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Effective Sales Incentive Plans
QUARTER 2, 2004
Overview
The effectiveness of sales incentives and compensation from both the perspective of plan sponsors and
plan participants remains elusive for many organizations because they rarely can maintain a balance
between cost and outcome. If the cost is too high the plan sponsor wants to cut back in pay opportunity. If
the outcome is too high relative to the cost, the sales force demands more money indirectly by going to a
labor or product competitor. The following article addresses establishing a process for determining sales
incentive effectiveness, establishing effective sales incentives and monitoring that effectiveness in the
future.
Introduction
Business is always undergoing significant change; this has been a standard for competitive businesses for
a long time. One of the oldest surviving companies in the world is the British firm, GKN. Clearly the
pressure to generate new sales has been one constant over the years.
“How GKN has managed to endure (245 years), with only one full-year loss, offers some unusual
business lessons. It has adapted by adroitly figuring out when to switch to new products and new
ways to make [and sell!] them. Its saga also demonstrates that many of today's biggest business
issues aren't new. Mega mergers stumbled. International trade and competition drove investments
and politics. WSJ, March 16, 2004
Today the pressure to increase sales seems to be escalating due to pricing pressures caused by gains in
productivity which is driving costs down. Although productivity is helping to boost profits for many
organizations units sales growth can still be quite modest. How can a company effectively motivate its
sales force in this environment? This is good question. First some background. The sales process follows
the following basic value chain:
Customers> Revenue > Profits > Value
In this value chain the sales force is one of the most important assets that any company can possess,
and ensuring its effectiveness is one of the key differentiators between superior and average performing
companies. Plan design is most successful when everyone involved has an open mind and is willing to
take a step back and think about the strategy of the company and the sales process. And understanding
both the product and the sales process are critical to determining the appropriate compensation
arrangement. Is the product a commodity? A product similar to the competition is more difficult to sell and
may require a more aggressive sales compensation plan. How fast does the company need to grow? If
there is intense pressure for rapid growth, the company may need more representatives and a more
aggressive compensation structure. How about the lead-time and time required to make a sale? Sales
compensation should reflect the level of difficulty to close a sale, the skills required to sell a product (e.g.,