When is it important to consider changes to your sales incentive plan?
“To improve is to change; to be perfect is to change often.” – Winston Churchill
When implementing an incentive compensation plan we often keep room open for changing it in future, but how do we know the right time to change our plan? To understand this we must first understand the core purpose of our sales incentive plan and its key elements. When this purpose is not served by the current incentive compensation plan structure, organisations need to revise their incentive strategies to bring about a positive change.
Here is the list of the objectives that your incentive compensation (IC) plan should meet:
- Aligns business objectives:
The question we need to ask here is that does our IC plan focus on right products as per organisational strategy?
- Pays for performance:
Does your IC plan pay salespeople for increasing volumes, market share and revenues?
- Equal earning opportunities:
Your IC plan should provide fair earning opportunities to all the salespeople. Does a person with higher historical volume have an unfair advantage?
- Financially responsible:
Your IC plan should generate predictable pay-outs. A plan with too many outliers is more prone to have loopholes which may be exploited by some sales representatives.
- Motivational & engaging:
Finally the core purpose of an IC plan is to reward top performers and motivate them to keep up the good work and at the same time penalise low performers. Eventually a sales incentive plan should harness the human potential of the sales force in the best possible way.
If your incentive compensation plan does not satisfy any of the above purposes it requires changes. The magnitude of this change depends on the level of dissatisfaction. These dissatisfactions are attributed due to various external and internal factors happening in and around your business space. These factors are the signals for an organisation to check the health of its incentive compensation plan and ensure that it aligns with the needs of the organisation. The factors below are the triggers of misalignment and may act as a catalyst for future change.
External Factors External changes in a business environment are those which organisations have no control over. These however do affect them in a way which requires strategic as well tactical changes. Some of these factors are:
New entrant/competitor Competition brings in a major change in the business landscape. It affects the sales force directly especially for maintaining market share. A strong new entrant in the market definitely increases pressure on the sales force to sell more aggressively. This aggression must be fuelled by the organisation by making changes in the incentive compensation plan.
Mature market leading to increased competition During its life cycle every industry achieves maturity where penetration has saturated. At such a stage the salesforce should be more motivated to make an organisation compete in the challenging environment.
Change in overall compensation structure adopted widely by the market The incentive compensation plan structure should not be very different from the rest of the market players as it may lead to higher attrition. The plan should be optimized to retain good employees and reward them as per industry standard without compromising the organisation’s financial goals. Therefore it is imperative for a plan to adapt to the changing pay structure in the market.
Recurring Natural Disasters / Pandemic 2020 has witnessed a series of disasters across the world leaving organizations with minimal sales. Sales reps have struggled to make any incentives and setting targets for future quarters is going to be a challenge in absence of historical information. Moreover, incumbent IC ecosystems are not equipped to handle such situations and ensure reps are paid fair. This results in increase in attrition and loss of talent that should be handled well in the first place with a disaster-proof IC plan
Regulatory changes that make industry more competitive Change in government policies often suits one or more industries but also at the same time makes industry more lucrative for new entrants to join and lower the entry barriers. This results in making the industry more competitive and ultimately forcing the established players to rethink the ways to motivate the sales force.
Substitutes increasing competition Technological/scientific innovation within an organization often comes at a cost. It creates substitutes which may result in the cannibalization of existing products. Forming an aggressive sales strategy is one way to cope with such situations for organisations thus needing a change in incentive compensation plans.
Internal Factors Internal factors are those concerned with organisational outlook and can be controlled by management. However there are some decisions which cannot be avoided and thus sales strategies have to be modified in accordance with the change being brought about.
New acquisitions Acquiring new businesses changes strategic focus of the organisation and also brings in changes in expense allocation. So to meet business objectives the incentive plan should be revised to accommodate new organisation structure.
Entering new markets Success in entering new markets largely depends on sales and marketing efforts. Entering new markets involves revamping the strength and capabilities of the salesforce as per market requirements. This ultimately affects the incentive compensation plan design as it must accommodate the challenges faced by the new markets without compromising good practices in the existing ones.
Increase in product portfolio Similar to new business acquisition increase in the portfolio also shifts company’s strategic focus, incentive compensation plans are the great tools to align the salesforce to company’s product focus.
Change in internal corporate strategy To compete in an industry companies have to constantly change internal policies and strategies which affects sales force behaviour. The changes in the policy should not affect the motivation of the sales force negatively and hence post-strategy changes the organisation should assess employee satisfaction level.
To make one's incentive compensation plan adaptable to changing business environments, organisations must keep an eye open for these change triggers and check if the incentive compensation plan is serving the core purposes mentioned above. Suitable modifications must be implemented to adapt to these changes. Usually the structure of the plan should change every 3 to 4 years, however there can be instances where change drivers are strong and require organisations to change IC plans earlier to keep up with competitive markets. It is advisable to conduct periodic health checks as that can help us identify any systemic biases and also keeps them up to date for any localized changes. The qualitative impact of incentive plans that are perceived to be unfair is well recognized but companies still fail to take into account the financial implications (of increased attrition rate, lower morale, lost selling opportunity due to higher shadow accounting and dispute resolution time, higher administration cost) and don’t put enough time aside for this exercise in their year-end planning calendars.
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