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If your sales numbers aren’t growing, you might be looking to try something new. There are plenty of different sales effectiveness strategies that can optimize sales growth, but one of the simplest strategies is adjusting your sales compensation plan, says Joe DiMisa, Global Sales Strategy and Rewards Advisory Leader at Korn Ferry.
Though many organizations use compensation solely to support their chosen sales strategy, it can also drive growth if it’s structured correctly.
To determine whether you’ve optimized your sales compensation plan to drive sales growth, DiMisa recommends that leaders answer three questions.
The mix is the ratio of base pay to incentive pay. The more pay that is “at risk” as part of an incentive, the more aggressive your plan is.
If you answered A, you have more money tied to base pay and less variable incentive. This mix is designed to strengthen client relationships and maintain accounts rather than drive aggressive growth. “You may still be able to achieve growth with this plan, but the payouts of that growth will be lower if you hit your targets,” says DiMisa. To focus on growth, he says, you need to put more pay at risk in your incentive plan.
If you answered B, your sales compensation plan might be considered aggressive, but is poised for growth. “Higher incentive pay effectively drives sales reps’ performance because they recognize that their pay depends on what deals they close,” he says. “This mix typically is part of a performance-based plan focused on productivity and growth.”
The “upside” is the incentive pay that a sales rep can earn if they exceed their quota, expressed as a ratio. A 2:1 ratio means that sales reps earn 2% of their target incentive for every 1% of quota they achieve over their goal. So, for example, a rep who achieves 120% of their quota would earn 140% of their target incentive. A 3:1 ratio means sales reps have the opportunity to earn three times their incentive target amount.
Generally speaking, upside is a function of the plan’s mix and targets. A higher base salary and lower incentive pay usually means lower upside potential in terms of dollars. Setting an objective over the target can influence the upside significantly, according to DiMisa.
If you answered A, your plan is less aggressive, which means it incentivizes sales reps to push to achieve higher levels of performance, but it is not a true performance-oriented plan. “Sales reps will typically reach a certain attainment percentage, then level out their performance commensurate with their pay if they feel the added effort is not worth the dollars they would earn,” explains DiMisa.
If you answered B, your plan’s pay strategy is more aggressive and offers stronger motivation to drive reps’ performance. It is structured to deliver bigger payouts at higher performance levels. “Sales reps are motivated by high earnings opportunities and will push for growth if they’re continually paid at higher rates,” says DiMisa.
Breakthrough to immediate, predictable and sustainable sales effectiveness
If you answered A, be careful. Your compensation plan may limit sales reps’ ability to earn and, as a result, limit their drive to perform.
If you answered B, your plan is likely to effectively communicate the company’s dedication to paying for performance and rewarding reps who drive growth.
Still, that doesn’t mean incentive caps should never be used. “There are cases where they are necessary,” says DiMisa. “For example, if you have a quota-based plan and lack confidence in your ability to set accurate targets, it is advisable to use an incentive cap.”
DiMisa cautions that sales growth is a function of multiple disciplines and components, but adds that a sales compensation plan should not be overlooked as a piece of the puzzle. “It’s a critical lever to pull if you want to increase efficiency and spur growth in your sales organization.”
Get in touch to learn more about structuring your sales strategy and methodology for growth.
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