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The top 7 incentive plan design screw-ups and how to avoid them

The top 7 incentive plan design screw-ups and how to avoid them

The top 7 incentive plan design screw-ups and how to avoid them

Sales commission plans dictate your sales team’s behavior. The right incentive plan could boost your sales performance by 25% to 44%.

Kim Bergstrand
Kim Bergstrand

May 16, 2022

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Sales commission plans dictate your sales team’s behavior. The right incentive plan could boost your sales performance by 25% to 44%. However, there are also risks. A poorly built plan can result in underperformance or increased staff turnover.After talking to industry veterans—both managers and sales reps alike—we crafted this list of the top 7 mistakes we’ve seen in incentive plans. We also included best practices to avoid each mistake.

#1. Lack of incentives for new revenue

Finding new clients is hard, and sales reps can often more easily increase revenue with existing clients. If your incentive plan equally rewards both, your reps will focus their efforts on expanding accounts, rather than finding new customers. This is a risky approach that might boost short term revenue, but it will hinder your long-term growth.

📕Best practice: On a small team, where an account executive is both a hunter and a farmer, the incentives for new business should outweigh the other components of the plan - for example, consider adding an additional bonus for new logos landed. As you grow, you should split the team into hunters and farmers, and create separate incentive plans for each role.

#2. Incentives for new business without considering churn

If you give high rewards to your reps for bringing in new clients, without considering their quality, you are taking significant risks. A scenario that we’ve seen multiple times in VC-backed companies: At first the company performs well with great revenue growth. But then some customers start to churn - first a trickle, and then a flood. What’s happening? The problem is that the plan was incentivizing the reps to aggressively overpromise and target inappropriate customer profiles. The reps received commission immediately and the fact that many customers subsequently churned was none of their concern.

📕Best practice: An incentive plan for new business should include at least one other component to ensure the right accounts are targeted and the customer does not churn. For example, you can defer a portion of the commission to a later date. The rep will receive the deferred payment only if the customer has renewed. Additionally, it’s critical that customer churn is tracked with high frequency, to detect any issues early on.

#3. Making plans too complex or too simple

If plans are complex, they can be difficult for sales reps to understand. You don’t want your sales team wasting their time trying to calculate how much they can earn when they could be selling.

At the same time, every business is different. Your incentive plan should be customized to the specifics of the market, your company’s products, your sales processes, and your sales team, otherwise you are leaving money on the table. A “one size fits all” approach does not work in sales commissions.

📕Best practice: when designing your plan, strike the right balance between necessary sophistication and transparency. Don’t use more than 3 components in a plan. Some businesses are afraid to introduce more complex incentive rules, because they are so hard to administrate. This is a legitimate concern that can be handled with sales commissions software. Such software automates the administration of sophisticated incentive plans while ensuring transparency for all stakeholders.

#4. Using commission caps

Capping your commissions is a sign that you don’t fully trust your commission plans. Caps are common among fast-growing companies, or companies entering new and unpredictable markets. Due to the difficulties in projecting sales for the coming period, companies are concerned that the incentive plan might lead to extravagant payments for certain reps. The fix seems obvious: put a cap on commissions.

But by capping commissions, you remove the ability and the desire for sales reps to exceed goals. As a result, you will have trouble hiring and retaining top performers. Also, it’s likely to negatively impact productivity. Once a rep gets close to the cap, why do more work?

📕Best practice: Don’t use caps. Instead, introduce logic into your incentive plan that mitigates concerns of overpaying. It’s more work, but worth the effort. One way to handle uncertainty in projections is to set targets quarter by quarter, or even month by month, instead of for the entire year. This gives you the ability to respond to changes in the market.

#5. Delaying the rollout of a new plan

What we see regularly is that a new incentive plan is rolled out after the sales year has already started, without proper communication. These delays are often caused because discussions tied to the budget and projections at the end of the year are not completed in time.

Starting the sales year without an incentive plan is bad. To work on deals without knowing their compensation demotivates reps and it can lead to sandbagging (holding back deals). Sandbagging makes forecasting inaccurate and erodes the relationship between the manager and the sales rep.

📕Best practice: Organize the roll-out of a new plan well in advance and prioritize end of year financial projections that are required to update incentive plans. Make sure to have a communication plan: explain what changed, show examples of how it’ll work and provide an opportunity to answer questions.

#6. Pushing unrealistic targets

Setting unachievable targets is detrimental to your team’s motivation and individual performance. Your top performers will be the first to seek out a new company if they can’t see a clear path to achieving 100% of their targets. Motivating your reps takes careful planning and target setting, not a “shoot for the stars” approach. It’s also important to avoid incentives that rely too much on factors outside of someone's control. This can be demotivating, for example when the BDR only receives commission if the AE closes the deal.

📕Best practice: Provide your teams with targets that are aspirational, not impossible, and aim for at least 80% of reps making their quota. As a guideline, 70% of the target should be achievable through own efforts.

#7. Delaying payments

If your reps have to wait many weeks or even months after a sale has been completed, you’re diminishing the impact of your incentive plan. Behavioral science shows us that a short interval between the achievement and reward best promotes the desired behavior. This is because there is a clear connection between the achievement and the reward.

We’ve come across extreme cases where the reward is almost completely disconnected from the achievements. One example is an incentive plan with an annual bonus at the end of the year for achieving an annual revenue target. The plan paid fixed advances to the reps every month, irrespective of performance, with an end of year true-up. Such a plan is very convenient to administrate, but does almost nothing to motivate reps.

📕Best practice: Compensate your reps as close as possible to the achievement and avoid administrative delays wherever possible.

EqualTo provides a next-generation commission operating system. EqualTo’s software and APIs set a new standard for how companies manage commissions and motivate teams. Get a demo now

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