Perspectives from ISB

Panelists: Prof. Raghuram Bommaraju, Senior Assistant Professor, Indian School of Business [Moderator], Ms. Aarti Chandra, Associate Director, India Total Reward Leads, Pepsico and Mr. Varun Gupta, Chief Executive Officer, Atmax Technologies
Date: July 24, 2020
Compiled by: Minal Agarwal, Manager, ISB-Centre for Business Markets

Sales incentives are the crucial drivers in improving the performance of sales representatives. Organisations must come up with innovative designs and processes to keep motivating their sales teams, which ultimately leads to better results.

Organisations often face the challenge of deciding which function should design the sales incentives: should it be HR, Sales, or Finance?
HR department decides the compensations of the employees; Finance determines the sustainability of incentives from the P& L perspective. The sales department understands whether targets have been achieved, or overachieved, or underachieved. Therefore, a cross-functional team of all three departments for deciding the incentive plans will be the best approach.

The incentive plans should be designed keeping the expected outcome in mind and should have the right impact on the sales representatives and their behaviors related to performance.
An organisation should keep in mind the following parameters while designing the sales incentives:
• Quantitative parameters: If the highest performer of the team is not getting incentivized enough as compared to the laggards, then it means the incentive plan is not effective. The incentive should neither be too low nor too high. At least 75% of the team should be able to achieve the target set by the organization and therefore qualifies for some incentive payments.

• Qualitative parameters: Organisations should communicate the incentive plan much before its launch. The team should be given enough time to understand the scheme and clear their doubts before they start selling the product.

• Job profile of the sales team: While designing the incentives plan, it is important to understand the job profile of each team member. Organisations cannot have the same incentives plan for a salesperson and her manager. At the same time, it cannot be diametrically opposite. There should be a reasonable alignment of the incentives of the salesperson and the sales manager. Understanding the KPIs (Key Performance Indicators) and job responsibilities is key to designing effective sales incentive systems. No two salespeople or sales teams are the same. A hunter salesperson and a farmer salesperson will not have the same sales incentive plan. If organisations implement the same incentive plan for the entire sales team, it is likely to be ineffective.

• Clear communication of the organisation Goals to the sales team: The sales team must understand the goals that the organisation is trying to achieve. The sales team and sales manager should be in sync, and their objectives should be aligned with that of the organisation.

• Measurable targets: Targets should be measurable and quantifiable. The sales team should know what they have achieved and how they have contributed to the profitability and revenue of their organisation.

• Consistency: The sales incentives help to drive the behavior of the sales team. To make this behavioral change, organisations should be focused as well as consistent in what they are trying to achieve from the sales team. Most of the time, organisations tend to forget about the average performers, and they only focus on either the top performers or laggards. If average performers are given stepwise targets, then they see the possibility of achieving those targets.

• Transparent and real-time availability of data: Most of the time, the sales team is not able to know their real-time achievement data. For instance, if they have worked for ten days in a month, they would be interested to know about their performance till that point of time. This information could be their motivation to work harder for the remaining 20 days of the month. In this context, it is useful to remember the maxim, “Out of sight is out of mind.” The visibility of their performance through concrete metrics and the corresponding incentives received will motivate them to work harder.

• Timeframe: There are two key factors in deciding the time frame for announcing the incentives.
i. Business operating cycle: The shorter the operating cycle, the sooner the Incentive should be given.
ii. Type of Products: In the case of FMCG, incentives can be designed on a monthly or a quarterly basis. For products that have a long gestation period, incentives can be designed on a quarterly or half-yearly basis.

• Personalized incentives: Salespeople who have designed their incentives themselves will understand their incentive plans better. They will not feel that the plan has been imposed on them, and they will be more committed to achieving the target, and the level of their efforts will be much higher. This can however be done only in cases of a seasoned sales force and in an evolved sales organisation.

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