Chapter 20

Incentive Myths and Legends

f you flipped to this chapter first for the secrets of incentives, know that the correct blending of incentives still only factors in as one of four core processes of our Revenue System. However, when designed correctly, a Results-Driven Incentive Process can have a profound impact on the revenue performance.

Before we begin, let’s get it out in the open –

That may not be what you wanted to see, but we’ll walk you through the lessons we’ve learned over the decades that will save you years of agony about incentives.

Let’s review the seven most common mistakes that most businesses make with their incentive programs.

Incentive Mistake #1
All business (new and existing accounts) earns the same incentive.

New account business is ALWAYS worth more than ongoing business with existing accounts because

1) it’s more difficult business to obtain than continuing business with already established account relationships.

2) it’s the only way your business will generate sustainable growth.

By paying more for new business, you train your salespeople to GROW your company instead of just taking the easy business (low-hanging fruit) that was likely coming your direction anyway. From the Chief Revenue Officer role, it is important to keep your company strong and growing; new business is the best way for you to accomplish this.

If senior management sent out a message that they wanted and expected substantial growth in both revenues and profits in the coming year and in the same text announced a maximum cap on those revenues and profits, they’d be viewed as having no business sense.

Yet, we still hear of companies that put caps on their salespeople’s earnings. Essentially, they have just put a cap on the company’s earnings. Management tells the salespeople to sell, sell, sell, but by placing a ceiling on their earning potential, management discourages the salesperson from being anything greater than average. These companies also tend not to attract the best sales talent.

Sure, we’ve heard the justification for capping salespeople’s earnings, "If we didn’t put a limit on a salesperson’s earnings, they might make more than the president." Get over it! If the president has to make the most money, he/she should take on a Hunter/Rainmaker role in sales. Then the president will at least have a more hands-on understanding of what is required to grow revenue and manage a herd of those wily, independent variables called prospects.

If your salespeople bring value and profits to your company, why shouldn’t they be compensated for it? Great salespeople can be worth their weight in gold, and if you don’t recognize that by paying them what they’re worth, they will find someplace else that will.

This seems so obvious, but is so easily missed by most companies. Here’s an example of what we mean:

A consulting company offered only five-year consulting arrangements. They felt that by having this longer agreement, they would be more successful with their clients and more profitable. The sales people claimed that it was a hard sell and they’d sell more if the term of the agreement was shortened to three years.

Well, the salespeople got their wish. The company began offering a three-year agreement with one catch: it paid only a fraction of the standard incentive. Guess what, no salesperson ever sold the three-year program that they so desperately needed. The incentive program the company offered drove the business to where they wanted it.

We routinely visit companies that can rattle off a long list of quality control measurements for their production line, the daily efficiency ratios, declining warranty costs, and the failure rate of the newest product. Yet, when asked about the metrics used to measure their sales cycle, we’re met with blank stares and stammers.

Having an understanding of how long a piece of business takes to go from an initial contact (cold call, web inquiry, etc.) to payment for goods/services delivered is critical for both business planning and incentive processes.

Installing a midyear special incentive program for "new business to close this quarter" when in actuality the sales cycle from new prospect to sold business is typically eighteen months will only confirm:

1. Management is not well connected to the business fundamentals.

2. The company will end up paying more commission this quarter for the "new business" that was already over a year into the sales pipeline process and coming in anyway. So the special incentive has no real impact on finding new, closeable business.

When we asked clients why they have Finance design their incentive plan, the most common response was, "To protect the company." We have never been able to figure out how sales success damages a business!

An effective plan is designed to reinforce both the critical behaviors defined in the revenue system and the desired results. For example, Finance typically does not think about new business vs. repeat business, the incentive for closing five new accounts in a quarter, or the incentive for closing the first account in a totally new market segment.

Sales people will respond to what the company wants when the incentive plan is well-defined and integrated into the business model. It’s important that the incentive process supports and rewards a salesperson’s measurable level of contribution.

Incentive Mistake #6
Paying incentives on orders versus customer payment.

Not that your salespeople would ever do this, but we have seen salespeople submit orders, get paid, and then quit only to have some of their last orders cancel or never happen…and they were never going to happen. This does not mean you can only pay incentives upon receipt of payment. It does mean your incentive plan should clarify that incentives are earned only upon timely payment of the complete transaction amount. The company practice can be to advance an incentive payment (full or partial amounts) at the time of order acceptance, shipment, or whenever you decide to recognize the performance, but this approach keeps the incentive at risk until the entire payment transaction is completed, not to mention it can save your company a significant amount of time and money on legal battles.

Incentive Mistake #7
Assigning more sales leads to the reps that are NOT doing well to help them crack the incentive column.

There’s no democracy here. There are reasons why some sales reps are struggling at sales. Sales management needs to address those performance issues and map out a get well plan for the non-performing rep. Always play your strongest players for a better chance at the new business opportunities.