A company’s incentive compensation program is only as good as its plan.
To formulate reasonable, orderly incentive compensation for your sales reps, there are tenets that should be included. The key incentive plan characteristics are simplicity in design/structure that allows for flexibility to align with their agile business dynamics, measurability/trackability, goal-alignment/objective-centeredness, defined motivating rewards criteria, fairness, customizable functionality for unique markets/company dynamics, and compliance.
What is an Incentive Compensation Plan?
Incentive compensation plans are a source of truth and rubric that keeps a company's incentive compensation methodology and process agile yet defined for any organizational change and scale of effort. Both individual motivation and teamwide/companywide motivation correlate with sufficient, consistent incentives that reward their work efforts.
Having a structured plan in place for incentive compensation allows for full coverage of company success, so long as the nine key characteristics of the most effective incentive plans are implemented.
1. Simple and Clear in Design
A clear, well-defined structure in your incentive compensation plan shows exactly how the system will work in a way that all levels of the company can understand—from the C Suite to the employees.
2. But Also Flexible in Design
A clear, grounded structure then gives room to flexibility because less complexity and ambiguity makes it easier and quicker to make adjustments to the plan over time as needed.
This adjustable, scalable trait is needed to account for any changes in the company, from business strategy to market landscape to the individual employee performance.
3. Trackable, Measurable
Success needs to be identifiable, so you’re able to maintain accountability and trust, so incentivization is rewarded effectively. Your incentive compensation plan should be quantifiable, and, therefore, needs to embrace and include this point: valuable data and metrics around employees’ targets and other benchmarks. These metrics keep you informed about your team’s efforts and keep your team aware of their performance.
Here are some key components of trackability and measurability in your compensation plans:
- Clearly Defined Metrics (KPIs): The foundation of any measurable plan is a set of specific, quantifiable key performance indicators (KPIs). These metrics must directly relate to the desired outcomes.
- Example: For a sales team, KPIs could be "number of new deals closed," "total revenue generated," or "customer lifetime value." For a customer support team, it might be "first call resolution rate" or "customer satisfaction scores." Avoid vague metrics like "improve performance" and instead use precise terms that can be tracked.
- Robust Data Collection and Integration: To track KPIs accurately, you need a reliable system for collecting data. This involves integrating the compensation platform with core business systems like your CRM (e.g., Salesforce), ERP, or marketing automation software.
- Guidance: Ensure data flows automatically and seamlessly between platforms. Manual data entry is prone to errors and delays, which can erode trust in the compensation program. An integrated system allows for real-time tracking and reporting.
- Real-Time Dashboards and Reporting: Employees and managers need immediate visibility into their performance against targets. An incentive compensation management software helps businesses craft a well-designed incentive plan includes real-time dashboards that show progress, earnings, and remaining goals.
- Benefit: This transparency motivates employees by showing them how their daily actions translate into earnings. It also allows managers to identify performance gaps early and provide timely coaching.
- Defined Calculation Rules and Payout Schedules: The rules for how incentives are calculated must be transparent and easy to understand. This includes defining the percentage of commission, the tiered structure, and any accelerators or decelerators.
- Example: A tiered structure might reward 5% on the first $100k of sales and 7% on sales above that. The payout schedule should also be clearly communicated (e.g., "commissions are paid on the 15th of the month following the close"). Clear rules prevent confusion and disputes.
- Auditability and Adjustability: The program must be auditable to ensure accuracy and fairness. This means having a clear record of all data inputs, calculations, and payouts. The plan should also be flexible enough to be adjusted in response to changing business conditions or market dynamics without causing disruption.
- Guidance: Regularly review the plan's effectiveness. If the market shifts or company priorities change, the plan should be adaptable to new metrics or goals. Auditing ensures that the program remains fair and accurate for all participants.
4. Goal-Aligned, Objective-Centered
The company’s main objectives and goals should be known and then communicated in the incentive plan. “The company’s incentive compensation plan is only as grounded and focused as its company is” should be the defined mantra here.
5. Defined: Motivating Yet Achievable Rewards Criteria
An incentive compensation plan—or any plan for that matter—is only successful if it’s achievable with its idealism. Plan targets need to motivate and aspire for high goals–but only realistic goals that can be nimbly adjusted with time, much like one’s real-life performance journey.
For example, gradient systems of target goals can ensure each sales member’s and the entire company’s performance journey gradually yet realistically gets to the finish line.
6. Fair in Individual Performance of Each of Your Employees
Recognizing and motivating sales members comes by acknowledging their individual performance/employee profile—even in the incentive plan and its related points. The incentive compensation plan should be structured to account for each person’s unique role, contribution, and experience level.
Establishing specific goal curves and performance benchmark/criteria around those individual profiles then crystallizes the most equitable incentive management and success.
7. Tailored Functionality for Your Unique Industry or Company Dynamics
An incentive compensation plan should have customizations in the framework that account for one’s company culture, competitors, and other unique industry dynamics.
Your sales reports and dashboards should be nimble, much like your company’s operations, for continued trend and performance analyses that will inform your decisions soundly.
8. Compliant for Your Company’s Longevity
Following the latest incentive compensation rules, such as legal, financial, and regulatory standards, within your incentive compensation programs is key for continued sales employee trust and company success.
Some types of compliances you’ll want to ensure your incentive compensation plan and program follow would be tax rules around financial incentives, financial reporting of certain incentives, specific labor laws in your jurisdiction around how financial incentives are administered and calculated, and proper employee disclosures and privacy rules around what type of performance metrics and data can be monitored.
Performing regular audits and counsel from tax, legal, and/or financial experts can help you stay aware of your company’s compliance to employee incentivization and payment.
9. Effective, Timely Planning Tools in the Framework for Your Company’s Success
A company’s or sales team’s incentive compensation plan and management should be around developing incentives that encourage consistent, multi-dimensional motivation to improve employee performance. Putting in the work to establish a solid incentive plan is a gratifying task: greater company reward in the form of company scale and success.
The next task in meeting that large goal is starting with the first goal: an incentive plan that offers flexibility, customization, and trackability of each sales representative and their team. So that companies can accurately administer these incentives (financial, stock options in 401ks, PTO, rewards, etc.), automated workflows are a solution to manage all of these moving parts.
Streamlined processes at large will ensure accuracy and greater efficiency, including automated calculations of incentives and the subsequent timely payouts of such incentives. By using effective incentive compensation software, employee incentive pay and processes to keep it measurable and successful are much more attainable and trackable.
Ready to motivate your company’s team performance for the greater performance of your enterprise? Request our incentive planning demo to see how our Xactly Incent tool helps businesses like yours with automated workflows, compliance, accessible reports, calculations, and real-time tracking.