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Boosting the Effectiveness of Sales Compensation
 

By Jason Angelos and Mark Wachter, © Accenture  2/6/2013
 

 

Every year, millions of dollars are spent on sales incentive compensation. However, new research reveals that at some organizations incentive compensation practices may undermine sales effectiveness. Consider the following findings from a 2012 sales performance study by consultancy Accenture and market research firm CSO Insights:

  • Sales representatives at up to 47 percent of surveyed U.S. companies did not reach their sales quotas. Implication: Companies’ goal-setting approaches may be off target or perhaps incentive strategies are prompting the wrong sales force behaviors.
  • Forty-one percent of salespeople did not have a clear sense of corporate objectives. Implication: Sales reps whose activities are not aligned with their company’s strategic mission are more likely to have trouble making the right selling decisions.
  • Only 10 percent of respondents believed their companies’ compensation programs consistently drove precise selling behaviors. Implication: Compensation strategies and approaches are probably not as effective, or as relevant, as they could be.
  • Businesses spend between 3 percent and 10 percent of revenues on incentive compensation, yet the linkage between incentive dollars invested and the returns those investments produce are hazy at best. Implication: A disconnect may exist between how companies motivate their salespeople and the behaviors and outcomes that those motivators elicit.

These findings raise the question of whether salary and commission structures are encouraging sales reps to establish the right priorities.

Understanding the Problem

One likely reason for the incentive/output disconnect is that business models are evolving rapidly. For instance:

  • In the technology sector, many companies now sell more solutions and services with recurring-revenue streams. Sales coverage and compensation approaches haven’t always kept pace with these changes.
  • In the insurance field, digital marketing and direct-selling platforms are increasingly prevalent. However, traditional sales practices—for example, using one-size-fits-all commission models or rewarding salespeople for their existing book of business—still predominate.
  • In the banking business, lending and risk-management approaches have changed dramatically in recent years. It’s still common, though, for banks to pay 5 percent or more of earnings to sales producers and servicing agents—dollars that may not reflect the institutions’ new priorities.

In net, it appears that many companies are trying to power new selling models with old approaches to incentive compensation. In many cases, however, it isn’t working.

Structuring a Solution

Ways that organizations might tighten the link between incentive compensation and higher sales productivity include the following:

Re-examine commission rules and success measures. At a leading provider of electronic data storage solutions, more than 90 percent of the sales reps were sharing sales credit on a typical deal. The company reengineered its sales incentive program following an analysis of its sales-credit rules. Within three years, incentive spending decreased from 5.5 percent of revenue to less than 5 percent, while overall revenue grew by 60 percent.

Explore new ways to set targets, quotas and credits. Recently, a multiline insurance carrier moved from a one-size-fits-all approach for broker sales incentives to a tiered commission rate structure that provided higher incentive rewards for the most lucrative sales. This helped the carrier reduce its annual incentive spending by $40 million without compromising sales performance.

Curtail overpayments. A global bank analyzed its incentive payment program recently, and confirmed that in some cases, overpayment rates were running as high as 10 percent of total incentive spending. By rationalizing policies, strengthening controls and improving the integrity of commission data, the bank has since avoided more than $15 million in annual incentive over-payments.

Keeping data timely. A large telecommunications company was awarding outsized commissions on third-party dealers’ wireless products and contracts. The issue was residual commissions. Inadequate information updates allowed dealers to receive commissions beyond the eligible term, long after consumers changed contracts or began purchasing equipment from the company directly. Subsequent changes garnered savings opportunities of more than $10 million per year.

The bottom line: creating incentive programs and support systems based on the right metrics for the organization and industry can drive better sales performance with higher return on investment.

Jason Angelos is executive director, and Mark Wachter is senior manager, in the sales and customer services practice at Accenture, a global management consulting, technology services and outsourcing company serving clients in more than 120 countries.

© 2013 Accenture. All rights reserved. Posted with permission.

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