The Top 5 Mistakes in Designing Incentive Compensation

December 5, 2010

What are the Considerations When Designing Incentive Compensation ?

Management must have a clear vision regarding what it wants to accomplish.

The ideal, properly designed incentive compensation plan for the sales team, consisting of base pay + incentives, will attract and retain top sales talent, reward behaviors that promote organizational objectives, improve morale, enhance customer service, increase revenues, deliver a respectable ROI—while lowering the cost of sales.

A poorly crafted incentive comp plan, on the other hand, will tend to have the opposite impact—and will be exceedingly costly in more ways than one.

After deciding specific revenue targets for the sales team, management must develop an appropriate  way to measure the desired results.

Once management acknowledges the importance of accomplishing these goals, the key is that they  make a commitment to pay a desirable incentive  for the achievement of  these clear, organizational objectives.

“Where there is no vision, the people perish…” Proverbs 29:18  – Lack of vision has resulted in many organizations perishing as well.

Unfortunately, many management teams do not design incentive compensation with the clearest  of visions as a point of departure. Hence, mistakes are all too common.

The Top 5 Mistakes in Designing Incentive Compensation

1). Failure to explain in writing—and in a meeting, the company’s compensation plan.

While this should be obvious, a written statement reflecting management’s philosophy regarding the idea behind the incentive plan, plus details how the program works, is crucial for getting off to a good start.

It is best to create written plan documents which include plan goals, definitions, payment structure, exceptions, assigned quotas—and whomever leads out in the compensation meeting should allow ample time and be prepared to answer all questions posed by the sales team.

2. Setting unreasonable quotas and uneven goals. Not clarifying which behaviors the company wishes to reinforce and reward is an indication that management is either “winging it,” immature, clueless or incompetent.  To maximize success and ROI, a sales incentive plan must be absolutely unambiguous, uncomplicated and fair—containing reasonably attainable goals.

If quotas and sales performance measures are not plainly and rationally standardized across a team of Account Executives, in no time flat, a spirit of discontent will permeate the ranks of the sales force. Interestingly, those who are the most diligent members of the team will tend to be most offended by management’s lack of fairness and failure to comprehend realities.

3. Failure to launch the plan in a progressive manner. Sales and Account Executives must be given adequate time to acclimate themselves to a new pay for performance comp plan. If you just decide to randomly  “start the program one day,” instead of promoting a gradual implementation, you can expect loads of trouble when unanticipated adjustments need to made, such as correcting quota inequities, clarifying objectives and other unanticipated comp plan glitches.    

4. Failure to creatively align the employee’s self-interest with the company’s business strategy and self-interest. After carefully defining the goals, objectives, delineating company strategy  and explaining how the sales team members’ performance is linked to company goals and objectives, the compensation plan must reward sales reps precisely for doing what you said you wanted them to do.

If there is any ambiguity regarding what sales team members are expected to do on order to reach the goals, get paid a bonus and commissions, you will impair the plan’s ability to drive consistent, sustainable accelerated revenues. A longer term negative impact will be poor morale and high turnover.

5. Designing an inappropriate type of incentive compensation for a particular worker category. This last mistake would almost appear to be ludicrous, absurd—even comical—if it weren’t such a disastrous flaw that is clearly no laughing matter.

However, if your goal is to inflict a severe wound to the life-blood of your organization (i.e. shrink the revenue stream and rapidly destroy credibility with clients and employees), pay attention to this grievous error…it could have a fatal, catastrophic impact on your revenue stream with little or no warning :

Team Sales/ Customer Relationship  Management

In the last several years, companies have recognized that you can exponentially grow sales and accelerate revenues by shifting to a multi-faceted, team sales/account management, support model.

A few years ago, I has the opportunity to work closely with a national technology company. One of my responsibilities was to create a Biz Dev. strategy to grow sales while simultaneously lowering costs.

I proposed the creation of a client support position that would handle day-to-day customer issues, after the National Account Manager landed a new account. The incentive compensation plan I designed consisted of a small override on the accounts that had been sold and handed off by the National Account Manager, to be paid out every quarter. In addition, any up-selling to these clients would reward the client support rep with a more generous commission on top of the quarterly bonus.

Client Support Incentive Compensation The client support incentive compensation was deliberately designed to NOT be associated with a quota assignment. The reason is simple—the support position is not a sales job! Competencies for client support and account management personnel  do not include the capacity to land new accounts or develop new business from scratch.

The best client support specialists and account managers serve as a a crucial, single point of contact for existing clients. They should possess superb communication and negotiation skills, but their focus should not be revenue growth–their priority should be Customer Relationship Management.

Customer Relationship Management CRM is extremely important because it costs significantly more money and  involves many more  resources to bring in brand new business, than it does to maintain existing accounts.

However, if an inferior, uninspired, exhausted, overburdened  or careless customer support team precipitates the loss of existing client business, the revenue disappears–and the higher cost “hunter” Account Executive program must go into high gear to generate new sales in an attempt to offset the lost revenue.

The Value of a High Performing Account Management Teams

A high performing team of Client Support , CRM Specialists and Account Managers ensures the revenue stream associated with existing clients remains intact—and even incrementally grows to the extent that upsells, upgrades and some new “farming” opportunities trickle in and are handled professionally.

Quota Based Incentive Compensation is Contraindicated for Customer Relationship Management Teams A quota in such circumstances only serves to distract the team from their chief, central, extremely critical, Customer Relations/Client Services/Account Management role: keeping existing accounts happy, solving their problems, offering valuable solutions—which translates into keeping the revenue engine flowing steadily!

Instituting an incentive comp plan involving a quota in a Customer Relations/farming/maintenance/account manager position is confusing and discourages  account management/client services team members.

Invariably, there are a few “satisfied” account managers who inevitably “luck out” with being handed an unusually hot book of business that almost automatically grows with minimal effort on their part. Needless to say it is not in the company’s overall best interest to place so much wonderful, flowing recurring revenue at risk–and in potentially serious jeopardy.

Why it is inappropriate to assign a quota to someone in a Customer Relationship Management Role.

If in order to get a decent bonus,  Account Managers end up to concentrating their primary efforts toward growing revenue,  the Customer Relationship Management/client retention strategy becomes severely compromised.

When Account Managers feel compelled to shift their focus to a sales/new business development scenario, overall client support tends to suffer. 

Such a shift is counter-productive, because it is downright dangerous to de-emphasize caring for the many existing clients whose business generates a stable flow of  revenue, in favor of concentrating on dealing with fewer accounts, with the hope of growing the revenue of the overall book of business.

Long Term Consequences: Eroded Client Relationships and Lost Revenues:

Initiating a quota based compensation plan for client services or account management teams will invariably result in deteriorating customer service, because the comp plan rewards revenue growth instead of  properly building, supporting, managing  and strengthening client relationships.

Is your company at risk?

Properly designed and appropriately implemented incentive compensation programs in the hands of a talented, professional team of sales representatives/account executives, will have a positive, tangible business impact, yielding exceptional sales growth; however, if your company is currently guilty of one or more of the Top 5 Mistakes in Designing Incentive Compensation, you may be at risk relative to losing a significant chunk of recurring revenue—or at best, you are not optimizing human capital—therefore not maximizing your potential for accelerating revenue growth, improving customer service, enhancing employee morale—while simultaneously lowering costs.

Traininguru, Training Guru Trainingguru

John A. Fallone: America's Leading Biz Dev Consultant

John A. Fallone is a Biz Dev. consultant, marketing strategist, Web Solutions Expert, sales and training executive, turnaround specialist, motivational speaker, legendary sales manager, copywriter and Founder, President, & CEO of TRAININGURU and THE HUMAN FACE OF TECHNOLOGY

For more than 20 years John has assisted successful entrepreneurs, CEOs, IT & business leaders implement proven, powerful high growth strategies—while lowering costs, increasing profits, improving employee retention and enhancing customer service.


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