Monday, June 22, 2009


Sales incentive plans and bonus plans are different.

Sure. You’ve just introduced a new sales incentive plan, a plan you, your consultant, your CFO, and Vice President of Sales have worked on for the last six months. It’s got Tier 1, Tier 2, and Tier 3 commissions. It’s got performance bonuses based on gross margin, net margin, net profit, sales revenue, continuing client relationship, new customer acquisition, customer retention, and a host of other both subjective and objective parameters, including the Vice President of Sales opinion on just how hard the sales person worked during the course of the year. In other words, you’ve got the perfect sales incentive plan. At least that’s what you think.

But guess what? You don’t have a sales incentive plan. You may think you do, but you don’t. The way you find out is with the acid test Sales Incentive Plan Question. This is a question that Professor Sherwood has used for years to evaluate whether or not a company has a sales incentive plan, a sales bonus plan, or just another plan that is in their policy but really doesn’t incent or motivate sales people to go that extra mile to close that extra large contract.

Here is the acid test question: About an hour before your sales person is going to go in and close the big contract, call him or her on the telephone and ask the following question. In the next hour you’re going to close a large contract with Customer A. If you do, what will be your incentive commission for this client? If it takes a sales person longer than about 20 seconds to answer that question, you do not have a sales incentive plan. You might think you do. You might have an incremental, marginal bonus compensation plan, and it may be well written with the language of an attorney and the adjectives of your VP of Sales, but you do not have a sales incentive plan. If the sales person doesn’t know how much he or she is going to make by closing the contract, they simply are not going to be incented to go that extra mile.

You may ask, “Don’t all my sales people work just as hard to close every contract because they’re morale, ethical, honest, and hard working people?” Well, the answer to that is probably yes. By the way, if that’s the case, why do you need a sales incentive plan? If you are going to have a sales incentive plan, then you want to make sure that plan accomplishes what you want which I believe is to incent the sales person at the point in which the order might be taken or lost to incent the sales person to go that extra mile, to overcome that last objection, to weather the storm of protests about your company’s inability to deliver or the specifications or the scope or the price. You want that sales person to be incented such that he does not leave the client’s office without the order. That’s a sales incentive plan. Anything less than that is a bonus plan or simply an additional compensation plan. Nothing wrong with those things, but they don’t accomplish the incentive part of a sales incentive plan.

So if you have some doubt about whether or not you a sales incentive plan or just a complicated compensation plan for your sales people, use the acid test question from Business Rule No. 3 by Professor Sherwood. Ask your sales person what’s his or her incentive commission on the next contract they’re about to close? If they don’t know the answer, your plan didn’t pass the acid test question.

Are your people on an incentive system or bonus system? Most company managers don’t know the difference between an incentive system and a bonus system. Many companies have incentive systems that are bonus systems, and bonus systems that are neither. You may have heard the old story past down from employee to employee where for years all the employees got turkeys for Christmas. One year, no employee received a turkey, and one employee was heard saying to another employee, “I guess the boss sold his turkey farm.” In other words, they were so used to receiving their turkeys that it wasn’t an incentive system, and it wasn’t a bonus system. In fact, It wasn’t even a gift. It was simply something they expected to get regardless of their performance or the performance of the company. But I can speculate that the boss thought the turkey was part of a bonus system, a reward, an incentive for working at this fine company. But the employees had completely contrary thoughts.

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