How to Structure Compensation Plans to Drive Sales Performance
September 11th, 2020 (Updated 05/18/2022) | 5 min. read
By Tolu Oke
Managing Compensation Plans That Drive Sales Performance
The companies with the highest employee morale and productivity pay a mix of salary and incentives. Financial incentives beyond base pay include commission, overtime, bonuses, profit sharing, stock options, benefits (insurance, vacation, leave, etc.), but what about the other “softer” forms of compensation that drive sales productivity?
There are plenty of ways to restructure your compensation plans to motivate sales teams, maximize productivity, and retain employees and customers. Many can be achieved without spending a penny. These often-ignored methods, explored in detail below, provide real-life solutions for extracting the best performances from each salesperson on your payroll.
“Motivation is the art of getting people to do what you want them to do because they want to do it.” (Dwight D. Eisenhower)
Restructuring your compensation plans for maximum effect requires close consultation with your salespeople. Too many companies have either highly complex or overly-simplistic compensation plans, taking a top-down approach with little clarity about what’s driving their sales force and the market. Companies need to be asking the following questions:
- “What are the company’s and team’s business goals?”
- “What balance do I want to create between motivating personal success versus team success?”
- “How do I want to strike the appropriate balance between pay and performance?”
Along with answering the above questions, managers must recognize how each salesperson reacts to rewards based on their intrinsic or extrinsic motives. Intrinsic workers are those driven by “recognition.” In contrast, extrinsic workers are more incentivized by reward. In reality, however, most people are a mix of both.
“Intrinsic Workers” Favor Social Recognition Over Financial Rewards
What’s more intrinsic than acknowledgment? In a recent podcast, Paco Jimenez of Bain & Company said that transformation, “…is such an opportunity for companies to actually put the most important person in the center of the discussion, which is the actual salesman or salesperson“. We couldn’t agree more. Somewhat surprisingly, perhaps, 80% of top salespeople are driven primarily by intrinsic over extrinsic motives. Intrinsic workers might hit targets but remain unmotivated if they fail to receive empathetic praise from management, fuelling cognitive dissonance in their minds that degrades performance over time. To compensate intrinsic salespeople, managers should assign meaningful tasks that showcase their employee’s unique skills, providing a sense of accomplishment and progress.
A public announcement of an intrinsic worker’s achievements can be invaluable to their personal growth, fostering a sense of pride that makes them feel a valued member of the team. A well-timed “shout out” in a meeting, email, or Slack channel is a free source of intrinsic compensation that motivates others who crave the same level of praise and attention.
“Extrinsic Workers” Favor Monetary Rewards
For extrinsic workers, monetary compensation is often all they need to showcase their value to the company. But it’s clear from the research that some standard benefit practices do more harm than good. Doug J. Chung, Associate Professor of Business Administration in the Marketing unit at Harvard Business School, makes some crucial suggestions for companies looking to restructure their compensation plans:
- Managers should remove caps on commissions, or if they have to retain some ceiling, set it as high as possible. Caps only serve to decrease high-performing reps’ motivation and effort.
- The practice of “ratcheting” quotas (raising a salesperson’s annual quota if he or she exceeded it the previous year) hurts long-term results. It’s tempting to assume that quotas are set too low if reps smash through targets (and they do have to be adjusted periodically), but resetting quotas too frivolously leaves reps feeling hard done by.
- Compensation plans shouldn’t be overly complicated, but they should have multiple components because different elements drive different individuals. So-called “overachiever bonuses” motivate top performers, while quarterly bonuses help keep lower performers on track over the long term.
- Managers should continually experiment with their pay systems to find optimal plans (A/B testing, is particularly helpful.)
Five Creative Ways to Compensate Salespeople and Improve Retention
Compensation doesn’t have to be purely financial to elicit positive change. Companies have come up with a myriad of novel ways to motivate and help build strong internal relationships within sales teams, vital for departmental collaboration, growth, productivity, morale, and overall well-being.
- A designated fun budget: The better your sales team performs, the more money is added to the “fun budget.” When it’s full, the group decides on a fun thing to do together.
- A personal recognition letter from the CEO: It’s a great way to make high performing salespeople feel appreciated.
- Household chores: If salespeople are working particularly long hours, why not foot the bill for a month’s worth of house cleaning or a handyman’s services for the day. It shows you care.
- Classes and courses: Both on and offline courses are an excellent motivator for time-starved salespeople and an ideal team-building exercise. They strengthen skills, stimulate the brain, improve memory, focus, and even reduce stress.
- Subscriptions: Spotify Premium, Apple Music, Stitcher Premium, book clubs, coffee clubs, hot sauce clubs(!) The list is endless.
The Right Technology is Central to Effective Compensation Restructuring
Compensation optimization requires a mix of qualitative data drawn from in-person discussions and quantitative data and statistical analysis provided by the right technology.
Pricing software gives managers total visibility over each transaction, all the way through the funnel, win or lose. Decision-makers can see if salespeople have followed their pricing guidance in the “real world,” and fine-tune compensation plans to shape sales behavior towards achieving the best results for the company and the greatest job satisfaction for employees.