Structuring an effective sales incentive
An effective sales team is key to commercial success. Getting the incentives right is a big part of that – but doing so requires careful consideration. Inflexion recently invited its portfolio to hear from experts in the field at its latest Commercial Exchange.
If it’s hard to know how best to incentivise sales teams, it’s because there’s no one right answer. What rings true universally is that each scheme should be unique to its business, its growth phase, and what the business is trying to achieve.
“There’s a shift almost overnight once we touch on compensation plans. But the reality is that many incentive schemes don’t achieve their objectives,” warns Ada Pham, Assistant Director in Inflexion’s Value Acceleration team focused on commercial strategy.
She cites three main culprits behind most failed launches: many are poorly designed, often too complex or lack material reward for the sales team; some lack clear objectives; and others suffer from poor communication and visibility of impact due to insufficient preparation.
Getting it right matters, since failing can cause numbers to go backwards. Thomas Hofmann, Partner at management consultancy Oliver Wyman, shares the experience of a services business that got it very wrong. Seeking to fuel growth, they pivoted from a margin-based incentive to a new business revenue one. They had intended to keep retention intact, however no control on discounting for existing or new customers and a lack of proper scenario analysis brought the unintended consequences. “The fight for growth came at the unplanned loss of margins and resulted in a massive value destruction including diminishing the brand value.” Thomas recalls.
“Designing an incentive scheme can be complicated because there are a lot of dimensions you can potentially consider. You need to use a systematic approach to work through those that make sense for your organisation's objective and avoid the worst-case pitfalls” says Simon Eymery, Partner at Oliver Wyman. He recommends resisting the urge to add KPIs each time you want to fix something since staff get fatigued rather than intrigued by it and you lose effectiveness. “Start from the behaviour you want to urge, limit the number of KPIs, don’t use KPIs people can’t act on, give continuous visibility.”
Thankfully this cautionary tale was countered by a number of success stories, including from Inflexion’s own portfolio.
Peach, a global market leader in video ad distribution workflow software backed by Inflexion since 2016, had a number of different complex incentive schemes across its numerous international offices. “There was no consistency in how, how much, and when we pay. It didn’t align to our commercial strategy at all” admits Jani Levanen, Peach’s VP of Sales Operations.
They moved to a new, more simplified scheme consisting of three key elements: new business revenue and existing business revenue, which were more KPI-led, supplemented by qualitative objectives and key results to drive strategic objectives such as cross sales and cost recovery.
The first key change was to move from a commission to a quota-based scheme, aligning the quotas to different roles such as account managers and business development. The second key change was to increase the variable component, making it more worthwhile for sales teams to drive growth. The third key change was to standardise one umbrella structure globally.
“We want people to be hungry, so the scheme needs to align with our corporate strategy and ensure its driving the behaviour,” Jani stresses. They modelled different scenarios to check affordability and then ran multiple training sessions to make sure sales teams understood what they are rewarded for. He says the changes have helped foster more of a target-driven sales culture.
Payments consultancy CMSPI, which received minority funding from Inflexion in 2021, made a number of smaller tweaks to its incentive schemes to drive new business growth and to attract high calibre sales people.
“The old scheme paid sales teams over the project lifetime, making it hard to motivate existing teams as they were paid for engagements they sold years ago. This in turn created a disconnect between performance and compensation, with newer sales people finding it took a long time to see compensation come through,” explains Richard Kyne, CMSPI MD of Europe and APAC.
“What we did was pull forward the commission pay-out so that the sales people would be paid in year one of signing a project. Top performers also get an additional bonus kicker on top if quotas are met or exceeded,” he adds.
Sales teams are happy since a higher variable component means they can earn more than before. “We’re seeing more drive across the board which is very positive. Overall, it has been a journey for us, taking six months to develop and test. We will keep re-iterating and learning after each time” enthuses Karolina Tallar, CMSPI’s Global CFO.
1. Set clear objectives: what is it that we want to achieve commercially, what behaviours do we want to drive, and can we monitor progress.
2. Make it materially rewarding for sales teams and keep it simple to understand those objectives. Sometimes tweaks to existing schemes make a material impact and deliver immediate changes in behaviour, such as increasing the variable component and paying out earlier.
3. Get insights from sales team early on and leverage sales manager to stress test the model prior to deployment.
4. Model the business case and spend significant time on this, involving finance to see what is affordable. Consider and quantify different scenarios, including best and worst cases.
5. The before/ after has to be crystal clear for each population.
All Inflexion portfolio companies, regardless of size or ownership stake, have full access to our dedicated value acceleration resources covering digital enhancement, international expansion, M&A, ESG, commercial strategy and talent management. Our commercial team support management teams to identify and execute on high-impact top-line growth initiatives including pricing, proposition, sales, and retention.