HR Services1

HR Services1

Monday, 17 June 2013

How to design a suitable sales incentive policy for your company Sales force?

 Every company has a sales force to sale its products and services. We all know that a motivated and self driven sales force can contribute a lot in financial growth of the company. A well structured incentive scheme for such sales force can act as a catalyst to ignite the fire of desire to over achieve their targets. Same way, a poorly designed incentive scheme can be just a scheme for sales force and can demotivate them. Hence as HR, we need to play important role while designing such incentive schemes for our sales force and for that matter for any profile in the company. In this post, we are concentrating more on incentive scheme for sales force hence I will keep my discussion around it only. I think we design most of incentive schemes for our sales team.

Throughout my career, I have learnt following things to keep in mind while framing incentive policy for sales force. These are also useful tips to keep in mind for designing any kind of incentive policy. Let’s have a look at each one, one by one.

It should be based on facts and figures

Before you design an incentive policy, you better get the data in place. You should collect at least last 12 months data to see pattern of sales happening in each month. If your company has presence in more than one city, then you can also take city-wise and month-wise sales data both in terms of quantity and revenue. This will help you to understand, how each region does in terms of sales?

You can calculate average, minimum, maximum and median of all 12 months sales data. You need to carefully observe the sales pattern, like how many times average of all 12 months was met in last 12 months, how many times company did above or below average. Once you have all this data in place, you can easily determine starting level and next levels of sales incentive plan. 

You should do it for each region as each region data will be different. These facts and figure will help you in putting your incentive scheme strongly in front of sale team and team will not think that scheme is made ill logically but in a logical way, considering all data points. Hence it is easier for them to accept and adopt it. Please note, until sale team adopts incentive scheme in positive way, they will not put their 100% efforts to make this a success hence their buy-in is very important.

Sale projection should also be kept in mind

As it is important to see, what we have done in history as organization in a particular region, same way, it is also important that we should know that what the sales projection in future. Here, sales head can contribute a lot. Sales head knows total leads in hand, hot leads, cold leads etc. Basis which, Sales head can project sales projection in coming quarters. 

You should also keep this in mind and incorporate such inputs in your incentive plan. For example, if last 12 month’s sale average is 1000 and projection by Sale head in next quarter is 1500 then you cannot simply make starting level of incentive scheme as 1000+. It has to be somewhere from 1250+ product sale. This way you have considered both historical data and projection.

Also keep individual sales person capability in mind

You also need to consider individual person’s sale record and capability to sale. A high performer can easily achieve your given targets and can claim higher incentive if you make easy targets for him. Same way, a sale person not doing well, will not be able to achieve anything even if the incentive scheme is on basis of data points.

But, you can also not make different incentive scheme for different person. It has to be identical for a group of sale team. You can certainly make different incentive slabs for sale teams located at different regions or working on different product but it has to be identical in same group. 

Idea should be ensuring sales team earn more

Idea while designing an incentive policy should never be to not to give but it should always be giving more to sales team if they sale more. This way it is WIN-WIN for both individual and organization. But at the same time, it should not be designed in such a way that sale team can achieve it easily with normal efforts. Incentive scheme should motivate them to do little extra than their normal efforts. Please note that sale team also gets salary other than incentive for sale. They also need to justify their salary hence there should be a minimum target which they need to achieve. Incentive scheme should start after that normal target.

Ensure that incentive should not eat up major portion of your profit margin

You need to also ensure that incentive you are paying for a sale should not be that much that it eats up your profit margin substantially. Hence incentive payable against each sales slab should be evaluated considering this. You can also check what is the total amount you are paying on same sale? Example, you might have incentive scheme for individual on a particular sale and at the same time you are also giving incentive to team lead and project manager on same sales in some way hence total impact of incentive paid on particular sale should be kept in mind.

Check 360 degree impact of incentive scheme

An incentive scheme can be linked with other ongoing policies or scheme in the company. Hence as HR, you need to ensure addressing all such impacts on other existing scheme or policy. Example, if a sale person already have some incentive scheme which is similar to new incentive scheme which you are planning to launch then you need to make it clear which one will be applicable.

Launch incentive scheme for limited period to test

There could be situations when you are not sure about success of incentive scheme which you are planning to launch then it is better to launch this scheme for limited period like 3 months. By doing so, you will be able to evaluate success of incentive scheme. If incentive scheme do well, then you can continue with it else you can review the incentive scheme and re launch with changes.

Take all stakeholders in confidence before launching the scheme

Ensure that all stakeholders should be involved before finalization of incentive policy and give their buy-in. This will help you to implement the policy and impact will be much higher. These stakeholders can also give you valid inputs and suggestions which will help improving the incentive scheme and making it more robust so that there is less loop holes in your incentive scheme designing. It is better that all such things should be addressed in your scheme during designing phase as it is difficult to make changes in your incentive scheme again and again after launch. It also gives bad impression about planning team.

Articulate the incentive policy clearly

As mentioned in my previous post on “Do’s and Don’t while making or reviewing Company HR Policies” articulation of incentive scheme will be very important. It is written document and will be referred in case of any clarification and concern raised by anyone in future. You may or may not be present at that point of time hence ensure you draft the incentive scheme in such a way that all aspects which can come up should be clear.

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Arpita Ganguly said...

A good brief on incentives.

Govind Negi said...

Thanks Arpita for your appreciation.

abha sharma said...

very detailed and good inputs...a must reference point for designing incentive policy .

Govind Negi said...

Dear Avha,

Thanks for your encouragement.

Brian Reynolds said...


Thanks you for the time you've put into this article. There are however some concerning challenges that conflict with you points.

Any good policy should consider modern data regarding decision making and the response to incentives from research in behavioral economics. From those we know that monitory incentives play a much smaller role in value of a team then previously thought. We know that people are rarely as money-motivated as we think and that even when they are they're less happy with their role and more likely to be poached by a competitor. If you have an incentive-based pay structure you'd better hire the right personality types for the job.

You're point about using data is an excellent one and likely even more valuable when talking about the evaluation of front-line managers; this because we know that the role of these managers is more critical to a business unit's success then the incentives in most cases.

When incentives are used it's a trap to tie them to particular values like "units sold" or "customers acquired" or even a cash value of sales. This is problematic because these values will change in a growing company and employees tend to resent a manager who "moves the goalposts". Instead look at percentages vs. sales forecasts.

Most importantly, never ever break your offer. A friend of mine (a VP at AVIS the car rental company) had an incentive program revoked when it became clear that he would earn over 100% of his base salary in bonus. Obviously he left the company afterwards. How short-sighted to design a program that promotes growth and not validate the success of a team that gives you that growth? This is a point for you to consider when thinking about your point earlier that incentives shouldn't exceed profit. Clearly there are many situations where that rule should be broken.

All of this then fails if you don't have a team in place that WANTS to capitalize on the incentives. You really need to know the patterns of thought, feeling & behavior to look for when you make hiring decisions. If you don't it's virtually impossible to build an incentive because the team won't respond to it uniformly, and if they don't... what's the point?

Just a couple of thoughts, I hope they've given you something to chew on.


Govind Negi said...

Dear Brian,

First of all, many thanks for spending your time in sharing your thoughts with my readers. All your points are well taken.

Waqar Khan said...

Very Good Explanation..!! keep it up best of luck

Govind Negi said...

Dear Mr Khan

Thanks for your appreciation.

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