10 fundamental aspects to consider in the implementation of the payment system in a sales force incentive plan: a decade of experiences

This article focuses on reviewing the aspects to consider when implementing the payment system in an incentive plan for the sales force.

The aspects presented below have been useful for the review of more than 50 cases globally, much in Latin America, evaluated during the last decade by us at TMC in a variety of economic sectors.

One of the fundamental decisions of a sales incentive plan is the payment system to be used. There are several types of systems: by units, commissions, quota system of various styles (monetary values, points, etc.). The payment system, as part of the spectrum of decisions to be made, can be found in our Sales Compensation DNA that is part of our book “Sales Compensation”. It can be seen from the left side under the Technical Design section

On several occasions in the cases mentioned above we have encountered aspects related to these plans that can guide the reader as a "check-list" when considering deciding on the type of system to be used. In this article we mention some of them:

1 Targeting:

One of the fundamental purposes of the payment system in sales incentive plans is to promote a good movement towards the various categories / products / services. If you have two or more categories of products and services, then it is about “moving” or stimulating the sales force towards those products or services, over a period of time. Thus, in a given period it may be more convenient, for different reasons (margin, market, others), to sell some products / services more than others. The payment system must be prepared to be able to move quickly and in a non-traumatic or risky way from the organizational / legal / other point of view to the various categories, without the need for additional payments (“the product of the month”) rising unnecessarily the costs associated with the plan.
When the system does not have the appropriate address we have, among other consequences: mix of products / services is not sold, desired margins are not obtained, products remains in inventory, logistics problems are generated

2 Type of indicators

Another of the elements to be defined is the type of indicators that are considered appropriate for the case. Assuming that the decision regarding them is correct, there are systems that do not allow you to have certain types of indicators. For example, a traditional commission payment system does not allow qualitative indicators because, roughly, it is the application of a percentage on the value of gross or net sales. In some products and services it may be essential to include indicators that, although they are not final sales, may be correlated with the final sale (for example, include conversion of retail sales, or recurrence in insurances, or customer satisfaction in others). Thus, the chosen system must contemplate the possibility of a good adjustment to the type of key indicators that it is desired to stimulate in the sales force.

3 Internal equity

Payment systems must also consider very roughly equal compensation under equal conditions. If, for example, different payment compensation at 100% target occurs in two sales territories, then it may not be the right decision to assume. Problems derived from inequities such as the aforementioned can produce serious consequences on the organizational climate or the behavior of the affected sales force. Internal equity issues should be analyzed from three different angles: between members of the sales force / back-office areas (horizontal equity), between members of the sales force and lower upper levels (vertical equity), and between regions / countries (transversal equity).

4 Legal risks

Although this article does not intend to give legal advice on the matter, let us keep in mind that payment systems usually do not generate legal issues when they are first implemented but when there are modifications of the plans from one period to another or within the same period. In some cases or laws, as in Latin America, for example, the decrease of a percentage could be be considered as a deterioration of working conditions, even when others are increased to maintain compensation in equal absolute values. Therefore, in choosing the payment system, you should ask not only for the risks in the first implementation but for possible subsequent modifications.

5 Compensation Market Policy Control

One of the classic points of any variable compensation system is the review of its external competitiveness, that is, the relationship between its remunerations and those corresponding to the compensation market. It is important that the payment system allows adequate control of remuneration at 100% compliance. For example, if it is decided that the market policy is going to be the median (50th percentile) of the market, that the system produces the desired policy at 100% compliance and not significant elevations above or below that goal.

6 Simplicity

A good compensation system must be easy to remember by the sales force. When compensation systems become unnecessarily complex, it is more difficult to direct the behavior of the sales force towards the objectives of the organization. It is important to remember that it is the behavior of the sales force that must be directed, so the definition of formulas, tables and others must be oriented towards that fundamental purpose.

7 Administration

A payment system must be thought in the same way for the administration, payment and reports generated in it. Reports, monitoring of compliance with quotas and associated systems are important to consider. Remember that there are two categories of issues in incentive plans: design and governance thereof, the latter referred to in this point.

8 Alignment

A good sales incentive plan must be aligned with the strategic and operational plan. In a few cases, during the last decade, we have encountered excellent strategic and operational plans whose choice of payment system was not the best to support that plan and align with it. Although the alignment of a sales incentive plan depends on other additional elements such as a correct definition of sales roles, among others, it is essential that the payment system can be properly geared with what shareholders want.

9 Organizational risks

In this section we refer to the consequences on the sales force when we make modifications to guide the plan to the desired results. An essential point is that these variations are not perceived as changing the "rules of the game" that give the impression of having a different purpose than to achieve the results of the established plans.

10. New sales models

Finally, we must refer to the payment system chosen can be adapted to the new sales models, if applicable. In a market where the ways of selling are multiple and very diverse, it is essential that the chosen system has the capacity to adapt and also correspond to the demanding changes in the sales models in the market.

We want this checklist to be useful when defining the payment system of your incentive plan.

Good luck and better sales

+ information