Sales Incentives for Employees

Dear M&M:

I am considering using sales incentives to motivate my employees.  Is there any disadvantage I should consider?

-Albert

Dear Albert:

Small companies use sales incentives to attract some of the top-performing sales representatives. The marketplace in most industries is highly competitive. Many sales representatives gravitate toward companies with the best compensation and sales incentive plans, necessitating the inclusion of these types of rewards. Incentives may include commissions, bonuses, trips, special gifts, contests and profit sharing. While such incentives generally help increase sales, there are several disadvantages to using them.

Rewards for Top Performers: Most sales incentives tend to reward only the top performers in small organizations. Twenty percent of sales representatives usually sell 80 percent of a company’s products and services, according to the University of Delaware. The same holds true for the top workers in general. Some of these representatives may already be selling at a high level. They do just enough to collect their bonuses or trips. Meanwhile, more average sales representatives may already know they have a slim chance of receiving any incentive rewards. This can hinder their morale and motivation. A better option would be open-ended sales incentives, where sales representatives are rewarded according to how they perform from one year to the next.

Narrowly Focused: Many sales incentives are also narrowly focused on just sales. This causes sales representatives to focus only on revenue-generating activities. Consequently, they may rush their paperwork and skip inter-departmental meetings. Some make fewer sales calls and focus only on their best customers. More experienced representatives — including those who take a more consultative approach to selling — may also rush their presentations to close sales faster. A consultative approach is generally slower in nature, offering the customer help evaluating her competitive situation and determining which products best meet her needs.

Costly: Sales incentives also have high associated costs. Small companies which fail to tie incentives to the right performance variables may needlessly be paying tens of thousands of extra dollars per year for bonuses, trips and impromptu rewards. In addition to sales, the best sales incentives should be equally tied to increases in new business and sales of specific products and services. Some products or services may be ignored for higher-priced products or higher volume sales. Small companies also need to tie incentives to reacquiring lost customers or clients.

Considerations: The use of sales incentives may lead to more cancellations, especially for those clients who feel they were rushed into deals. Clients may also notice the lack of communication from sales representatives spending most of their time selling. Some smaller companies may also find themselves hiring and training new representatives more frequently, as those with more average performances leave the company for fairer compensation plans. We would suggest you try to design your sales incentive plan to reward performance. Like many managers today, you may be exploring new sales incentive plans to fire up the troops, to keep your best salespeople, and to add to your company’s profitability. But be careful not to adopt a new plan that falls into the same traps as the old one. Studies have shown that employees and management alike are dissatisfied with their compensation plans. Most employees see no connection between their performance and their pay. And many managers find that their plans fail to motivate their staffs and that they end up overpaying poor performers. It seems to be getting more difficult to pay according to performance. It’s especially tricky to reward individual successes because integrated team efforts have become more essential in meeting customers’ needs. Many customers now make their buying decisions based on a vendor’s overall capabilities, not because of a key individual’s efforts. Don’t substitute incentives for fair wages. Employees are most interested in a guaranteed income level. Whatever formulas you use, a salesperson’s W2-form total must be in line with market rates. Putting rookies on commission only is a mistake. Veteran high-performers can afford to be at risk for bonus compensation. But if you substitute risk and incentives for fair pay at the entry level, you’ll only attract losers who can’t command the market price.

 – M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org

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