A Senior Executive has often grumpily said to me ‘the business has missed its goals – why is the sales team still earning incentives? We should tie sales incentive pay-out to business success!’ In a downturn where it’s difficult for most business to achieve their targets, this type of question becomes more common.
A good sales incentive should align to the business strategy of an organisation and drive business success while motivating salespeople to perform.
And with some commentators expecting the UK to enter recession this year – albeit one which should be briefer and shallower than previously thought – it makes sense for businesses to stress test their sales incentives structures now.
So why is your sales incentive still paying out when the business underperforms?
Regarding our Senior Executive’s question - there are bad reasons for sales teams to be earning when the business is underperforming. For example, if salespeople are selling unprofitable business (and not being measured on profit), or if sales quotas do not align to business targets: which generally means adjustments to the sales incentives are needed.
However, there are a number of good reasons why – even if a business misses its overall goals – sales teams should continue to earn:
- Sales incentives typically have a threshold that starts to pay-out below target. That is because with a normal performance distribution, if threshold is set at target, around 50% of the sales force would earn nothing even in a good year which is not very motivational. Typically, thresholds are set where around 10-15% of sales people will miss and earn nothing.
- In a bad year for a firm (which is more likely in an economic downturn), when the corporate bonus pays nothing, a sales incentive should still continue to pay-out at least to higher performers who may still be beating threshold and/or target. Critically, if the plan pays nothing to anyone then top performers are likely to move somewhere else.
Should you link sales incentives to business success?
Our Senior Executive’s comment about linking business success to sales incentives is similarly often driven by a desire to tie salesperson pay-out more closely to corporate bonus pay-out and again is more likely to come up when the corporate bonus is not paying out.
But this is missing the point of sales incentives.
Sales incentives are typically created separate to corporate bonus because, unlike the average employee, salespeople can be measured individually against hard metrics that drive the success of the business. Including a business element means that for at least a portion of the incentive all salespeople will be treated the same (i.e., high performers will be treated the same as poor performers – the ‘free rider’ problem).
What can businesses do?
Fundamentally a sales team is critical to driving the top line of the business, and in an economic downturn, they might be the difference between business survival and failure. So, what is different for sales teams in difficult times?
Best practice suggests that quotas should be tough but achievable. If quotas are completely unrealistic then some salespeople will be demotivated and completely switch off. Best practice also suggests that the sum of sales targets should align with business targets. In a downturn or recession demand drops and quotas are harder to achieve. If business targets are reduced, then sales quotas should reflect this.
But this often won’t be the case, so how can businesses help try to make sales quotas achievable?
When business targets are broken up and handed down to sales teams often a level of contingency is added to create cover for vacancies. This is often 1-2% but may be higher. In some cases it may be added at more than one level (e.g. country, region, area etc). In one client that I worked with this ended up at over 10% and targets were unachievable. Employers should think carefully and potentially reduce the amount of contingency applied.
In a downturn demand overall will drop, but demand for different products and services will also change and in some cases may go up. Sales cycles are likely to increase but fundamentally demand is more unpredictable. It is therefore harder to set sales target (quotas) for salespeople.
Where targets are harder to set, the performance distribution of the sales team tends to be wider and likely to be shifted left. If quotas can’t be reduced, then businesses should consider reducing the threshold at which payments start increasing the width.
If organisations do not already do this they might also consider truing up payments at year end. Volatile sales can mean performance is more varied over the year, and with stand-alone performance periods we could see under or over payments versus annual performance. A true-up mechanism adjusts payment at year end to reflect actual performance across the year.
Change in behaviours
In an economic downturn potential customers will change their behaviours; some will cut spending drastically; others will still spend fairly freely – and most are likely to prioritise certain spending. With longer sales cycles and changes in customer behaviour the sales force also needs to change its focus and really understand customer needs.
A scatter gun approach that may work in good times is unlikely to work in a downturn. The business may also want to focus on products or services that are likely to succeed. Increased use of strategic goals as part of a sales incentive will help re-enforce this message and drive this change in behaviours
Retaining and growing existing customers
It’s always more cost effective to retain customers than to gain new customers but this is especially the case in a downturn where mining existing customers can really drive results, especially with those that are more resilient (so identifying these and targeting them is important too). A greater focus on retention and cross selling in sales incentives may be appropriate.
Overall sales go down in a downturn or recession, it is tougher for salespeople to sell, however over penalising salespeople will demotivate a critical part of your operation. Don’t forget that salespeople often have lower base salary and higher incentives so completely turning off incentive (as you might for the general population) will have a much bigger impact on them. Reviewing and updating your sales incentive will help maintain motivation and sales.
If you have any questions regarding this article, or on sales incentives in general, please contact Scott Cullen or your usual KPMG contact.