LeapComp - Sales Performance Management Blog

Good Intentions, Bad Outcomes

We often hear, “be careful of what you ask for” when putting new measures into the incentive plan. The origins of this warning come from what is the transactional or short-term nature of many sales organizations.

Consider two examples:

Example 1:
A manufacturing company has two primary products – A and C. Project A is the most mature and currently the most profitable in the line. Product C is relatively new and is not forecast to be profitable for two years. The pricing for both products is roughly equal, though A is relatively commoditized and its average sale price is declining.

At the start of the year management changes the sales incentive plan such that 30% of the target incentive opportunity goes to monthly gross sales margin, as leadership emphasizes that long-term profitability is critical to the company’s future. While Product C best represents the future, the sales force is focused on Product A because of its greater contribution to monthly profitability, and it’s the easier product to sell.

Example 2:
An equipment leasing company assesses fees to its customers for excessive usage, unscheduled service calls and late returns. Account managers have in the past used discretion over the application of fees, mostly avoiding them on loyal clients with infrequent fee-bearing incidents.

Region managers are now responsible for a quarterly contribution margin in the region, and stress to account managers more stringent fee policies, which include regional manager approval of all waiver requests from account managers. While account managers understand the policy and abide by the new approval process, most do not clearly disclose to customers the applicable fees – they’ve not in the past since the fees seldom applied, and they seldom receive feedback since customer questions regarding fees get routed to a customer service center.

In both examples, the company changed the incentive plan to include a profitability measure, but did not evaluate the short-term behavioral implications and longer-term consequences. In Examples 1 and 2, the longer-term impact of a slow product launch and customer churn, respectively, was severe and more than removed any short-term profit gains.

With any proposed change to the sales incentive plan, carefully evaluate the alignment between corporate objectives and sales execution. Test concepts with a small group of proven performers to understand how they might maximize their earning opportunity. Discuss with sales and product management whether these behaviors put at risk longer-term profits, and what processes or plan design features can best mitigate the risk.

When considering alternatives for better aligning sales compensation expense with profitability, remember that any meaningful plan change requires analysis before and reinforcement after its implementation. Such changes are not easily undone. A low-risk approach is the quarterly campaign or “SPIFF.” SPIFFs are by nature temporary and in many circumstances can be an effective way to evaluate behaviors and impact in a real-world environment. Another low-risk approach is to report and provide feedback on profit-based goals at the individual rep or team level, without tying the impact of goal achievement to pay. Low-risk approaches usually mean low reward (impact), but they are steps to help you walk before you jump.

Scott Barton is a senior consultant in sales effectiveness and compensation.  Contact him if you have any questions regarding this article series, sales compensation or if you are looking for an experienced consultant to help you out build your compensation plans.