As the new year kicks off and you take aim at your 2015 goals, are your incentive plans aligned with your business goals? Best practices ensure that each individial component of your incentive plan support specific high-priority goals of the business. Are there conflicts between plan components, and if so, are those conflicts intentional to drive the appropriate business choices? If your incentive plans are not properly aligned, fix the plans now to ensure you get the sales behavior and results you need.
One thing we often see with clients is a business plan that includes improved margins through better pricing. Obviously we like to see those kinds of goals. Unfortunately, we often find the incentive plans of those clients do not create the appropriate incentives to sell at higher prices. Most commonly we see incentive plans that reward the sales team for annual volume, customer growth, and growth of certain target product types, but not any kind of component that increases or decreases commissions based on the prices sold. If you are trying to hit growth targets, and your compensation does not depend at all on the prices at which you sell, how hard are you going to work to get higher prices?
If your incentive plan does not contain a component for pricing, add one. If there are already too many components to your plan, map each component of your plan to your business objectives and set priorities. If pricing is a truly a high priority (and it should be), you will find room for a pricing component in the incentive plan. If earning higher margins through better prices is not a high enough priority, your incentive plan will logically not include a pricing component. But don’t be surprised when you don’t see improvement in margins.
Another variation in incentive plans we often see is a plan that has one component for volume growth and another for achieving certain gross margin dollar targets. In these cases, we are usually told that if the sales team sells at higher prices, they will generate higher gross margin dollars and therefore higher commissions. Unfortunately when we look at results and talk to the sales team, we learn they are hesitant to ask for higher prices out of fear of losing the sale. “Any margin dollar is a good margin dollar.” To be effective, pricing incentives need to be more specific than simply hitting margin targets.
Conflict between incentive plan components can be good when it is intentional. All businesses require choices to be made between alternatives, both strategic and tactical. Allocating our time and resources is a daily challenge, and encouraging the sales team to do the same thing makes sense. For example, when an incentive plan includes rewards for penetration in certain new product categories, volume growth, and growth in relative price levels, there are few customer situations that will offer all three. So the sales person must make choices about how and where to allocate his or her resources. To obtain volume growth, should he pursue the price-sensitive customer who will easily switch from a competitor for a lower price, or identify the unmet needs of customers who are buying less from you than their peers? Similarly, to increase penetration in new product categories, a seller should identify the customers for whom your value proposition would be most compelling, not just the price buyers.
Lastly, sellers need to be careful about just selecting low-margin customers to target for higher prices. Some of those customers may be paying relatively high prices, but have low margins because of the mix of products they buy. Simply raising prices could drive them away. Sellers would be better off targeting the customers who are paying low prices for the products they buy, even if those customers are buying a mix of high-margin products.
Incentive plans are a critical component of every business. They require careful thought and choices among competing priorities. Before we get too far into 2015, make sure the choices inherent in your incentive plans are properly aligned with your goals for the business and encourage wise choices by the participants.