Leaving a sales compensation design meeting the other day, I ran into an old friend. We took a few moments to catch up and the topic of my meeting arose. We were planning for a market event, I told her, and discussing how to adjust the compensation plan. Her reaction surprised me: “I think we should get rid of the bonus program and pay 100% on salary. It would be simpler to understand, and the team could focus on the national forecast.” Disagreeing immediately, I shared a few counterpoints that showed the value of having a sales compensation plan. I assume readers of this blog also receive this opinion occasionally, so I wanted to share my response.
At its simplest, incentives motivate sales reps, who are critical to drive top-line results. Without incentives, effort will drop and sales will be impacted. In one example, a medical device company tracked sales of one of its products when it was included and excluded from the incentive plan. It saw sales grow when the product was included and sales decline when it was excluded. In this example, reps had other products to focus on, but if the bonus plan was removed completely, it is reasonable to assume all product sales would drop somewhat due to lower motivation and lower selling effort.
This brings me to my second point. In addition to driving sales, incentives drive desired behavior. This is important for salespeople because they operate under a model of limited supervision. Since the manager is not with the rep most days, the incentive program provides a mechanism for the company to direct the sales force on where to focus. Furthering the medical device example above, while the excluded product dropped in sales, the products which were new to the incentive plan grew. Since these brands were important for the company strategy at that time, the incentive plan enabled the company to message this importance to the sales force and focus its efforts.
Lastly, sales force cultures are often based on recognizing success and paying for performance. Because of this, incentives help to gauge success, both for self-reflection by salespeople and for manager reviews. In fact, the compensation plan is often a key factor in job selection for salespeople and removing the possibility of upside through a bonus plan would be very foreign to nearly all potential sales hires.
Sharing these points helped to persuade my friend of the importance of the sales compensation program. Hopefully, they help you as well the next time someone in your company suggests the same.