Here’s the truth that most sales comp leaders brush aside- Understanding Incentive Compensation does not immediately translate into an Incentive Compensation plan. Incentive Compensation Management is a different ball game altogether!
Incentive Compensation is basically performance-based compensation – exclusive of the base salary that a rep might receive – and is directly connected to the reps’ goals and milestones. When managed and implemented properly, an Incentive Compensation plan will tell the rep in clear terms what they need to do in order to earn more. By setting clear and realistic goals for sales reps, an ICM drives them and the company towards profitability.
To put it simply, ICM is the strategic process of creating and implementing an incentive plan that works. For instance, an IC plan built for success will ideally-
- Improve your forecasts
- Align rep behavior with your company’s goals
- Empower your reps to earn more and provide them upward mobility
- Contribute to better customer interaction and service
- Reward top performers
Saying that it is difficult to create a plan that potentially leads to these outcomes would be an understatement.
If you have taken on the gargantuan task of designing your company’s IC plan, you may find yourself asking the question- Where do I start? No two organizations today look the same, to say the least. This diversity is also reflected in their IC plans and pay philosophies. Therefore is no ‘pick off the shelf’ compensation plan that sales leaders can turn to. Customization is key.
That’s where the three Ws come in! How can you create a unique IC plan that stands out and drives you to success? A growth leader can simply start the process by asking themselves three very important who, what and why questions.
Who is getting the incentive?
One common myth about Incentive Compensation is that it is a system that only rewards individuals, when in reality profits can be shared with-
- Individuals – Incentives can be a part of their structured pay.
- Sales teams and departments – Incentives could be rolled out when they succeed in hitting shared targets.
- Channel Partners – Incentives to distributors, affiliates and vendors when they reach goals.
Decide who will be the primary beneficiaries of the Incentive Compensation plan.
What will the incentive be?
What does incentive mean to your reps? What is it that they would really like to get when they achieve their goals? Is it money? Or is it non-monetary incentives like a paid vacation or office trips?
Another thing to consider here is the Pay-mix Ratio. The Pay-mix ratio is the combination of Base Salary and Incentives that make up the On Target Earnings (OTE). An optimal Pay-mix Ratio has the potential to drive performance, motivate reps and overall lead the company towards success. To know more, read this blog- A Crafty Concoction: The Pay-mix Ratio!
Why are you giving these incentives to your employees?
Ask yourself what you want the outcome of your incentive to be. Is it to get new leads or is it retaining customers? Do you want your employees to specifically focus on one recently launched product or do you instead want them to focus on clearing the stockpile of a discontinued product?