How Can I Tell If Our Incentive Compensation Plans Are Working?

Oct 29, 2020
5 min read
It can be challenging to tell if your incentive compensation plans are working. This post debunks traditionally accepted metrics and introduces three simple, more modern ways to see if your incentive compensation design produces desired results.

One of the most frequently asked questions that Intangent and Xactly receive is: How do I tell if my incentive compensation plans are working? 

Today, the query has all-time importance. As executive teams lean into continuous planning to meet unprecedented market dynamics and constantly evolving priorities, their businesses also demand agility to adapt incentive compensation design. 

Nine of 10 businesses say real-time insights are imperative to make relevant strategy shifts in today’s new sales era. Unfortunately, only one-third of those nine businesses can make corollary updates to their incentive compensation plans. That’s a problem when you consider incentive compensation exists to direct sales reps’ behavior forward specific company aims, such as revenue and growth. 

This blog explores why traditional effectiveness metrics for measuring incentive compensation are no longer relevant. It also proposes a more modern approach that produces quantitative answers more quickly—and will help your team agree that, yes, your incentive compensation plans are working.

The old way to evaluate if your incentive plan design is working 

Conventional wisdom assesses three factors to see if incentive compensation design is working: Profitability, sales attribution, and improvement over time. Let’s explore the current limitations of each metric. 

#1) Profitability

Traditionally, revenue professionals have evaluated incentive plans by looking at the percentage of reps making quota, and the bell curve of quota attainment. According to WorldatWork’s Design of Sales Compensation course, led by David Cichelli, recommended best practices include:

  • 10% of reps below, or at, threshold.
  • 25-35% above threshold but under target.
  • 55-65% at, or above, quota.
  • 10% of reps earning all potential leverage and upside. (This concept is known as “achieving excellence.”)

Accepted thought lines say incentive compensation investments must at least pay for themselves in booked business, and that they’re a corporate expense — not an investment — if they aren’t driving profitability. 

However, the revenue executives’ role has evolved. Today’s best Chief Revenue Officers (CROs) and Global SVPs of Sales manage more than sales quota carriers. They also own digital marketing and demand generation, as well as account management, customer renewal, and success. While these leaders still frequently reference quota attainment, they run their revenue organizations with a more strategic view — toward efficiency and effectiveness. 

#2) Sales attrition

Assessing sales morale and turnover is another common evaluation method for incentive compensation design. Without a doubt, both are important. Engaged and happy reps are 20% more productive and produce 37% more sales, and companies spend 1.5 to two times of an attrited sales professional’s salary finding a replacement. These statistics show why revenue leadership often evaluates company pay levels — by role — against trusted industry standards, and monitors when reps begin showing signs of disengagement that are common to soon-to-be-departing employees. 

However, both morale and attrition are significantly influenced by other, critical non-compensation factors. For example, direct managers are the most common reason that employees move on. Sales morale and attrition aren’t foolproof signals for incentive compensation health.

#3) Improvement over time

An improvement over time is also a long-embraced effectiveness indicator for incentive compensation. However, even the term belies the measure’s subjective nature, not objectively designating what is being improved.

The fact that quota attainment has steadily decreased over the last decade, according to CSO Insights, shows accepted incentive compensation metrics are no longer enough. Revenue organizations need a more modern approach to objectively evaluate not just the health of incentive compensation design, but overall revenue performance. Only then can they confirm their incentive compensation plans are working.

The rise of revenue operations

Gone are the days when revenue executives can throw bodies at a sales problem. They now need to be efficiency experts in revenue operations.

Since the advent of customer relationships management (CRM) solutions over two decades ago, CRM’s promise of unifying revenue operations remains unrealized. In response, revenue executives have honed specialized roles — supported by specialized technology — with expertise for each stage of the revenue lifecycle. Examples include account development reps, sales and business development reps, account executives, product and overlay specialists, account managers, customer and renewal specialists, and more.

But CROs still grapple with orchestrating these roles and tools to deliver revenue predictability. 

Even when Intangent talks to our customers about their primary sales performance management (SPM) problems, conversations inevitably come back to revenue operations, especially three crucial inflection points in the funnel:

  1. Sales engagement: How to improve conversion to increase sales pipeline.
  2. Deal structure: How to maximize value for the company and customer.
  3. Cross/upsell: How to efficiently find new opportunities with existing customers to reduce a CRO’s overall cost of sales.

The coordination of this trio needs to be in place for teams to affirm, “yes, our incentive compensation plans are working.”

A more modern approach to revenue capture in 3 steps

We see time and again that SPM is the glue that pulls everything together — orchestrating, motivating, and incenting the field to better orchestrate revenue operations and resolve revenue challenges. Below are three steps that modern revenue teams can follow to predictably capture revenue, effectively and efficiently, and tell if the incentive plan design is working.

Step 1:  Orchestration

Revenue leaders create orchestration with territory and quota management. According to HBR, relatively small tweaks like optimizing territory design raise sales two to seven percent, without a change in sales resources or strategy.

To produce similar results, build your revenue operations matrix for all roles in your revenue cycle. Align them based on what each role is measured and paid on. If you see problems, you may need to better incent roles for what they directly influence.

Step 2: Motivation

Sales reps only behave in ways they can validate, so set your incentive compensation plans up for success by giving your revenue team tools to model potential compensation. 

Motivation makes performance expectations clear — helping reps spend more time selling because they understand what they’re supposed to do, and how they should do it. That’s why companies that use SPM increase sales productivity 12.5% and close times 50%, according to Simon & Kucher. Transparency is key.

Step 3: Incentivize

Incentives align orchestration and motivation, driving company objectives by directly correlating behavior and payment. But be careful. One global business services company recently declared victory on its incentive compensation program because it had paid the $5M set aside for payment. Upon inspection, the company realized it had only paid team members who exhibited desired behavior prior to the incentive. Other salespeople hadn’t changed behavior. They’d inaccurately declared victory.

Position your incentive compensation design for success by looking holistically at measures that can’t be debated — such as revenue per head or revenue per product, territory, or sales head. Are these quantifiable metrics trending up? Industry leaders generally average about $300,000 per head, though enterprises where products don’t change, like Hershey’s or General Electric, can average as high as $600,000 per head.

Gartner research shows that with incentive compensation, revenue leaders can unlock 10% more sales opportunities every year. We’ve seen this three-step process work for industry leaders in our customer base across multiple industries, and look forward to hearing how it works for you to verify that your incentive compensation plans are working.

This is a guest post by Caitlin Roberson, VP of Marketing, Intangent. Learn more about Intangent here.

  • Incentive Compensation
Jordan Scott
Jordan Scott
Manager, Content Marketing

Jordan Scott is the Manager of Content Marketing at Xactly. She attended The University of California at Santa Cruz, and received degrees in Literature and Education.

Caitlin Roberson
Caitlin Roberson
VP of Marketing, Intangent

Caitlin Roberson is Vice President of Marketing for Intangent. For 15 years, she has built scalable marketing strategies that accelerate high-growth businesses. Previously, she served in marketing leadership roles at venture capital firm Andreessen Horowitz, Lyft (pre/post-IPO), and Happy Returns. Before that, she founded and sold a marketing agency that served companies including LinkedIn, Marketo, and Xactly.