We have created a unique methodology to design sales incentives, which the following precise goals in mind:
- Provide a high degree of flexibility in the design of sales incentives
- Ensure strong alignment of sales incentives with business goals
- Decouple concepts (ex: how is performance measured vs. how rewards are calculated vs. who receives rewards)
Our methodology is based on a sequence of 5 essential questions. We are confident that our approach will make designing your next incentive manageable. While our web application implements this methodology, reading this KB may help you gather some thoughts ahead of time. Finally, remember that you can always define multiple (concurrent) incentives. Therefore, when designing a comprehensive incentive program, try to focus on each incentive plan one at a time.
1 - What should be the performance measurement scope?
To answer our first question, you should choose one of the following:
- Measure performance by individual
- Measure performance by team / territory
The most common option is to measure performance by individual. You should use the second option only if you want to measure the collective performance of teams / territories because:
- You want to reward managers based on the collective sales performance of a team / territory
- Your employees work in a highly collaborative manner to achieve sales results
- You want to reward not just individual performance, but also collective sales performance
Still unsure? Here is some additional information to help you decide.
2 - What should the performance metric be?
To answer our second question, you should choose choose one of the following:
- Measure using revenue
- Measure using profit
- Measure using scoring
Revenue is the simplest option. However, if your team is allowed to grant significant discounts, it may be a poor choice. Indeed, a large number of low-margin transactions could lead to overpayment (as your revenue remains high, but margins low). Also, if product margins are highly variable, you may be better off using profit instead of revenue. Finally, if neither revenue nor profit make sense, you should use a score-based approach. You can use point-based scoring, scoring based on revenue, or scoring based on profit. Scoring is also the correct choice if you are dealing with events (ex: qualified lead, gave demo) rather than product sales. Below, we'll use <performance metric> to represent your chosen metric type.
Still unsure? Here is some additional information to help you decide.
3 - How should the performance metric be evaluated?
To answer our third question, you should choose one of the following as the best way to evaluate your chosen performance metric:
- Raw value - achieve a high value for <performance metric>
- Competitive ranking - achieve the top <performance metric> within a scope (ex: territory)
- Percentage increase - achieve a % increase of <performance metric> within a time period
Raw value is the simplest option. For example, all traditional quota-based incentives measure achieved revenue using raw values. Those raw values are later compared to attainment thresholds. However, more innovative incentive plans may be based on competitive rankings (ex: a sales contest rewarding each top performing representatives within a territory). Finally, sophisticated incentive plans may favor historical increases (ex: total revenue growth) to using raw value targets. Below, we'll use <performance value> to represent your chosen metric evaluation method.
Still unsure? Here is some additional information to help you decide.
4 - What should be the attainment levels and associated rewards?
To answer our fourth question, you should define a number of attainment levels. For example, you could use:- Level 1 - <performance value> is between A and B
- Level 2 - <performance value> is between C and D
- etc.
And then, for each attainment level, you should define the reward(s) such as:
- A fixed cash amount
- A value calculated from <performance metric> (ex: 5% of total revenue)
- A cash amount calculated from the employee's salary
- A prize (ex: trip to the Bahamas)
- A notification via email (ex: congratulatory email)
- A notification on the participant dashboard (ex: special announcement)
- Etc.
Still unsure? Here is some additional information to help you decide.
5 - How should rewards be assigned?
To answer our fifth and final question, you should define who receives the reward. In most cases, it will be a simple answer - the individual representative who did the work and attained the expected result!
However, in reality, other assignment schemes are equally valid. For example, it could make sense to assign part of the reward to the individual's manager because this is how your business provides incentives to managers.
Also, you may have chosen to measure performance at the team / territory level, and you now need to define how the reward should be split between team members.
Here are some examples of reward assignment policies:
- Individual - recipient is the individual (default)
- Individual - recipient is the individual's manager
- Individual - recipient is the team the individual belongs to
- Team - recipients are defined by split rules
- Team - recipient is the team's manager
- Etc.
Still unsure? Here is some additional information to help you decide.
That's it!
We've focused on the core design principles of your new sales incentive plan. You defined a measurement scope, a performance metric, a way to measure this metric, attainment levels, associated rewards, and how to assign rewards.
There are many other details we glossed over. Our web application will walk you through and help you configure all parameters such as: