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When thinking about building business in the new year, many business owners will consider tinkering with the compensation structures offered to their sales people.  However, there are some caveats to consider when planning how to best create a successful reward and incentive plan that motivates salespeople.  Being ignorant of these warning can lead to less than satisfactory results – and may serve to actually DE-motivate salespeople and lead to reduced outcomes.

The overarching goals of a compensation plan are to:

1. Reward the right outcomes - achieve results that build the business outcomes the entrepreneur seeks (market share, sales, profit, on-time payment, or other business results).
2. Motivate salespeople to strive for or improve on past performance.
3. Fairly provide proportional incentives and rewards based on an objective standard.

By accomplishing those few goals, the sales incentive plans (often referred to as “SIPs”) can be integrated into the daily activities of the salesperson and help provide the right focus, motivation, and ability to achieve objectives.  Unfortunately, that is not always the reality of how these plans are integrated and applied.  An outcome to be avoided is to purposely or inadvertently alienating the best producers or “A” level salespeople – while at the same time, providing appropriate inducements for the other salespeople to accomplish their targets.

Mistake #1 – Limits or Capping Earnings

Placing a maximum amount on the incentive plan serves to protect the pay owed to a salesperson from a company standpoint and is a way to manage expenses – but at the cost of demotivating salespeople, reducing the interest of salespeople to push for additional sales opportunities, and limiting results.  Imagine Geno Auriemma telling his players that every basket they score after they are winning by 20 points no longer counted to the final score!

Mistake # 2 – Reward the Behavior

The outcome of not having caps or limits on sales compensation means that it is possible (maybe likely) that the final income of the best salesperson/salespeople may exceed the income of the business owner.  Nevertheless, that is a commitment that a sales incentive plan should encourage.  Salespeople are tasked with selling.  If they do it well, they should be recognized and rewarded for it.  Not partially.  Not occasionally.  When a sale happens as a result of a salesperson’s behavior; it should be rewarded. 

The idea of unrestricted earnings for high performers is far superior to encouraging mediocre or poor performance – but maintaining a balance of salaries, bonuses, incentives, and compensation that remains true to a predetermined hierarchy of what “should” be the income.

Mistake # 3 – Clawbacks

As a hedge against unforeseen circumstances or changes in the market/accounts, businesses will occasionally include clauses in the incentive plans that allow them to change the parameters of measurement or even reduce or have a salesperson “payback” monies previously paid.  Aside from the legal matter that prevents that from happening in some states (though a sales rep can “volunteer” to return it – an outcome not likely to happen in reality without coercion).  If there is a need for this clause, it is an indication that the plan is not well structured and should not be used.  The only exception to this should be if the salesperson is engaging in illegal activity and has achieved results unethically.

Mistake # 4 – Overly Complicated

A sales incentive plan (SIP) should be easily understood and communicated.  If it requires numerous pages and clauses or overly legal language; it will fail to inspire and will serve to create a distraction.  Now, instead of working on selling behaviors, salespeople will work on understanding the plan, seeking the nuances within it, building defenses for performance, searching for loopholes, etc.  All of that can be avoided if the sales compensation plan can be reduced to just a couple of pages.

A recent post shared the advice to “lead with the headline.”  Providing the commission plan and calculation method upfront as opposed to leaving it in a page to the backhalf of a long document after all of the legal mumbo-jumbo has been covered.  The message to the salesperson is less about rewarding sales and more about protecting legal interests.

The competition for ‘A’ players in the job market is likely to increase over the next year or two.  The economy is improving and there is projected to be greater pressure to hold onto the true stars of the sales ranks. If you want to hang onto yours in 2012, avoid these common mistakes when designing sales compensation plans.

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