Two Misuses of an Incentive Plan (And How to Solve Them)
The purpose of the incentive plan is to set expectations and drive the activity required for the business to meet its objectives. As powerful as a well-crafted incentive plan can be it has inherent limitations when we stray from these objectives.
Misuse 1: Feedback Tool
There will be a temptation to use the compensation plan as a feedback tool. After all, we already have this plan in place and it is supposed to reward those who do well, right? There will be situations where a Rep makes their quota but is not overachieving to their satisfaction. You may hear something along the lines of “This Rep does a great job with customers and they are going to leave if we don’t pay them more. Can we lower their quotas so we can keep them around?” It is a compelling argument, we certainly don’t want to lose a great employee and their customer relationships to a competitor. In addition, hiring and training a new Rep could be expensive so why not make an exception in this case.  Conversely, if we have a Rep that regularly makes their numbers by coasting and never puts in the extra effort. Could we raise their quotas to stretch them and give them that nudge to put in the extra effort? Addressing these two feedback scenarios with the incentive plan can have adverse impacts.
“To the man who only has a hammer, everything he encounters begins to look like a nail.”
Abraham Maslow
Making adjustments for one person can negatively impacting other members of the salesforce and sends a mixed message. Quotas are a zero-sum game, the targets for the business still need to be met and they need to go somewhere. Who are the unfortunate recipients of extra quota and how do we deal with the fallout? We may now have more employees feeling they are underpaid who might very well go to a competitor. Let’s remember that the opposite of a reward is punishment even if the isn’t the intent. Instead of one unhappy employee, we now have many. It also sends the message business targets really have no meaning and incentives are just a control mechanism. To keep the incentive plan from becoming a monster of our own creation we need to diagnose the underlying issue and find a better way. Â
We need to take an honest look at the incentive plan to see if it’s competitive, there is a territory alignment issue, or a lack of intrinsic value in the role. If the incentive plan is truly not competitive for the industry that would impact a large swath of the sales organization. To remedy this will require benchmarking competitors’ plans and redesigning a competitive plan. If the Rep’s territory has changed in size or has matured then this should be addressed in quota setting. If neither of these issues applies then there are other remedies to add intrinsic value:
- Recognition – Who doesn’t like seeing their name in lights.
- Base Pay Increases – If the base pay is determined by years of service and has flexibility then this too may be a remedy. However, if base pay is determined by the cost of living in that territory a similar increase may need to be justified for the salesforce in the same zone. This is especially true in large organizations where base pay needs to be aligned with HR guidance.
- Projects – Adding fulfilling work may be more important than money in and of itself. Include the Rep in a project either as a subject matter expert or a leader. A successful project will elevate the personal capital of the employee and increase their business knowledge.
- Promotion – Perhaps it is time to promote the rep to the next level where the pay is higher. For instance, if there is a Major Account Manager position open move them into that slot.Â
A word of caution regarding promotion for a top Rep into management. Although they may appreciate the higher base pay that comes with the promotion they may not be interested in being a manager. The further you get from the point of influence the more difficult it is to drive your results. They may already be making more with their total pay in their current role and chafe at the loss of compensation. I have seen many situations where a reduction in pay with an increase in responsibility made for an unhappy employee. Promotions should be reserved for those with a long-term view who are made aware of any financial impacts.
For the Rep who makes their numbers regularly but won’t put in the extra effort, it needs to be made clear the organization is looking for excellence. Clear expectations need to be conveyed with short timetables to improve one metric at a time. If performance management isn’t working then it may be time to move the Rep out of that role. There is a brief discussion of turnover below.
Resist utilizing the comp plan to reward employees beyond their performance measures and instead look outside of the incentive plan for more suitable options.Â
Misuse 2: Replace Effective Sales Managers
In organizations with poor sales supervision, the comp plan needs to be more aggressive to achieve objectives. The previous discussion on the limits of extrinsic motivation holds true here as well. A lack of leadership or the wrong type of leader will cancel out the effect of a well-designed plan. We need Managers to be coaches and take on administrative tasks. An ineffective Manager can turn into a tyrant pushing as hard as they can to make the numbers no matter the collateral damage. Selling with integrity and turnover is critical to long term success.
Selling with integrity is a means to do right by the stakeholders which include the customer, society, and the business. Most fraud can be attributed to incentive, rationalization and opportunity which make up the fraud triangle framework. Quotas create an incentive for employees to meet targets. The pressure to do what it takes to meet objectives increases risk. An overbearing Manager may give the salesforce the rationalization they are justified in unethical activities. A feeling they are being treated wrong or there is no other solution are a common excuse. A well known example involving Wells Fargo who recently payed $3 billion to settle a civil and criminal probe into their sales practices uncovered in 2016:
“The problems began when Wells Fargo executives pressured rank-and-file bank personnel to aggressively cross-sell products to enhance sales and revenue to meet certain quotas.”
Forbes – Jack Kelly https://www.forbes.com/sites/jackkelly/2020/02/24/wells-fargo-forced-to-pay-3-billion-for-the-banks-fake-account-scandal/
Compliance and internal audit are important to roles to identify and manage fraud risk. However, eliminating incentives and rationalization should be driven by the tone at the top. We need a winning corporate culture that rewards managers for developing talent that isn’t myopic on just making the numbers at all costs.
In any business there will be turnover otherwise there isn’t an opportunity to find great new hires. An organization will want to keep those who strive to perform and move those that underperform to a more suitable role or out of the business. Our concern is driving the performers out of the business and into competitors’ arms. There are also costs involved that make unnecessary turnover tough on the business and employees. According to Built In, a website dedicated to furthering technology jobs there are tangible costs:
Depending on the individual’s level of seniority, the financial burden fluctuates. For hourly workers, it costs an average of $1,500 per employee.
Built In – Kate Heinz https://builtin.com/recruiting/cost-of-turnover
Built In estimates nearly two thirds of the cost is intangible. It’s difficult to quantify the lost knowledge, productivity, and impact on the remaining salesforce who have to pick up the slack. We want to make sure the turnover rate is within industry norms and be vigilant for anything that drives that rate up.
Conclusion
The quota should be set to be a stretch goal that is achievable but challenging. Incentive plans utilize extrinsic motivation already and we go to great lengths to make sure it isn’t seen as a punishment. In addition, an effective incentive plan cannot be a substitute for either a strong culture or management. There are several levers available to management to meet objectives and we want the incentive plan to be one of many.