• Key Sales Incentive Plan Practices


  •   
  • FileName: E157963SI05.pdf
    • Abstract: conducted to gather information about some of the key elements of sales incentive plans, such as ... Frontline Sales Managers’ Preparation for New Plan Implementation. More than one-third of organizations (37 percent) reported having sales managers participate in ...

Download the ebook

A WorldatWork Survey Brief
Key Sales Incentive Plan Practices
Survey of WorldatWork Members
April, 2005
About WorldatWork
and WorldatWork Membership Surveys
WorldatWork is the worlds leading not-for-profit professional association
dedicated to knowledge leadership in compensation, benefits and total
rewards. Founded in 1955, WorldatWork focuses on human resources disci-
plines associated with attracting, retaining and motivating employees. Besides
serving as the membership association of the professions, the WorldatWork
family of organizations provides education, certification (Certified
Compensation Professional CCP, Certified Benefits Professional CBP and Global Remuneration
Professional GRP), publications, knowledge resources, surveys, conferences, research and networking.
WorldatWork Society of Certified Professionals and Alliance for Work-Life Progress (AWLP) are part of the
WorldatWork family.
WorldatWork regularly surveys its membership of compensation, benefits and total rewards practitioners
regarding current issues and topics, best practices and common professional practices. The majority of
WorldatWork members are at the manager responsibility level or higher, have more than 10 years of experience
in the human resources profession, and work in the corporate headquarters of a company based in North
America with more than 1,000 employees. The association routinely receives a voluntary response rate from
members in the 15 percent to 20 percent range, a response rate that generally ensures the respondents are
representative of the WorldatWork membership as a whole.
WorldatWork
14040 N. Northsight Blvd.
Scottsdale, Arizona 85260-3601
480/922-2020
Toll free: 877/951-9191
Fax: 480/483-8352
Toll-free fax: 866/816-2962
www.worldatwork.org
Copyright 2005 WorldatWork. This content is licensed for use by purchasers solely for their own use and not
for resale or redistribution. No part of this article may be reproduced, excerpted or redistributed in any form
without express written permission of WorldatWork and appropriate attribution.
Key Sales Incentive Plan Practices
A WorldatWork Member Survey Brief April 2005
Introduction and Methodology
This report summarizes the results of a December 2004 survey of WorldatWork members that was
conducted to gather information about some of the key elements of sales incentive plans, such as
eligibility, pay mix, performance measures, and manager communication and training.
In December, surveys were sent electronically to 1,167 WorldatWork members and 177 responses
were received, a 15-percent response rate. The demographic profile of the survey's respondents is
similar to that of the WorldatWork membership as a whole: The typical WorldatWork member works
at the managerial level or higher in the headquarters of a large company in North America. Ninety-five
percent of the Fortune 1000 companies employ a WorldatWork member.
Forty-four percent of respondents to this survey work in an organization that employs more than
5,000 employees. The two largest industries represented in the survey are manufacturing (22
percent) and finance/insurance (18 percent).
Key Summary Points
This survey report is divided into two broad sections: 1) select sales compensation practices that
WorldatWork members most frequently inquire about to our Knowledge Services Center; and, 2)
practices that companies use to equip frontline sales managers with the knowledge and skills to
manage performance through a new or revised sales compensation plan.
Sales Compensation Practices
In the majority of organizations, indirect sales employees are not eligible for sales incentives. The
most commonly indicated indirect sales employees who are eligible for sales incentives are
"customer service" employees, mentioned by almost 13 percent of organizations.
For jobs in which sales is the primary responsibility, the most common pay mix is 60 percent base
pay with 40 percent variable pay, and the second most common is 70 percent base and 30
percent variable. For jobs in which sales is the secondary responsibility, the most common mix of
pay is 90/10 base-to-variable pay.
The largest cluster of organizations in the survey (42 percent) indicated using three performance
measures in the sales incentive plan for the primary salesforce. Next most common was two
measures at 21 percent.
1
More than 60 percent of organizations use "total revenue" as a performance indicator in the sales
incentive plan. The second most common indicator was "new revenue," used in a little more than
40 percent of organizations.
Sixty percent of organizations use the salesperson's base pay only as the basis for paid vacation
time. Five percent offer no paid vacation to sales personnel.
Frontline Sales Managers' Preparation for New Plan Implementation
More than one-third of organizations (37 percent) reported having sales managers participate in
informal meetings to learn the details of the new sales incentive plan, while an additional 19
percent have formal in-person training sessions. Twenty-nine percent do not use face-to-face
techniques, instead using techniques such as Web and teleconferences to communicate plan
changes.
Eighty-one percent of respondents believe it is "very important" for sales managers to be educated
regarding how the sales plan ties to the company's business objectives. The next most important
topic to cover in a training session of frontline sales managers is the company's sales incentive
pay philosophy (64 percent report this being "very important").
When asked which topics are actually addressed in preparing frontline sales managers to manage
effectively with a new sales compensation plan, 95 percent of organizations say they address
"how the sales incentive plan ties to the company's business objectives." Additionally, 80 percent
report that they address the topic of the company's "sales incentive pay philosophy."
When the ratings of the importance of 12 topics related to the launch of a new sales compensation
are compared to whether these topics are addressed in company efforts to prepare frontline
managers, survey respondents reported a significant gap between the two for six topics. All six of
the topics are related to performance management.
2
Detailed Survey Results
Section 1: Common Sales Compensation Practices
Customer Service Is the Most Common Indirect Sales Role Eligible for Sales Incentives
When asked which types of indirect sales roles are eligible for participation in the organization's sales
incentive plan, respondents indicated that they are few and far between. Customer service personnel
are most commonly eligible, but even so, at fewer than 13 percent of organizations. Conversely, large
percentages of non-direct sales employees are apparently eligible for incentives under another non-
sales incentive plan.
Figure 1: Please indicate whether the following indirect sales roles are eligible for
participation in the sales incentive plan, not eligible, and/or eligible for participation in
another incentive plan. (Check all that apply.)
70
65.7
63.7
59.9
60 56.4
Percent of Plans with Respective Eligibility
54.6
Eligible under
50 48.3 sales incentive
46.7 45.8 plan
43.7
40 38.4
Not eligible under
sales incentive
plan
30
Eligible under
20 another (not sales)
12.6 incentive plan
10 6.4
3.5 3
0
Customer Service Marketing Administrative Advertising Creative
(n=174) (n=172) Support Staff (n=167) (n=168)
(n=172)
60 Percent Base Salary/40 Percent Variable Pay Is the Most Common Mix for Primary Sales Jobs; A
90/10 Mix Is the Most Common When Sales Is the Secondary Responsibility
The single most common pay mix for jobs in which sales is the primary responsibility is 60 percent
base pay and 40 percent variable pay, followed by a 70 base-30 variable mix. Respondents were
given the opportunity to answer any mix between 5 percent and 95 percent for either base pay or
variable pay. Interestingly, almost the same percentage of organizations has a 70-30 mix as have a
30-70 percent base-to-variable pay mix, the second and fourth most common responses,
respectively.
For jobs in which sales is a secondary responsibility (e.g., inbound sales and customer service) the
3
most common pay mix is 90 percent base and 10 percent variable, followed by 95 percent base and 5
percent variable. Some believe that these percentages of variable pay may be too low to affect sales
in any substantial way even though that is their intention.
Figure 2: Please indicate the average pay mix for primary sales jobs (e.g., sales jobs
with largest number of incumbents) and for positions in your organization where sales
is a secondary responsibility (e.g., inbound sales, customer service or technical
support representatives, etc.).
Top 5 Responses
Primary Sales Jobs Jobs Where Sales is Secondary
1. 60% Base / 40% Variable 15.0% 1. 90% Base / 10% Variable 15.4%
2. 70% Base / 30% Variable 10.4% 2. 95% Base / 5% Variable 14.7%
3. 80% Base / 20% Variable 9.8% 3. 80% Base / 20% Variable 14.7%
4. 30% Base / 70% Variable 9.8% 4. 100% Base / 0% Variable 9.6%
5. 50% Base / 50% Variable 8.1% 5. 5% Base / 95% Variable 6.6%
Three Performance Measures for Sales Incentive Plan Is Most Common
When asked how many performance measures are included in the organization's sales incentive plan
for the primary salesforce, the answers were fairly dispersed, although the most common response
was "three" (42 percent). Some experts believe that two or three performance measures are best,
and a 63 percent majority of respondents in the survey were captured within these two categories.
Figure 3: On average, how many performance measures are included in your
organization's sales incentive plan for the principal or primary salesforce? (n=175)
13% 11%
One
13% Two
21%
Three
Four
Five or more
42%
4
"Total Revenue" and "New Revenue" Are Most Common Measures in Sales Incentive Plan
Far and away, the most common measure used in incentive plans (according more than 60 percent of
organizations in the survey) is total revenue. The next most common response, new revenue, was
mentioned by roughly 20 percent fewer respondents -- it came in at just over 40 percent of
organizations. Respondents chose new accounts as the third most common answer. Many of the
other options provided to respondents were indicated by less than one out of five respondents, or less
than 20 percent.
Figure 4: Please indicate the measures used in your sales incentive plan. (Check all that
apply) (n=177)
Total revenue
New revenue
New accounts
Gross profit
Select product sales
Units sold
Key strategic objectives or milestone
Other
Account expansion
Renewal revenue
Retained accounts
Customer satisfaction
New products
Order volume
Price realization
Contract commitment
Approved vendor
First order
Outdated products
Approved bidder
0 10 20 30 40 50 60 70
Percent of Respondents
Base Pay Only Is the Most Common Factor Used in Calculating Sales Peoples' Earned Vacation
Sixty percent of respondents indicated that their salesforce's vacation pay is calculated using base
pay only, while only about 16 percent report vacation pay is based on the average of total earnings
(salary plus incentive pay). About 5 percent of organizations provide no paid vacation pay at all to
sales employees. Among the nearly 20 percent who replied "other," several indicated that it was tied
to years of service or according to "company policy."
5
Figure 5: In your organization, how are sales employees compensated for vacation time
when the majority of their pay is incentive compensation? (n=169)
5% No paid vacation
19%
16%
Paid vacation is based on
average of earnings
Paid vacation is based on
base pay only
Other
60%
Improved Alignment with Business Strategy Is the No. 1 Change for Sales Incentive Plan in 2005
More than half of the organizations in the survey (54%) indicated that their No. 1 priority for improving
the sales incentive plan in 2005 is to create better alignment with their business strategy. Almost one
in three organizations (32 percent) reported that they are working to reduce the complexity of their
sales incentive plan in 2005, while about 26 percent are making no changes. The question was a
"check all that apply" opportunity, and hence, many respondents chose more than one answer.
About a quarter of all respondents said they would be changing performance measures to put more
emphasis on sales profitability, while just under a quarter (22 percent) said they were changing
performance measures to put more emphasis on business development.
Figure 6: Which of the following statement(s) below best describes how your
organization will change its FY 2005 sales incentive plan? (Check all that apply) (n=176)
6
Plan changed to improve alignment of incentive pay with business
54
strategy
Decreased plan complexity (e.g., reduced the number of performance
31.8
measures, simplified the incentive formula)
No change in plan 26.7
Performance measures changed; more emphasis placed on sales
25.6
profitability
Performance measures changed; more emphasis placed on new
business development (e.g., winning new custoemrs, selling new 22.2
products)
Incentive opportunity increased for overachieving plan (e.g., making
19.3
overachievement financially worthwhile to high performers)
Compensation mix more incentive focused; incentive opportunity
15.9
increases for achieving target (on plan) performance
More jobs eligible for sales incentive pay 10.2
Other 9.7
Compensation mix less incentive focused; less 'at risk' pay; incentive
3.4
opportunity decreased for achieving target (on plan) performance
Fewer jobs eligible for sales incentive pay 2.8
0 10 20 30 40 50 60
Percent of Respondents
7
Section 2: Frontline Sales Managers' Preparation for New Plan Implementation
Informal Meetings Are Most Common When Preparing Frontline Managers for Plan Changes
When asked about how frontline sales managers are prepared to manage their people through a new
sales compensation plan, more than a third of organizations (37 percent) reported having managers
participate in informal meetings to learn the details of the new plan, while an additional 19 percent
have formal in-person training sessions. Twenty-nine percent do not use face-to-face techniques --
opting for the Web or teleconferences --to communicate changes to the plan, and only about 6
percent do "nothing specific." Again, this question provided an opportunity for respondents to indicate
"all that apply" so totals exceed 100 percent.
Figure 7: How does your organization prepare its frontline sales managers to manage
with a changed sales compensation plan? (Check all that apply) (n=175)
8
Managers participate in informal, local meetings with their
manager/sales director to gain understanding of new/revised plan 37.1
and learn how to address sales compensation plan
Managers participate in non face-to-face meetings(s) (e.g.,
teleconference, web, etc.) that provide overview and orientation to 29.7
the new/revised sales compensation plan
Preparation varies; responsibility for new plan launch is
decentralized to local business/operating organization
22.9
Direct communication about new plan to all sales employees; no
specific orientation or training provided to managers on how to 21.7
handle new plan launch
Managers participate in formal face-to-face training session
designed to equip them with information and skills to manage 19.4
effectively with new/revised sales plan
Currently under consideration; plan to initiate a defined process in
the near future
9.1
Nothing special is done 5.7
Other 4
0 5 10 15 20 25 30 35 40
Percent of Respondents
9
Business Objectives, Sales Incentive Philosophy Are Most Important Topics for Training
Survey participants were asked 12 questions about the importance and prevalence of practices used
by their companies to prepare frontline managers for managing performance through a new sales
compensation plan. By a large margin, the single largest group of respondents (81 percent) believe
that it is "very important" for frontline sales managers to be educated about how the sales
compensation plan ties to the company's business objectives. According to respondents, the next
most important topic to cover in a training session of frontline managers is the company's sales
incentive pay philosophy (64 percent ranked it "very important").
The two least important topics are "how to talk to employees about sales incentive compensation and
career planning" (about 18 percent ranked it "very important") and the data used by the company to
set sales incentive pay levels (about 15 percent ranked it "very important").
Figure 8: In your opinion, how important is it to cover each of the following topics in any
type of training to prepare frontline managers to effectively manage a new/revised sales
incentive plan?
10
1 Not Important 2 3 Somewhat Important 4 5 Very Important
How to talk with employees about sales incentive compensation and
2 14 29 38 18
career planning (n=175)
How to have an effective conversation with employees about their
4 21 39 36
payout under the plan for the performance attained (n=176)
How to coach employees to win under the plan (n=175) 3 11 37 49
How to execute performance planning with sales employees eligible
4 15 34 47
for participation in the plan (n=175)
How to explain why various performance measures were selected for
2 12 48 39
use in the plan (n=177)
How to talk with employees about the plan (n=177) 4 15 40 41
The fundamentals of sales incentive compensation (n=177) 2 15 25 31 28
How the sales incentive opportunity is determined for an employee's
1 10 24 32 32
particular job (n=177)
The competitive labor market(s) data the company used to set sales
3 14 39 29 15
incentive pay levels (n=177)
How the sales incentive plan ties to the company's business 1 3
15 81
objectives (n=176) 1
Why the company has a sales incentive pay plan (n=176) 4 8 20 34 35
Company's sales incentive pay philosophy (n=175) 3 10 23 64
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
11
Business Objectives, Sales Incentive Philosophy, and Performance Measures Used Are the Topics
Most Frequently Addressed through Training
Consistent with the question immediately preceding, 95 percent of organizations say their company's
efforts to prepare frontline managers to effectively manage with a new or revised sales incentive plan
address how the sales incentive plan ties to the company's business objectives. Additionally, 80
percent report that they address the topic of the company's sales incentive pay philosophy and 70
percent report that they explain why various performance measures were selected for use in the plan.
Again, as with the previous question, the topics most frequently not broached are "how to talk with
employees about sales incentive compensation and career planning," and "the competitive labor
market(s) data the company used to set sales incentive pay levels."
Figure 9: Please indicate whether the following topics are addressed during your
organization's efforts to prepare frontline managers to effectively manage with a
new/revised sales incentive plan?
12
Addressed Not Addressed
How to talk with employees about sales incentive compensation and
36 64
career planning (n=175)
How to have an effective conversation with employees about their
60 40
payout under the plan for the performance attained (n=176)
How to coach employees to win under the plan (n=175) 58 42
How to execute performance planning with sales employees eligible
60 40
for participation in the plan (n=175)
How to explain why various performance measures were selected
70 30
for use in the plan (n=177)
How to talk with employees about the plan (n=177) 62 38
The fundamentals of sales incentive compensation (n=177) 69 31
How the sales incentive opportunity is determined for an employee's
59 41
particular job (n=177)
The competitive labor market(s) data the company used to set sales
50 50
incentive pay levels (n=177)
How the sales incentive plan ties to the company's business
95 5
objectives (n=176)
Why the company has a sales incentive pay plan (n=176) 57 43
Company's sales incentive pay philosophy (n=175) 80 20
0 10 20 30 40 50 60 70 80 90 100
Percent of Respondents
Practices in Performance Coaching and Planning Offer the Greatest Opportunity for Improvement
Figure 10 (below) reports the answers for Figure 8 compared to those for Figure 9 with the purpose of
identifying the largest gaps between what respondents believe should be "addressed" when preparing
frontline managers to manage with a new plan, compared to what they believe is "important" to teach
frontline managers (as demonstrated by either a 4 or 5 rating).
The largest differences between what is important and what is currently addressed in preparing
frontline managers to manage with a new sales compensation plan are reported in six performance
related items. The differences between "what is important" and what is addressed are indicated in
Figure 10. A difference of greater than 20 percent between the two scores is obviously substantial.
Most notably, survey respondents reported a gap of greater than 32 percent between importance and
whether addressed for "how to coach employees to win under the plan." A similar large misalignment
13
was reported for "how to execute performance planning with sales employees eligible for the plan."
The obvious question, which is not answered by this survey data, is why there is such a substantial
gap between what respondents believe is important and what they are addressing in frontline sales
managers preparation for managing with a new plan? These gaps clearly demonstrate the need to
better equip frontline management for the crucial job they face when a new sales compensation is
launched.
Figure 10: Gap Between Topics Importance and Whether It Is Addressed
"Importance" "Addressed" Difference Gap
(rating 4 or 5) ("Yes" rank
response)
How to coach employees to "win" under
the plan (e.g., effort and behavior
85.7 57.8 27.9 1
required to realize a sales incentive
payout)
How to execute performance planning
with sales employees eligible for
81.1 60 21.1 2
participation in the plan (e.g., how to set
performance objectives)
How to talk with employees about sales
incentive compensation and career
55.4 36.3 19.1 3
planning (e.g., what employees can look
forward to in higher level positions)
How to talk with employees about the
80.6 62.3 18.3 4
plan (e.g., what to say/what not to say)
How to explain why various performance
measures were selected for use in the 86.3 70.4 15.9 5
plan
How to have an effective conversation
with employees about their payout under 75.6 60 15.6 6
the plan for the performance attained
Why the company has a sales incentive
68.2 57.2 11 7
pay plan
Company's sales incentive pay
87.4 79.7 7.7 8
philosophy
How the sales incentive opportunity is
determined for an employee's particular 64.4 58.5 5.9 9
job
How the sales incentive plan ties to the
95.5 94.5 1 10
company's business objectives
14
"Importance" "Addressed" Difference Gap
(rating 4 or 5) ("Yes" rank
response)
The competitive labor market(s) data the
company used to set sales incentive pay 43.5 50 -6.5 11
levels
The "fundamentals" of sales incentive
compensation (e.g., definition of terms,
mechanics of sales incentive pay 58.2 68.5 -10.3 12
calculation, sources of performance data
used in calculations)
Survey Respondent Demographics
Number of Employees
Less than 100 4.5
100 499 11.0
500 999 7.1
1,000 - 2,499 19.5
2,500 - 4,999 13.6
5,000 - 9,999 7.1
10,000 - 19,999 6.5
20,000 or more 30.5
Industry
Manufacturing 22.6
Finance and Insurance 18.5
Other 13.7
Information 13.0
Professional, Scientific & Technical Services 8.9
Health Care and Social Assistance 4.1
Other Services (except Public Administration) 3.4
Utilities 2.7
Wholesale Trade 2.1
Transportation and Warehousing 2.1
Administrative, Support, Waste Management and Remediation Services 2.1
Arts, Entertainment and Recreation 2.1
Retail Trade 1.4
Educational Services 1.4
Real Estate, Rental and Leasing 0.7
Management of Companies and Enterprises 0.7
Accommodations and Food Services 0.7
15
Special thanks to Jerry Colletti, Managing Partner, Colletti-Fiss LLC, for his generous assistance in
developing the survey questionnaire, review of the survey analysis and interpretation of findings
contained in this report. Also, thanks to Elizabeth Morris of the WorldatWork knowledge services
team for her assistance on this project.
16


Use: 0.3283