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The Complete Introduction to Incentive Compensation for Sales

by Uneeb Khan
Incentive Compensation

People are influenced by incentives. Even the most motivated employees require a little prodding to keep them functioning at their best, and performance-based incentives can provide that prodding.

Incentive compensation is a sort of variable pay wherein a salesperson’s (or other employee’s) income is directly proportional to the amount of goods sold, the performance of their team, or the company’s success.

The strategic use of incentives to create better business outcomes and more accurately align sales representative behavior with the organization’s goals is known as incentive compensation management. The incentive pay schemes of a company must be aligned with the company’s goals, however, this can be difficult to do.

What Is The Best Way to Create An Incentive Compensation Plan?

A structured approach comprises four phases (1) a planning session two to three months before implementation; (2) a diagnostic review of plan performance with relevant stakeholders; (3) an implementation phase in which all new plans, targets, and accounts are communicated to gain buy-in from sales staff; and (4) an ongoing adjustment phase in which plans are modified and re-evaluated depending on the business and market changes.

Sales representatives value predictability and clarity, and these principles make the process more dependable. Furthermore, effective plan designs are usually based on a few fundamental principles. Before beginning to design incentive compensation schemes, plan creators should ensure that they include the following:

1. Organizational principles

These factors influence how well incentive plans connect with corporate objectives. Organizational principles also set the plan’s performance measures (which sometimes include quotas) and analyze the plan’s capacity to accurately measure them. To maintain a clear and reasonable set of objectives, some experts recommend limiting the number of performance measurements to a maximum of three.

Sales compensation research groups tell plan managers that no performance measure should account for less than 15% of the entire incentive target. This enables administrators to avoid having measures that are deemed irrelevant by sales representatives.

2. Motivational principles

Salespeople are not all driven in the same manner. New hires, for example, who have not yet acquired many new customers, maybe highly driven by commissions. Veteran performers, on the other hand, maybe interested in a quarterly or annual bonus for surpassing quotas. \

Plan planners should examine the opportunities provided for high, low, and on-target performers regularly and reclassify employees as necessary.

3. Behavioral principles

This entails a number of factors, including how well individual salespeople will execute the plan, how well team behavior and success will be rewarded, and how straightforward, transparent, and understandable the plan is. Designers of incentive plans should pay attention to these different behaviors, particularly group vs. individual behavior, and adjust their plans accordingly.

Must Read: How to Incentivize Distributors?

Key Aspects of Incentive Compensation Software

Solutions should have the following critical aspects to properly manage incentive programs and encourage sales behavior.

1. What-if scenario modeling

To maintain incentive plans flexible and assist the firm to adjust fast in response to market changes and business needs, sales incentive systems should have scenario planning capabilities. Adjustments to incentive plans in the middle of the year can be incredibly irritating for sales staff.

Nonetheless, the capacity to predict risks, analyze and assess alternative paths forward, and make justified changes to compensation plans may aid sales and sales operations managers in maintaining stability. Before releasing a plan to the sales team, “what if” modeling allows plan creators to analyze the implications of potential alterations.

2. Rapid Calculation

Incentive payouts are calculated in seconds using best-of-breed technology, which is a significant enhancement over manual record-keeping processes that rely on fragmented sales systems of record.

Complex computations must be automated and improved in speed and accuracy, as well as time must be reclaimed for value-added activities. It should also ensure data consistency, minimize disputes, incorporate pipeline data and sales forecast to allow salespeople to estimate earnings ahead of closing deals, distribute quota agreement letters electronically, enable digital dispute resolution, and accrue commission while making sure that incentives are paid correctly and on time.

3. Insights that drive performance in real-time

Plans can be quickly adjusted to achieve corporate goals when sales leaders and frontline sales staff have access to real-time performance data. This, as well as other business analytics, such as summary reports and past audits, should be provided through an incentive management platform.

Final Thoughts

Incentive compensation plans should be designed using cross-functional data to optimize individual salespeople’s earnings and progress a company’s sales goals. They should be managed to determine the impact of possible changes on the rest of the organization. For both of these operations, an integrated compensation solution is essential.

An integrated compensation platform allows incentive compensation schemes to remain responsive to changes as they take place by assuring that all stakeholders have access to the same real-time data.

Similarly, enhanced scenario planning allows plan creators and managers to see all of the consequences of potential incentive plan adjustments before they are implemented with the sales team. This allows plan makers and managers to improve their plans while also experimenting with new, inventive concepts.

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