Why you need your sales incentive plan to be right

October 3, 2016
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, For a business to be successful, someone somewhere has to sell something. Who is making the sales in your organisation and how are you rewarding them?Sales management is essential for the success of a business. The sales reward scheme employed by a company has a direct effect on the achievement of this goal. Is there a rule of thumb when it comes to sales incentive schemes?

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Depending on the business model, an organisation has a myriad of sales reward options to choose from. These range from long-term incentive plans such as deferred performance bonuses andshare option schemes to short-term incentives including commissions per sale, involvement in an annual profit sharing program, non-monetary perks such as paid vacations, store vouchers, tickets to big games etc.

The choice of the sales incentives package should be tied to cost effectiveness, individual and/or organisation performance while being perfectly aligned to the achievement of the organisations primary objective. Striking this balance can be a daunting task but is nonetheless achievable.

Various scenarios can be drawn depending on the sales plan design an organisation sets in place. For instance; overpaying the sales staff without tying their rewards to their performance will most likely mean that your company loses in terms of sales volumes, profits and market share. On the hand, underpaying the sales personnel without tying their rewards to performance will lead to both the company and the employee losing. Low reward levels while tying this to performance will be a sure de-motivator, ultimately leading to increased staff turnover as employees seek better opportunities.

The balance however can be attained where the reward levels are high and based on performance. This way, high performers are adequately compensated whilst poorly performing employees are placed on performance enhancement programs, motivating them to boost their performance.

Globally, some companies are placing emphasis on their sales staff through lucrative sales commissions. Forbes lists Technology companies as the highest sales commission. Not surprisingly, these companies have revenues in the billions of dollars.

PwC’s REMchannel salary survey shows that most participating companies in Kenya do not offer sales commission. Instead, these companies use performance related bonuses to remunerate high performers. These performance bonuses are mostly paid annually with the rate being subject to individual and/or company performance. The few companies that do offer sales commissions offer it at a rate of between 2% to 10% of the sale value.

The PwC Benefits Survey (2016) also noted that some companies offering commissions as a short term incentive do not offer performance bonus to their sales staff.

Organisations are using outdated sales compensation plans being oblivious of the fast changing business environment. The 21st century market place is dominated by market players who are flexible and quickly adapt to change. This flexibility is more-so in sales where practitioners are finding new, better methods of selling products through technology. More importantly, sales practitioners are more agile and able to move across industries. The failure to adequately remunerate them will inevitably result in high staff turnover for organisations. In the end these companies will not only lose high performers but also potential revenues whilst incurring additional costs of recruiting, training and having new sales teams in place.

Realistic and well-structured sales compensation plans also need to be closely monitored to avoid fraudulent activities. The onus is on top management to critically review their sales compensation plans while taking into consideration various factors such as the economic environment, market characteristics as well the product sell ability. A well designed sales compensation plan will not only attract the best talent but also aid in retaining the same. After all, a company is only as good as its best employees.

(Joy Mwangi is a Consultant on Rewards & Benefits in the People & Organization team)

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