If you are involved in sales incentive plan design, you are familiar with the concept of “linkage.”
Linkage is the practice of linking performance on one measure to payout on another. It is frequently used when there are competing objectives. For example, a company wants to grow revenue while minimizing discounting. But salespeople know that lower pricing drives higher sales (sometimes at great cost to the bottom line). So, the company might modify the incentive for revenue volume based on discount, with a discount modifier table like this:
But What Is a Hurdle?
The simplest form of linkage is a “hurdle,” also known as a gate. It is an on/off measure. If you clear the hurdle, you earn more on another measure. For example:
A Recent Case
A client wanted to pay salespeople more for selling their more profitable products, but not at the cost of largely abandoning the less profitable ones. These were critical to keeping the company relevant as a full-line supplier, which was a strategic objective and a key to long-term growth. The prior incentive plan paid a much higher commission rate on the more profitable products than on the others. While some salespeople continued to sell large volumes of both sets of products, others maximized their earnings by focusing almost exclusively on the products with the higher commission rates. And who could blame them? That is what the comp plan encouraged. As a result, while margin % was high, overall volume declined and the company became less relevant as a full-line supplier, ceding market share to competitors.
The problem did not exist in all territories but was very damaging in a few. And the company did not want to under-emphasize their more profitable products. It just wanted to ensure a reasonable level of performance across all products and because product opportunity differed by territory, the level had to be low enough to be achievable everywhere.
So, they set a hurdle.
Salespeople who retired at least x% of their monthly total revenue quota through sales of the less profitable product would earn an additional 1% on all the revenue from more-profitable products. Salespeople understood that meeting this hurdle was quite doable, and so set about getting to the magic x%. Once they met that level, they were better served by focusing more on the more profitable products.
Rules of Thumb for Hurdles
- Achieving the hurdle should be easy. The best use of the hurdle is to bring up the performance of outliers or to focus attention on a specific issue that is not a problem for everyone. Although a hurdle should be set up so that good things happen if you clear it, it can be demotivating if a significant percentage of the salesforce is unable to do that.
- Use hurdles for strategic or secondary measures. The highest-weighted measure in any sales incentive plan should be volume (revenue, sales, contract value or units). A hurdle allows you to put focus on secondary measures without consuming a high percentage of target incentive. A good example is accounts receivable. No salesperson should earn a lot of money for over-achieving on collections. It should not be a big part of their job or their incentive plan. But if there are outlier salespeople, whose accounts receivable aging has reached a critical point, they should be encouraged to get it under control. And a hurdle can do that well.
- Beware of combining hurdles. Some companies don’t recognize that even if achieving A, B, C and D individually is easy, achieving all of them might not be. I have seen plans where payout is much lower if a combination of hurdles is not met and the result is that many are penalized because they cannot meet all of them, leading to resentment and excessive attention paid to clearing the last one or two hurdles, at the expense of overall company results. Furthermore, the more hurdles and linkage in a plan, the more complex it becomes, which by itself undermines the motivational impact of the plan.
- Assess the hurdle at the end of the year. A good hurdle will be perceived as more of a nudge than a punishment. By the end of the year, ideally, the modest goals of the hurdle will have been met. At that point you may choose to raise the hurdle if you think further progress on the measure is important, or you may take it out because you believe salespeople will be compliant even without it. Sales compensation plans tend to grow in complexity over time as tweaks are added and not removed, building up like barnacles on the bottom of a ship. So, remove elements that may have outlived their usefulness.
Consider a Hurdle
Hurdles may be an under-utilized tool in your toolbox, and you may have been burned in the past by unintended consequences, which are always a risk with linkage. But if you keep your aims targeted and highly achievable, hurdles can be a nice addition to many incentive plans, because:
- They effectively target specific problems without underweighting other parts of the plan.
- They are simple and easily understood, particularly relative to other forms of linkage.
- If easily achieved, they are encouraging.
About the Author
Elliot Scott is a long-time sales compensation and sales effectiveness consultant and the owner of Elliot Scott Consulting LLC.