In this article, we will attempt to demystify the sales incentive structure in a typical FMCG / FMCD / Telecom or any sales-driven organization in general. Learn the Good, Bad & Ugly of sales incentive.
We have covered the B2C (Business to consumer) business segment here.
Below is the list of things we will cover: (You may click to directly go to the section)
How Incentive system born?
People respond toward positive reinforcement and stay away from negative ones. In other words
“people are pulled toward behaviors that lead to rewards and pushed away from actions that might lead to negative consequences”.
So big organizations in the 1920s started giving targets to their employees & when an employee hit the target, he/she would be rewarded. It’s a classic conditioning technique which humans use to train their pets (by giving treats if they follow the instructions well).
Historically society used to reward their top performers. Caveman rewards members of the clan who bring most hunts by lucrative marriage or gold. Similar rewards have been given by kings since millennia to their top soldiers.
Today’s modern men (& women) simply repeating their hunter-gatherer ancestors. Fortunately, the modern task involves less killing & looting. (or is it?)
Why do organizations need sales incentive (or Incentive in general) plans?
Organizations have objectives in terms of short-term & long terms.
For example, Volvo has a short-term objective to capture X% market share in the premium segment for India & long-term objective to become an IC engine-free company.
To achieve these objectives, employees should be efficient & effective. Also, to motivate them as well as to differentiate between the top & bottom performers.
It also helps the company for future leadership & talent management as well as understanding developmental areas among the team.
An incentive plan saves a company from falling into stasis. It is like an alarm clock, that lets you know when to wake up.
Companies who ignore incentive plans, never really realize the full potential of their employees.
What are the types of incentives?
Below are a few major types of incentives:
1. Part of CTC – Many companies have adopted a formal structure in their CTC (Cost of company) package, where an employee is paid an incentive every month or quarter like a salary.
2. Cash reward – Few companies (mostly small) have cash reward in peak season months to boost sales.
3. Reward Cards – Many companies provide incentives in the form of pre-loaded gift cards.
4. Trip rewards – This is one of the most sought-after rewards where company send you (sometimes along with your family) to a sponsored holiday trip.
5. Stock options – Many startups pay incentives in the form of ESOPs. In traditional companies, stocks are reserved for upper management levels.
This is not an exhaustive list. Be an inventor!
6 Steps to a Successful Sales Incentive Plan?
Creating an incentive plan is easy, but following the below steps is hard.
1. Clarity of Goals: The goals or parameters should be clear & in alignment with the company’s vision. There should not be any ambiguity or ignorance about a parameter.
2. Fairness & transparency: Employees will only push themselves if they feel their target is fair & designed with clear rules across the organization. Any hint of favouritism & there goes your incentive plan.
3. Achievability: Incentive is not a proverbial carrot for a donkey. If targets are set unattainable then people will ignore your incentive plan. Targets should challenge them, not scare them.
4. Timely & consistent payment: If payment gets delayed, employees will lose trust in the organization’s intention.
5. Flexibility: Incentives should be flexible based on market conditions & internal issues.
6. Continuous improvement: Nothing should be etched in stones; incentive plans should evolve with time. Evolve for better performance. Not for better cost savings.
A very small percentage of companies are truly able to follow the above very basic steps.
How the Sales Incentive Structure look like (usually)?
The sales incentive structure has multiple parameters (aka KPI, Objectives, Goals, etc.) having different weights which sum up to 100%.
Parameters are decided keeping the vision & mission of the company for the short term & long term.
Type of elements/entities in incentive plans?
A. Hard Indicators/Parameters which are tangible.
Every profile has certain parameters which are irrefutable, which don’t need to be created and which are in the most simple forms.
Examples of Hard Indicators:
1. For a paper factory manager – Production volume of paper
2. For a medical representative – The value of the order fulfilled
3. For a teacher – Number of students passed or average marks of the class
4. For a CEO – Revenue of the company
These parameters are good, and they tell you the “What” part of the story but don’t capture the “How” part for the remainder of the story. For that, we have operational parameters.
B. Operational Indicators which have derived tangibility or secondary tangibility.
Operational indicators have come up recently in order to understand the qualitative essence of the performance. These are created parameters, derived by gathering various data & putting it into an equation that makes sense.
It also helps us to diagnose the issue with the employees and provide us with a way forward.
Examples of Operational Indicators:
1. For a production manager – Audit score for cleanliness
2. For a teacher – Number of one-on-one meetings with parents
3. For a car sales manager – The number of test drives given
4. For an FMCG sales representative – Number of retail outlets visited
Operational indicators are a good representation of the process excellence & it is responsible for the reduction of dependency on luck.
With operational KPIs help, the organisation moves from “person driven to process driven dependency.”
Why mapping the customer journey is important while designing any FMCG or Sales incentive plan?
Customer journey gives us an idea about what influences my customer at which places and via which medium. It helps us to design operational KPIs logically.
Let us take an example of a cold drink company named Loca-Lola.
Let’s name the potential customer of Loca-Lola as Mr Man. He is a businessman and travels mostly by his self-driven car & likes to have a cold drink every now and then. He prefers cola-flavored and lemony drinks mostly while sometimes he likes to have pulpy or fruity drinks. He only takes drinks in chilled conditions and doesn’t have any preferred shop. He likes to stop anywhere & grab a drink.
Let’s dissect important points of his journey:
1. Drives his car = He would prefer hoardings & visibility of the brand to nudge his decision.
2. Flavor preference = He doesn’t have a single preference & likes to experiment. Hence range availability is important for Loca-Lola to have at a shop.
3. Chilled condition = Drink should not only be available but available in a cold condition inside the fridge.
4. No preferred shop = As he travels, he doesn’t have a preferred shop. Hence availability of the product at most shops becomes important for the brand.
Example of an Incentive Plan based on Mr. Man’s Journey:
Let us take a simple incentive structure for a sales rep named Ms. Mary of the Loca-Lola company. She has 5 parameters in her incentive structure.
3 are Hard KPIs and 2 are Operational KPIs.
Now this sales rep Mary handles a small town with only 110 shops where cold drinks can be sold. Other shops are like hardware or garages, etc.
Hard KPIs are:
1. 200 cases of Koke (25%)
2. 100 cases of Sprit (20%)
3. 50 cases of Minit mad (20%)
Operational KPI are:
1. Bill at least 100 of the 110 shops (20%)
2. Maintain visi-cooler purity above 80% (15%)
There are also qualification criteria or gate criteria for Mary to be qualified for any incentive.
1. Ensure 95% of the beat visit plan.
2. Ensure distributor mean inventory at a minimum 7 days.
Here we have tried to design the incentive plan based on the customer’s journey. It is also known as a bottom-up approach.
If you want to brush up basic terminology of sales, please check this article. It will help you to understand better.
Is it easy to manipulate Operational Indicators in Sales Incentive? How?
Define Manipulation: When the achievement of operational KPI is done using system loop-holes, it is termed manipulation.
Operational KPIs are mostly human-driven based on employee’s ability to follow up on certain processes. If an employee is smart enough, he/she can achieve (manipulate) it.
Let’s consider the above example of Loca-Lola and let’s game the incentive.
Operational KPI are:
1. Bill at least 100 of the 110 shops (20%)
Game A:
If it is allowed to create new outlet codes, then you may sell 2 cases at a cold drink shop but in the system you bill 1 case in the existing code while 1 case in the outlet’s new code.
Old outlet name: Gunjan Cold Drinks
New outlet name: New Gunjan Cold Drinks
Game B:
Rather than opening a new code, just punch 1 case in an outlet which doesn’t buy Koke. Outlet owner most of the time don’t get the update about their billing. Even If by some good work, the company is sending them an SMS or a Whatsapp about their billing, they don’t care.
So, billing 100 outlets becomes more of a hassle than hard work.
How to stop these manipulations:
a. Outlet billing target should be made taking into account for average new outlet opening of a territory & factor that in.
· E.g if in Mary’s territory, every month 5 new outlets are being opened, then the target should be 100+5. This simple change will dissuade any employee from tempering outlet manipulation.
b. The organization should do sample calling to audit the billing genuineness. It should also help them to get market insight into the retailer’s pain. It will also dissuade employees from doing any wrongdoings in the market.
2. Maintain visi-cooler purity above 80% (15%)
Game A:
In this case, we are considering that the purity is not measured by any IOT device in the visi-cooler and should be manually captured by the Sales App. If the app only takes photos directly, then sales-rep has to rearrange the fridge as per the planogram & click it.
This is actually not manipulation but correcting the purity when found and reporting it after being corrected.
Game B:
If the Sales application is lousy & allows you to upload a picture, then just upload an old picture. If the system is completely manual, where you just have to write the purity, then God saves the operational KPI’s reporting.
How to stop this manipulation:
1. Get an IOT. It’s simple.
2. Run dealer’s contest which makes them send visi-cooler photos every month.
What makes a good sales incentive plan?
There are two definitions of “Good” here:
First “Good” is what is good for the employee.
A good incentive plan should keep them motivated & help them to showcase their talent & hard work. It should also reward them financially which makes their life better.
Second “Good” is what is good for the organization.
Here, the first “Good” is the subset of the second “Good”. So, apart from above-mentioned goodness, the second "Good” also enables an organization to achieve its short-term and long-term targets while moving closer to the vision.
So, a good incentive is good for employees and is good for the organisation's future. An incentive plan should not be designed as a financial burden to the company. If an organization is going through tough times, cutting incentives is definitely not the solution.
How much incentive earning is bare minimum to have a meaningful incentive plan?
There is definitely no rule of thumb here, but below are 4 categories. You should avoid the 1st and 4th categories.
1. Less than 30% - Major Problem
2. Between 30% - 50% - Minor Problem
3. Between 50% - 70% - No Problem
4. Above 70% - Major Problem
Here, the 2nd and 3rd are fine. Businesses face up and down, these forces fluctuate incentive here and there. Take a quick diagnosis about category 2 and see if the company can jump to 3rd by realigning the targets.
Let’s discuss the problem with 1st and 4th.
The first is called a complete lack of understanding between how the target is set & how are organization’s capabilities. This category may lead to attrition & employee discontent. Also, it dissuades high-potential candidates from working hard. Avoid this at cost.
The Fourth is called the “too-good-to-be-true” scenario, unless your company is going through the phase of hypergrowth you need to assess target setting. Also, check the outlier’s performance vs. potential to assess the situation.
That’s it from my side, connect with me on LinkedIn for any discussion. I am all ears.
Author: Gunjan Solanki
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Disclaimer: The opinions expressed in this article are the author's own & do not reflect the view of the author's employer.
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