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When is it time to conduct a review of your sales incentive plan?

Compensation Strategy & Design|Executive Compensation|Talent
COVID 19 Coronavirus

By Darren Tse and Ron Burke | May 5, 2020

As the COVID-19 crisis continues and time passes, it becomes useful to infuse data and analytics into any potential changes to an incentive plan.

In the early stages of the COVID-19 global pandemic, many sales organizations had to take quick action to address immediate sales compensation issues they were facing. For some, this resulted in guarantees or changes to sales incentive thresholds, payout curves, or quotas. Others took more of a “wait and see” approach, with a pledge to act accordingly as the situation progressed and use discretion where needed. Organizations communicated quickly to reassure their sales forces in a period of tremendous uncertainty — even absent extensive analyses and modeling.

While we still face much uncertainty, as time passes it becomes useful to consider infusing data and analytics into such decisions. Companies are realizing they need to conduct more ongoing monitoring of their plans to ensure they remain fit-for-purpose for the remainder of this year, and to inform actions that should be taken for next year. Importantly, this doesn’t have to mean a giant project that takes months to complete. In the current environment, doing something quick and focused is likely to be sufficient.

For companies that have recently made immediate changes to their plans (like temporary guarantees, or the elimination of thresholds), it will be important to understand when such changes are no longer required. To help, here are three ways you can review the performance of your plans to inform decision making.

Performance Distribution

A sample histogram showing the percent of quota attained
Quota attainment analysis

A simple histogram showing the percent of quota attained will allow you to see whether you have a normal-like distribution of performance, and it allows you to see how broad or narrow it is. Why does this matter? This helps to confirm whether your thresholds and payout curves are still creating the right motivational impact. If for example 50% of the sales force is below threshold (minimum performance required to trigger any incentive), this is a red flag that far too many are not participating in the incentive plan. You can also compare with a historical distribution (e.g., prior year) to understand significant changes in the distribution.

Earnings Distribution

This uses the same methodology as the performance histogram above but looks instead at the distribution of incentive earnings. Why does this matter? This helps to confirm whether you have appropriate upside and downside in the plan. As an example, if you previously eliminated thresholds to get more people in the game, but now find that no one is earning less than 80% of target, this suggests that it’s probably time to put thresholds back in place and to create a steeper payout curve.

Source of Earnings

A sample stacked bar chart showing the percent of earnings coming from each incentive component
Source of earnings analysis

This is most relevant for plans that have multiple components. Here, a stacked bar chart can provide a powerful visual — we like to look at it on a quintile or decile basis. For each group, calculate the percent of earnings coming from each incentive component. Why does this matter? It helps you to understand how closely aligned actual earnings are with your original intent — and is often a key indicator of how well aligned the plan is with your strategic priorities. To the extent the mix of actual earnings varies from the target mix, this may simply mean that the sales force is adapting to market opportunities and focusing effort where the current opportunities lie. But it may also mean that they are ignoring an important priority. This may not necessarily just be a sales compensation issue — it may point to a need for more coaching or selling tools or training, to increase sales reps’ capability in driving what is meant to be the top priority.

Longer term

In some cases, a more thorough review is likely to be valuable. This would go beyond the mechanical considerations noted above and get into bigger questions like whether the plan is driving the right behaviors, what impact it is having on your customer experience, and the competitiveness of your pay vs. the market. If you are on a calendar year plan, this sort of deeper dive review would be valuable to conduct in late Q3 or early Q4. Planning for this now can help to ensure you have the required resources and data available to support proactive decision making.

Authors

North America Practice Leader, Sales Effectiveness and Rewards

Global Practice Leader, Sales Effectiveness and Rewards

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