Designing A Sales Incentive Plan for
Competitive Advantage

As companies strive to develop and execute a sustainable advantage over competitors, one source of competitive advantage is the talent a company deploys in its sales organization.¹ In challenging economic times, how to design a sales incentive plan that give a company an edge over competitors in attracting, hiring and retaining top-notch sales talent is of keen interest to management. Thus, the purposes of this Short are to identify and briefly explain the three elements of a sales incentive plan that can help a company create and sustain its sales talent competitive advantage.

1. Competitiveness of the incentive opportunity

A clear definition of the duties and responsibilities of a sales job is the starting point for determining an appropriate incentive opportunity to pay for business results. Typically, reputable compensation surveys are a useful source of data for assessing the total cash compensation level and incentive opportunity offered to comparable jobs. However, determining if the incentive opportunity should be designed as a source of competitive advantage - that is, if it will be materially more attractive than the opportunity provided by other companies -requires going beyond this basic step. The following three factors should be considered in making such a determination:

• Desired competitive pay position in the labor market
• Role of the sales job in the sales process
• Performance expectations

2. Leverage associated with the incentive opportunity

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¹ This Short is excerpted from Chapter 3, Designing Sales Incentive Pay for Competitive Advantage by Jerome A. Colletti and Mary S. Fiss, in Incentive Pay: Creating a Competitive Advantage, Dow Scott, Editor, WorldatWork Press, 2007

The leverage associated with a sales incentive opportunity is the amount of "upside" pay earned at some defined level of performance above 100 percent. Generally speaking, companies that successfully use the leverage ratio to create a competitive advantage through the incentive plan set it at or greater than market levels as reported by industry surveys. To do so, answers to the following questions are helpful in building that justification:

• From a profit perspective, can the cost structure of the business accommodate high incentive payment for high performance?
• At what ratio or level do the direct product competitors and other competitors for salespeople set the leverage in their pay plans?
• How much impact do our salespeople have on customer decisions to buy our product over those of competitors?

3. Play type

There are two primary types of incentives used to motivate and reward the salesforce: commission plans and bonus plans. Knowing when to use a commission plan or bonus plan can be a source of competitive advantage for a company and its salesforce. This is because each plan type addresses different business objectives and drives different types of sales behavior. And, as such, should be chosen based on the competitive advantage sought.

Commission plans reward individual effort and results tied directly to sales transactions. Payout based solely on a "deal" or a transaction is a common practice. Thus, commissions are used in some industries to promote new products and gain share by winning new customers. On the other hand, bonuses are used in more complex sales environments where the goal is financial (volume, profitability, productivity) as well as nonfinancial (customer satisfaction). Payout is based on the results relative to those goals.