Which Incentives Work Best for Your Team? A Compensation Management Solution Helps You Find the Answers
The “principal-agent theory” from the field of economics states that a principal such as your company desires maximum output from its sales agents, while the agents want to expend minimum effort on your behalf. Sales incentives help align these interests… but which incentives work best?
Science teaches us that empirical evidence should be the #1 key to success when it comes to optimizing an incentive program that maximizes output from your sales agents, but it is difficult to gather empirical evidence. Even if you’re lucky enough to have an ERP with built-in compensation calculation tools, those tools will be too limited to be of any real use to you.
Instead, the best way to optimize your incentives is to rely on a flexible compensation management solution that makes it easy for you to collect empirical evidence, run experiments, and assess your results.
The Science: What We Know About Sales Incentives
Scientists have studied sales incentives intensely for decades and report a few highly consistent findings:
- Capping commissions often leads to gamesmanship
- Increasing quotas after a successful year (“ratcheting”) hurts long-term results
- Poorly timed sales bonuses can result in lower revenues
- A salesperson’s good luck can eat into your profits, whereas bad luck can result in high turnover
- Every salesperson is motivated by different incentives
- Simple incentive programs typically result in less salesperson manipulation of the process
The Doubt: What We DON’T Know About Sales Incentives
While these findings are good to know about, they don’t necessarily help. After all, tactics like capping commissions and ratcheting quotas are used to solve very real problems in many sales departments.
The key to success is to think like a scientist: build off of previously established data (like the bullet points above) and then run your own experiments to see which findings have the greatest impact on your sales department. A compensation management solution can help you run these experiments.
For example, these are some typical questions leaders don’t know about their sales incentives that they can run tests to answer:
- Which of your salespeople are timing contract-signature dates to affect their quotas at the end / beginning of each period?
- When does a quota increase help motivate salespeople, and when does it demoralize them?
- Would your sales team be more effective with quarterly bonuses, cumulative quotas, or presales milestone rewards?
- How much revenue are you leaving on the table without a flexible split incentives program?
- Which incentives are most effective for your sales team?
How a Compensation Management Solution Helps You Answer Unknowns to Optimize Your Incentives
An effective, modern compensation management solution is one of the best ways to answer these questions because it provides fast and accurate commissions calculations that provide empirical data and the flexibility to test different incentives programs. This helps you maximize your results.
Here are a few ways you could test your incentive programs with a compensation management solution:
- Customize incentives by role or provide split incentives
Gone are the days in which one salesperson handled a specific client. These days a single customer is likely to engage with sales reps, account managers, BDRs, SDRs, account executives, sales engineers, solution architects, marketers, and customer support team members – all in the initial sales cycle!
Each of these professionals has a critical role to play in customer satisfaction, retention, support, and — of course — purchasing, but typically only some people are incentivized for their efforts. Often, many of these roles step in to help the salesperson, but only the salesperson is incentivized for their work. Expanding incentives intelligently to more roles can help boost revenues and get the whole sales team working together.
- Customize incentives by territory
Established territories have different opportunities and challenges than emerging territories do. These variations in territory have an outsized impact on salesperson luck, which is why customizing incentives by territory can address a range of issues that arise in a one-territory-fits-all approach.
Perhaps generating a pipeline should be weighted more heavily in emerging territory sales, and customer satisfaction and retention should be weighted more heavily in established territories. Perhaps ratcheting quotas makes perfect sense after an emerging territory converts to an established territory. Perhaps “relaxation” incentives like ski trips or Hawaiian vacations are best for salespeople faced with high rejection rates in emerging territories – but perhaps those incentives may bore their co-workers serving established areas.
Ready to Start Experiencing Better Business Outcomes?
You can run nearly infinite experiments with a compensation management solution. At this point, you have probably thought of a few of your own questions or some interesting experiments you would like to run at your company.
Compensation software makes it easier to get the empirical data you need to optimize your sales incentives for better business outcomes. This is because good software reduces manual data entry, provides granular flexibility, delivers instant insight, and saves your accounting department critical time.
Ready to run your own experiments and see how you can motivate your team, boost your revenues, and maintain the boundless energy of your highest performers?
Want to know if your company would benefit from variable compensation software?
We developed this simple matrix to help you discover if variable compensation software is right for your company.