Thursday, April 28, 2011

Lesson #26: Designing Sales Incentives to Motivate Your Sales Team

In our last lesson, we discussed how to structure your sales team and procedures.   Today, we are going to tackle the other part of designing a winning sales strategy:  designing motivational sales incentives for your team that accomplish your internal business goals.  So, there are really three pieces to this puzzle:  (i) what metrics do you want your sales team focused on for your business needs; (ii) what incentives will get the salesperson excited about acheiving that goal, while working for your business; and (iii) what is the frequency of paying out those incentives.  We will tackle each of these points below.

You may be thinking that revenue targets are the most logical and easy way to design your sales plan.  And, often times they are.  But, if you simply give your team a sales target, they may not be paying attention to other important metrics like the profit margin on their sales, or the conversion rate as a percentage of leads they are being given.  When at iExplore, we actually were driving our sales team on the latter, since if they were driving gross profit and converting a high percentage of the leads we were sending them, the top line revenues would naturally follow.  So, figure out what key metrics drive your business, and get your team religiously focused around those metrics, which may or may not be revenues for your business.

There is a second piece to this, which is incentivizing the team based on their individual performance vs. the company's overall performance.  There could be scenarios where the company has a bad month overall, but an individual does great, and vice versa.  In my opinion, it is important to reward good invidual behavior, in all scenarios.  So, at iExplore we said that 50% of the incentive would come from individual performance, regardless of company performance, and 50% of their incentive would come from company performance, regardless of their individual performance.  That did a good job of balancing the ebbs and flows of both the individual's and the company's sales cycles.

In terms of the incentive itself, every individual is driven by different things.  Most people like cold hard cash.  But, others may psychologically be better driven by a free vacation or new iPhone or whatever.  Or, maybe they are trying to earn equity options in your business, if available.  It is the job of the sales manager, to figure out what makes each individual tick, and tailor a plan that meets everyone's goals.  I do not think a "one-size-fits-all" strategy is the best.  I typically will set the overall incentive plan based on cash, and use trips or prizes as "bonus" incentives for the sales leader in each sales period, letting the sales leader pick whatever they want from a menu of options, which they had input in designing in the first place.

In terms of the percentage of base salary vs the percentage of incentive income, it really varies based on the complexity of your products and difficulty in hiring replacement staff.  If you are selling something simple, like window washing, most anybody could be trained to sell it.  So, maybe your salesperson has a $40,000 base salary and a $20,000 incentive if they hit reasonable goals.  If you are selling aerospace engineering components with big government contracts on the line (much tougher to find expert staff), you may have to pay that salesperson a base salary of $250,000, with incentives which could double that.  Do competitive intelligence to determine "market rate" for your industry, and plan around that.

In terms of the frequency of the sales incentives, there are plusses and minuses of monthly vs. quarterly vs. annual incentives.  If monthly, the individual will appreciated seeing cash faster, but it doesn't leave any real "hooks" to stay with the company.  The minute they find a better job, they could leave.  On the contrary, an annual plan will set the long term "hooks" (e.g., won't leave mid-year to lose their commissions), but the individual may not like only seeing checks one time a year.

The way to accomplish a happy middle ground is the following.  First, you could have a portion of the plan (e.g., individual-based incentives) paid monthly or quarterly, and the other portion of the plan (e.g., company-based incentives) paid annually.  In addition, if an annual plan is desired, perhaps there is a way for individuals with near team cash needs to take a "early withdrawal" on their annual commission based on performance to date, if there is some crisis they are dealing with at home (e.g,. unexpected medical bills).  The more you work with your sales team to help them acheive their individual needs, the more they will feel that you care about them, instilling long term loyalty to you and your business (which is the ultimate goal).

Worth mentioning, I always like the sales team to have a visual picture of where the company is and where the individual is in terms of their monthly sales goals.  Like a big pie chart on the wall that gets filled in each day the closer we get to the goal.  Or, a daily or weekly sales report by team member, which will create a healthy competition between the team members, and let underperformers know when they need to pick up their pace.

But, the most critical overriding point is: in whatever sales incentive plan you put in place, make sure it works for both the company and the individual.  Nothing will demotivate a sales team faster than an individual working their ass off, and not seeing any fruits for their labor.  And, we all know how hard it is to recruit good sales people, and keep them on staff.  So, think long term, not short term, with your sales team, even in the bad months.

There is no single right answer here. Solicit input and reactions from your team and tinker with it over time to find the right long term package that works for everybody.  Good luck!

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