Is Your Comp Plan Incentivizing the Right Behaviors?

Is Your Comp Plan Incentivizing the Right Behaviors?:rom The Sales Challenger™ by Zeke Sexauer

With the first half of the year now complete, many organizations are evaluating their performance against annual goals. Inevitably, performance in many areas won’t perfectly match predictions, and now serves as an ideal time to reprioritize and adjust strategies for the latter part of the year. It’s a good idea to take a look at your sales compensation plan as well to ensure that your sales team’s priorities are aligned with your organization’s.
We recently polled our members about the design and management of their sales compensation plans and the different metrics they use when measuring rep performance. Different metrics encourage reps to focus on different things, so it’s important to choose the correct metric or combination of metrics to make sure you are driving the right behaviors.
Following are some of the most commonly used metrics and the behaviors they drive, as well as the unintended consequences of each that you should be aware of.
Gross revenue. The most commonly used metric in reps’ comp plans is the gross revenue they generate through sales. Our new compensation benchmarking shows that 67% of companies include some sort of gross revenue metric in their comp plans.

• Benefits: Gross revenue metrics encourage your sales team to sell, sell, sell—great for revenue and unit volume maximization.
• But watch out: While gross revenue metrics will encourage large revenue generation, they also encourage sales reps to use excessive discounts to close deals, which can really dig into profits when pricing isn’t pre-set.

New revenue. Gross revenue metrics are great for ensuring a certain level of revenue is being maintained, but to encourage revenue growth, you’ll need something more. 45% of organizations use a new revenue generation metric to communicate this priority.

• Benefits: New revenue metrics ensure that reps are creating new sources of revenue and not just living off of renewals.
• But watch out: Since new revenue metrics don’t specify where this revenue comes from, too much emphasis on new revenue generation may drive some reps to become excessively aggressive in pushing existing customers to buy more. If increasing market share is a high organizational priority, consider using a new account acquisition metric (used by 28% of members).

Sales of specific products. While revenue metrics easily communicate the most basic priorities of most organizations, we’ve found that comp plans that include only revenue metrics to be less effective than those that also include a non-revenue metric. The most common non-revenue metric measures sales of specific products, and is used by 35% of organizations.

• Benefits: Easily communicates to reps what products they should be focusing on.
• But watch out: This may cause reps to neglect products with weaker incentives, and can become confusing if you include metrics for too many products. See our advice on specific product metrics.

Profitability. When reps have a lot of autonomy in negotiating prices or when terms and conditions can incur major costs, it is often helpful to include a profitability metric your comp plan. Our recent comp plan benchmarking found that 30% of organizations include this metric in their plans.

• Benefits: A profitability metric will reduce reps’ urge to discount heavily to close deals, and ensures that deals have acceptable margins.
• But watch out: Reps’ focus shifts from aggressively closing deals to wringing as much profit out of each deal as possible, slowing down the sales process. Additionally, this can create conflict with new customer acquisition, which generally happens at lower price points. See our advice on using profitability metrics.

These are only the most commonly used metrics. There are many other metrics you can use to communicate different organizational priorities to your reps. However, be advised—for a comp plan to effectively convey what’s most important, it must be simple and objective. Too many metrics will confuse your reps and are likely to end up conflicting with each other.
SEC members, learn more about selecting the right metrics for your sales compensation plans and see the results from our recent comp plan design benchmarking.