
Tiered Commission Structure
A tiered commission structure is a type of sales commission structure that offers different commission rates for different levels of performance.Continue Reading
What is Incentive Compensation?
Incentive compensation is a form of payment that rewards employees, often sales reps, for achieving specific goals or objectives. It is often tied to individual or company performance and is designed to motivate employees to work harder and achieve better results. Incentive compensation can take many forms, including bonuses, stock options, profit sharing, and commission-based pay structures.
Although incentive compensation is primarily seen used to compensate sales teams, it’s not uncommon for other roles to earn incentive pay. These include roles in sales operations, customer success, recruiting, and marketing.
As previously mentioned, incentive compensation can take several different forms. These are often placed in one of two different categories– long term incentives and short term incentives.
Long term incentives are awarded over several years or even decades. These incentives may include stock options, restricted stock units, performance shares, or other equity-based compensation that vests over time. LTIs are designed to align the interests of the employee with the long-term success of the company, as the value of the incentive increases over time and is tied to the company’s performance.
Short term incentives, on the other hand, are typically awarded and paid out within the current fiscal year, quarterly, or semi-annually. They are usually tied to specific performance goals or targets, and may include bonuses, commission, or other performance-based rewards. These are often used to drive short-term performance and provide immediate gratification to employees for achieving specific goals.
Let’s look at some of the incentive programs that fall under the umbrella of long term or short term incentives:
Some organizations use only one type of incentive pay while others use multiple types of incentive compensation to create a more well-rounded incentive compensation program.
You’ll also see each type of incentive plan leveraged differently. Some companies pay teams only in commission while others pair commission with a base salary. What works for one company might not work for another. It’s best to test out different combinations until you find what works best for your specific goals and objectives.
Incentive compensation can provide several benefits to both employers and employees, including:
Incentive compensation isn’t for everyone. If used incorrectly or designed poorly, incentive compensation can have some drawbacks.
While there’s no right or wrong way to design an incentive compensation plan, there are a few key factors that will ensure you’re setting yourself up for success.
Let’s look at an example of a few well-designed incentive compensation plans. This example in particular is an example of Inbound SDR’s compensation plan:
This plan is well-designed because it incentives behaviors the SDR has direct control over (lead response time) but also uses closed won revenue as an incentive to focus on activity quality rather than just speed of activity. This next plan is for an outbound SDR and uses different levers to incentivize other behaviors:
You’ll notice different factors at play in this example. Instead of lead response time, the Outbound SDR is compensated using meaningful touch points as the main KPI. This is intentional as the Outbound SDR doesn’t field inbound inquiries. Instead, this plan is intended to incentivize high-quality, two way communication between rep and prospect.
Again, the Outbound SDR has a component tied to closed won revenue- slightly higher than that of the Inbound SDR. This is because, typically, getting a cold prospect to become a customer is more difficult than, say getting someone who signed up for a demo to become a customer.
Advice to CEOs: Put non-sales leaders on variable comp plans, too. How can every single employee that can materially influence revenue have a variable revenue component to their compensation plans? We all agree everyone in sales has to have commissions and highly variable comp structure. What we mean is everyone that materially impacts the plan should have some variable comp.
So, you’ve realized commission spreadsheets are actually evil, and that sales incentive software will vastly improve transparency, efficiency, and your personal sanity. Eureka! Problem solved. Except… not exactly.
Developing an effective sales compensation plan requires a lot of brain power. It makes sense to focus on behaviors you’d like to incentivize, or pulling certain levers to impact other components of your sales engine. But how much time do you spend ensuring reps actually understand how their comp plan works?