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Approximately 40% of American companies use sales incentives and a recent Harvard Business Review article stated that U.S. companies alone spend more than $800 billion on sales incentives for staff each year. 

Despite many sales teams being paid a base salary, sales incentives are still incredibly important in motivating your team and keeping morale high. We often reference Daniel Pink and his book “Drive” among others about human behavior.

So do you need a sales incentive plan, and more importantly, when do you need one? Also, how do you use the information to drive your organization?

If we aspire to what Daniel Pink and many others say, you should weigh your incentive plans, and use of them, when the sales cycle is long. When the sales cycle is short, or even that day, you may want to go to a high commission-based plan. Let’s take a few examples.

Sells defibrillators: Requires a degree, you often have to sit in the operations, a large amount of training to sell these devices.

Sells cell service retail: Highly transactional, usually store front sales. Requires training, but not long term.

Sells wind turbines to government agencies: Requires lengthy time to establish contacts and to sell.

As you can see these are very different roles with different skill sets and expectations. Normally you will see people who sell things like defibrillators or medical devices requiring a lot of training. Because of this, there are typically clauses in their contract that require payback or holdback if someone decides to move on to a competitor. More interesting, these types of sales people get a very high base salary along with bonus and commissions.

With cell sales, or items that are less taxing from a skill perspective, you tend to have low base, high commissions. There are some places that will pay people a low salary in order to sell or advise people on what to purchase. What most don’t tell you is that often in these cases there is a store bonus – think of a place like Best Buy.

Last, you have the government wind turbine salesperson who will take 4 years to get a contract finalized. This type of person would starve before they saw a commission check. These people sign massive contracts, but also make a higher salary, with bonus metrics.

So why do we even talk about incentive compensation then? Why not have these people go to straight bonus, or just salary? I can think of a few reasons:

  1. You are starting out your business and you are cash poor. You need an incentive plan or equity to attract mid-level talent
  2. You have high turnover in your organization regardless of how much you have as a salary and the job requirements. People will be turning. You should review your company policy and behavior, but the reality is that you will be better suited to commissions to lessen the blow of the turnover

While there are likely many more reasons, these are simply a few. Do you need incentive compensation plans? No, not really. Do they help your organization? Depends on what the plan looks like, what the industry standard is, and what you are trying to achieve.

Is there a plan for every employee or even generation? I want to explore that question as it was posed in this article that there is. 

I question the premise, as incentivizing back office and other groups can have a negative impact on your organization, such as what happened in the banking industry. You can’t incentivize your watch dogs on company performance solely as it will remove the desire to hold the proper checks and balances. 

Further, there are low effort jobs that, regardless of the incentives put in place, many of the people will still perform at the same output. I can think of a company I used to work for that created an incentive predicated on stock purchase at a discount. The logic being, if they buy the stock at a discount, then they own the stock, and should perform better. At a youth level, which is what I was, it had zero impact on me. 

The only thing I cared about was the money I made every other Tuesday. This of course may be a generational thing as many Gen X have experienced the worthlessness of stock options in companies that implode (.com boom, banking crisis, oil crisis, covid crisis). So creating incentives for that group based on equity is barking up the wrong tree. 

They are interested in cash. You may start seeing this with Millennials who are starting to get their first taste of disaster. They were the group everyone said wanted medals and recognition. Likely they see that that and two dollars buys you a Big Mac.

My point on the above is that there isn’t a comp plan for everyone, but there can be bonuses tied to specific job performance as long as it is a role that truly has an impact. Think of bonuses in non-sales roles. This would be store managers, heads of groups (maybe a finance head receiving MBO on cost reduction or profit margin). These types of things should be important to the company but also important to the role.

The bonus concept was at the thrust of what Daniel Pink was driving at. Pink was saying that commission plans for sales people were ineffective, which I think is incorrect – even more so in today’s environment. What Pink did drive at was recognition, monetary and non-monetary. 

Because of changes in the environment, there will be a lot more people taking lower base pay and higher variable pay so that companies can correct the ship and because of this I think that both commission plans and bonus plans for impactful employees will be at the forefront of our near future.