Selecting Sales Performance Measures with Impact
An important incentive compensation (IC) plan design decision is what measures should be used to determine the incentive component of compensation. The choices are many. The most frequently used metric is gross sales. But other metrics can also be used to determine incentive pay, including expansion of product usage, gross margin, market share, customer satisfaction, and activity. Measures can be based on the absolute numbers achieved, growth over the previous year, the percentage of goal attained, or ranking versus peers. Measures can reflect aggregate performance or can be broken down by market segment, product, or channel.
Plans based on just three or four measures drive sales activity most effectively. Using just a few measures makes an IC plan memorable and helps salespeople stay focused. Too many measures can lead to two problems. First, they can confuse salespeople and send mixed signals about what is important in the eyes of the company. Each plan feature gets so little weight that salespeople may ignore important priorities. Second, too many measures can blur the focus on company strategy; if salespeople have too many choices, they may find ways to be personally successful that do not align with the company strategy.
Multi-affiliate companies in which the divisions share a single sales force sometimes experience problems with overly complex plans. When each affiliate is intent on controlling its own metrics, the result can be a plan that has a complex and confusing array of measures and features.
The measures on which the IC plan is based need to support company goals at each stage of the product life cycle. The measures should link company sales and marketing strategies with the goals and challenges of each life-cycle stage (i.e., turn-around, startup, growth, maturity). Because forecasting new product sales is exceedingly difficult, goal-based incentive plans for newly launched products often end with one of two undesirable outcomes. If the forecast is too low, sales forces blow out their goals and are awash in IC cash. If the forecast is too high, an unmotivated sales force realizes that it cannot make money selling the new product and abandons it, making a tough situation even worse.
Good IC plans for newly launched products reward early sales by paying a commission on all sales for at least an abbreviated time. As products grow and forecasting accuracy improves, sales momentum can be sustained and enhanced by paying salespeople for sales growth or for attaining challenging but realistic territory goals. Finally, as products mature, the company can maintain sales and protect its strengths by paying salespeople incentives for reaching the goals for their territory or for retaining profitable business.
Paying for profitability is not as simple as it sounds. Profitability is the C-Suite’s objective, and leaders are tempted to devolve this responsibility all the way down to the sales ranks. For example, the board of one Top 10 asset manager decided that all sales IC plans must be based on the profitability of sales. This laudable goal is easy to decree but difficult to implement successfully. Territory-level profit calculations were so complex and difficult for the sales force to understand that the company switched back to the revenue-based plan after just one year; the value of simplicity outweighed the value of using the more strategic measure.
If the sales force does influence which products get bought, paying incentives on metrics like holding period or net sales can be a clever idea; but the company must get the computations right—or at least stable and transparent—before using the measure in the IC plan. Another technique that companies have used to encourage salespeople to focus on profitability, in addition to sales, is to pay incentives based on sales revenue (i.e., AUM in the territory), but to vary the payout rate across products based on product margins.
Pay for activities and the quantity of activities will go up, but the quality will go down. Few companies pay salespeople for activities such as the number of calls, illustrations, or proposals. However, tracking an activity can motivate an increase in the quantity of that activity but a decrease in its quality. Some companies fall into the trap of paying their salespeople to enter customer data into the CRM system. We see this most often at companies that have CRM systems that add little value to the salesperson or the sales process; these systems are destined to fail anyway, with or without incentives for data entry. We also find that paying for activities reinforces a “vending machine culture”: getting something requires putting the money in and pushing a button.
On rare occasions, paying incentives on activity measures can work if it is done for short periods of time to encourage specific behaviors. Smart sales leaders pay incentives on results and use the performance management system to influence activities.
