How to Design a Killer Sales Compensation Plan
This article is the first in a 3-part series that discusses various aspects of successful sales compensation design.
Sales leaders tend to have a strong opinion on the value and use of incentives. Their views are based on firsthand experiences and beliefs, and are often unconscious. As a result, their approach to sales compensation design can be biased toward past experiences, dismissing a broad range of options and philosophies available to drive the desired behaviour.
For example, most organisations believe salespeople possess a binary motivation to maximise their earning potential. However, other companies are purpose-driven and reward their sales teams based on group performance. We frequently hear how the millennial is "purpose-driven", but the key to any incentive plan is to define the word "purpose".
I recently asked a millennial sales leader if he was purpose-driven or financially-driven. His answer was "yes I am purpose-driven, but there is no greater purpose than providing for my family." In this regard, his motivation was primarily to maximise his earnings, and all the better if this could be achieved by simultaneously supporting a positive cause. I don't believe this trend is unique to the millennial generation. Every generation has individuals, groups, organisations and companies representing the full spectrum of the many philosophical choices.
Which is better, a cause-driven incentive plan, or cash-driven?
I recently discussed this question with my friend, Paul Vinogradov, from The Alexander Group. Below, I summarise our conversation.
Cause-driven plans work inside a mission-focused organisation. An extreme example of this model is not-for-profit organisations, and B2B companies can leverage this motivational driver as well. Frequently, these organisations have a visionary, charismatic leader who embodies the mission of the organisation. Workers are drawn to both the cause AND the person.
For example, consider the company Charles Schwab, which pioneered low-cost trading so the average investor could trade like the millionaires. In the early years, Charles Schwab brokers earned a fraction of their counterparts at the big brokerages like JP Morgan and Smith Barney. Schwab brokers were compensated with base salaries and bonuses tied to individual and team targets, including customer satisfaction. When Schwab left the company, revenues and morale plummeted, only to see profits return when he assumed control of the business from Bank of America.
In this organisation, the incentive approach attracted a different type of salesperson, i.e. more interested in supporting the cause than maximising their earnings, and this model fosters a team culture, based on loyalty to both the organisation and cause.
“He who does not work for the love of work and only for the money is not likely to make money nor find much fun in life.”
The Problem With Cause-Driven Incentive Plans
There are several challenges with scaling the cause-driven model:
• It is difficult to maintain the culture at scale
• It is difficult to keep recruiting the “right” talent that fits the culture and mission at scale.
• Keeping a sense of “family” is tough as the organisation expands into multiple locations and markets.
• Market changes (like more competition or shifting attitudes) can diminish the relevance of the cause and the attraction to the organisation.
When growth and results slow down, it creates new pressures to drive performance. Middle managers have more difficulty motivating employees and attracting top talent. Mediocrity sets in and the organisation simply becomes “a nice place to work.” Eventually, members of senior leadership suggest more pay for performance, challenging the founder’s original philosophy.
These same dynamics can be seen in highly successful start-ups where the new product experiences explosive growth because it “sells itself”. The product and what it does or its “cool” factor becomes the cause. Talented people work there for less pay and more stock options. Eventually, these organisations face the same challenges, particularly once the company goes public and must answer to the desires of external shareholders looking for profitable growth.
The Problem With Cash-Driven Incentive Plans
Given the challenges of cause-related plans, you might move directly to cash-driven, performance-based plans. However, not so fast. These plans have their share of problems too, particularly when left unchecked. Low base, high-commission plans can lead to a “shark tank” culture that rewards individual achievement above team and company results. This breeds a lack of loyalty, high turnover, and internal competition. These programs require more hands-on leadership and checks and balances to ensure moral, honourable and value-based behaviour. Without it, the customer experience can suffer as salespeople optimise results at the customers' expense. A recent example being Wells Fargo, where incentives and unchecked management resulted in creating over 2 million “fake” bank accounts.
Choose Your Pay Philosophy Carefully
While most companies gravitate toward a results-based payment model as the primary option, the secondary philosophy can differ and have a significant impact on company culture and performance. It pays to consider alternative approaches to rewarding sales teams. These incentives might include bonus plans, customer retention rewards, equity, activity and goal-based compensation.
Compensation plans are neither good nor bad, but it is the resulting behaviour that is deemed as appropriate or not. It is simply down to the type of behaviour you wish to encourage. Part 2 of this series (5 Crucial Aspects of Successful Sales Compensation Modelling) maps the company growth curve and correlates the various stages to various incentive models.
Further reading into motivational theories can be found at changingminds.org. Drop me a line if you would like a list of sales-specific compensation theories and philosophies.