55 Keys: Using Incentive Comp to Lift Performance, Profits, Innovation

Sales or incentive compensation continues to be one of the primary performance levers in companies today. However, according to the Alexander Group’s Sales Compensation Trends Survey, more than 90% of polled sales compensation leaders are dissatisfied with their current plans and are actively seeking change. This reflects the challenging years many companies have endured.

Organizations are looking to drive more accountability in their plans while incorporating limited management by objectives (MBOs) to ensure longer-term focus. Based on the survey results, the following five key areas highlight where companies are focusing their efforts to drive performance, profitability and innovation via incentive compensation plans.

1. Pay for Performance

Many companies are shifting toward more aggressive pay mixes (higher pay at risk models) to ensure sellers’ incentives are aligned with business outcomes. Per the Alexander Group’s benchmarks, 60% base and 40% target incentive pay is the most common mix. Only 15% of surveyed companies have a 50/50 or more aggressive pay mix. Additionally, 75% of polled companies either have or are incorporating minimum performance thresholds in plans.

Organizations are also realizing that growth comes from taking market share — displacing incumbent competitors is challenging, and a few companies are reflecting this effort in their plans. These can range from incentive multipliers for cracking into named accounts or new market segments, or MBOs like multi-threading (i.e., building a network of key relationships within named accounts).

2. Technical Roles

Many companies are redefining technical roles (product specialist, market specialist, sales engineers, etc.) to drive revenue. These roles are shifting to more aggressive pay mixes. Companies also are adding individual measures into the plan (vs. only team or galactic goals in the past) to motivate technical experts to actively contribute to sales efforts. In addition, organizations are realizing the virtuous cycle of successful adoption that leads to expansion sales with an account.

Post-sales activities often fall outside traditional compensation plans. However, expansion opportunities arise from existing accounts. Companies are introducing MBOs to incentivize post-sales efforts. Specific success metrics (e.g., on-time installation) rather than subjective measures (e.g., Net Promoter Score, customer satisfaction) better ensure targeted rewards.

3. Profitability

Companies realize discounting strategies can drive short-term sales but may erode long-term profitability. Two-thirds of surveyed companies have considered but not implemented profitability measures in the primary seller plan, showing implementation remains a challenge. First-line sales managers play a pivotal role in minimizing the practice of discounting. Select companies have introduced a profitability measure in manager plans to strike a balance by incentivizing managers to focus on sustainable growth.

It is important to note that profitability measures don’t strictly mean adding price or margin into the plans. Companies may implement such measures by adding product mix — rewarding sellers for retiring quota on more profitable products.

4. Linearity Bonus

Private equity (PE)-owned companies are embracing linearity bonuses to reflect quarterly emphasis. These bonuses reward consistent performance throughout the year, encouraging sellers to maintain momentum. By linking sales compensation directly to deal progression, organizations can fortify a steady revenue stream. Monthly incentive payments can further reinforce this shift, emphasizing consistent performance.

While 80% of surveyed companies use annual performance period, select firms are shifting to semiannual or quarterly plans that drive linearity and offer quota allocation flexibility at the expense of administrative burden.

5. Service Contracts and Warranty Revenue

Service contracts and warranty agreements can contribute significantly to companies’ revenue. Recognizing this, organizations are exploring ways to align compensation with these critical revenue streams. Incenting sales teams to promote service contracts during the sale locks in sustained income. This may help the organization stay in close touch with the customer to uncover expansion opportunities. Separate measures likely increase seller motivation to focus on service contracts during sales negotiations.

Planning Changes and Changing Plans

The Alexander Group survey shows companies are planning major changes to their incentive compensation plans and are adapting swiftly to changing market dynamics. They are realizing success lies in aligning incentives and performance.

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