Colman-Reid-SepiaDavid Reid and Dr Peter Colman of Simon-Kucher & Partners
Business to Business (B2B) companies are heavily reliant upon the performance of their sales force for realising commercial success and the difference between fielding a high performing and a low performing sales team has huge impact on corporate profitability.
Business literature in general demonstrates how well salespeople respond to incentives; therefore management need to devise and maintain reward schemes which both reflect the overall strategy of their business and lead to desired behaviour being adopted by their sales staff.
The task of designing an optimal incentive scheme should not be underestimated. It is a complex process which must consider multiple parameters including geographies, product segments, legal environments and cultural considerations. But, by investing time and resource in getting it right, businesses can reap substantial rewards.
Not all companies succeed with their incentive initiatives, however. Three common mistakes we observe include:
Failure to align strategic objectives of the executive team with those of the sales force
Setting incentives at too insignificant a level or too complex to effectively steer sales force behaviour
Failure to include all relevant metrics, meaning that important sales activities get neglected
Simon-Kucher & Partners frequently collaborates with ambitious B2B companies seeking to improve sales incentive schemes and we note that the best performing firms in this area tend to follow a similar path to success.
Four steps to developing successful incentives programmes
In spite of the complexity involved, by following a four-step incentive design and implementation process, while heeding common pitfalls, firms can substantially improve profit outcomes.
First, companies must set objectives that are consistent with overall corporate strategy; second, they must determine what constitutes success; third, they must communicate the scheme effectively; finally, they must evaluate the schemes’ profit impact, with a view to refining it in the future.
Define corporate objectives
The first step is to determine how the goals of the incentive scheme should align with the company’s overall strategy. There is often a ‘disconnect’ between management intentions and the sales outcomes.
In the recent Simon-Kucher & Partners Global Industrials pricing study, two thirds of executive managers claimed that their pricing strategy was margin driven. However, just 15% of sales people surveyed in the 2010 Kienbaum Incentive Survey (managers and sales force specialists) responded that margin was the most important contributing factor in their incentive scheme.
The most common incentive scheme objectives include:
Volume oriented objectives such as sales volume, sales volume growth, revenue growth, or market share growth
Profitability oriented objectives such as contribution margin, EBITDA, discounting levels or price performance
Customer oriented objectives such as specific customer segment penetration
In practice, the best incentives schemes involve a mixture of objectives and increasingly we see companies create multi-dimensional incentive systems along the lines of a balanced scorecard. However in most cases, sales revenue is still the predominant figure for reward systems, a metric which drives revenue but not profitability per se.
Determine what success looks like
The second step is for management and sales teams to define the level at which ‘success’ is achieved and to ensure that the reward is material enough to result in desired behaviours by sales staff.
Rewards should be linked to explicit and quantified targets, with limited reward for meeting minimum expectations. Management should also include stretch incentives for substantially beating in-built targets.
Incentives must be significant enough to actually steer and change sales force behaviour. It must be worthwhile for the sales person to fight for better prices on an individual deal. As a basic principle when implementing a sales incentive scheme, the variable component should be significant, with a minimum expectation of around 20%.
Involving sales staff in this process is recommended. The sense in which a scheme is both achievable and fair will contribute to its success. Marketing departments too will have a view on what is realistic and should be invited to participate.
Communicate and achieve sales buy-in
The third step is to communicate the incentive scheme effectively to the sales staff and to ensure that they understand why and how their variable remuneration is linked to the overall corporate goals being achieved. This is particularly important in the more complex schemes, where unless impact is clearly demonstrated, the buy-in and commitment on the part of the sales force is potentially reduced.
When making alterations to an existing incentive system, Simon-Kucher & Partners strongly recommends demonstrating the impact of the new scheme versus the old scheme using the previous year’s financial data. If not, the sales force is typically more resistant to change. Furthermore, there may also be a case to introduce a temporary cap on the first year pay-out to prevent unexpected and overgenerous windfalls.
Sales people should also be able to readily track performance against targets. In a recent best practice example a client linked their sales incentive scheme to their Human Resources system allowing the sales team to see the impact of a particular deal on their annual bonus; this had a very strong steering effect on the pricing behaviour of their sales force.
Evaluate profit impact and refine
Finally it is important to review the impact of the incentive scheme on corporate performance at year-end and critically evaluate its effectiveness. The best incentive schemes evolve over time, as corporate strategies and objectives change.
It is insufficient to assume that all sales incentives just ‘work’. Firms need to carefully consider the outcomes realised and the extent to which the incentive scheme has helped to deliver it. Recently the Incentive Federation conducted a survey of sales incentive schemes and discovered that only half of companies had conducted cost-benefit analysis to determine the schemes’ impact on profitability. But this form of analysis is essential, as it serves as the basis for adjusting the scheme in subsequent years.
Given how important a well-executed sales incentive scheme is in ensuring that corporate profit goals are achieved, executives need to invest appropriately in perfecting its design and championing its success.