel, there really is no substitute for detailed analyses. Before making any changes to your incentive scheme, conduct a detailed analysis of your current scheme's performance. This may include evaluating salary benchmarking to ensure competitiveness, assessing quota attainment versus payout to identify any discrepancies, and gathering feedback from the salesforce through surveys or questionnaires. 

Once you've thoroughly evaluated your existing scheme, the next step is to design and stress-test the planned new scheme. This involves estimating the return on investment (ROI), assessing potential payout variance under different scenarios, and modeling the impact on individual sales reps (winners vs. losers). 

These data-driven insights will help you finalize your new incentive scheme. The next step is to prepare comprehensive communication collateral to explain the changes to the salesforce. 

Communication should clearly articulate the rationale behind the changes, how the new scheme will benefit sales reps, and what actions they need to take to maximize their earnings under the new scheme. Transparent and well-structured communication facilitates a smooth transition and garners buy-in from the salesforce.

How Simon-Kucher can help

At Simon-Kucher, we understand the critical role that sales incentive systems play in driving motivated sales team members and achieving exceptional results. Our expertise lies in crafting innovative and effective sales incentive ideas tailored to your company's unique needs and sales processes. 

Whether you're looking to revamp your existing incentive system or create a new one from scratch, we have the knowledge and experience to help you design a great incentive structure that will energize and motivate your sales team. By partnering with us, you can unlock the full potential of your sales force and drive revenue growth like never before. Let us empower you to motivate your sales team and achieve unparalleled success in the marketplace.