Businesses need to link sales incentives to ensuring profitability

ProfitsIn the last month a number of sales team personnel will have been given a wakeup call. Despite hitting their targets for the first quarter of the year, some staff will have had to forgo their bonus payment as it is linked to poorly thought out  sales incentives.

The reason? They’ve been discounting the products or services to hit their sales targets or they have been selling value-priced products or services where the profit margins are reduced. As a result, the sales that they have made have not contributed added value to the businesses operating profit.

With, or perhaps because of, the current economic climate many companies are now extending their key performance criteria to focus on net profit, return on investment or delivering cost efficiencies in order to earn a sales incentive bonus.

 

The sale is no longer about revenue or numbers

“The focus is now on continuous cash flow and improving the quality of revenue, which can be achieved when business goals are taken from CEOs and board levels down the hierarchy,” Ajit Isaac, managing director at human resources firm Ikya Human Capital Solutions, says.

Whilst at PepsiCo, their chief people officer Samik Basu says the company has instructed its sales team to improve the product mix of its food and beverage business and sell higher volume packs, which have a direct bearing on the profitability of the company.

Companies are shifting their focus from market share to profitable growth and as a result sales targets and the subsequent sales bonuses are no longer just about the amount of revenue generated or the number of products sold.

 

Rewarding the right behaviours

Sales incentives foster behavioursSales reward schemes reward people for achieving a set target, for displaying certain behaviours. Unfortunately for many businesses their sales incentives tend to end up with the sales person making the following assessment:

“To get this bonus I need to sell £XX of this product, plus I need to sell £X of this add on.”

It’s this behaviour that leads to discounting and selling low profit margin items in order to generate the revenue or numbers.

But by following forward thinking companies that are linking bonuses to the overall strategy of their business and investing time and resource on getting the targets right and setting out the required behaviours, businesses can improve their profitability.

 

Four steps to success

Setting up or changing a sale incentive scheme that contributes to the overall strategy of the business is relatively simple…

 

1. Define your overall corporate strategy and objectives

The goals of your sales incentive programme should be closely linked to the overall strategy and objectives of your business. They should be driven by the leadership team and will probably include a mix of objectives such as:

  • Volume based targets such as sales volume or sales revenue
  • Profitability based objectives such as margin contribution or discounting
  • Customer based objectives such as improving customer service standards or market segment penetration

 

2. Determine success levels

Rewards for sales should be linked to specific and quantifiable targets. This may include a minimum level expected but also a stretch target which can be rewarded with a greater incentive. The rewards that are available should make it worthwhile for the sales person to fight for better prices on an individual deal.

 

3. Communication

Sales incentives need to be communicated effectively to your entire sales team so that they know why and how their remuneration and bonuses are linked to the overall company strategy and objectives.

 

4. Evaluate and review

Finally it is extremely important to evaluate and review your sales incentives on a regular basis, not just at the end of the financial year. The best schemes adapt and evolve to keep pace with the market, economic and competitive environment.

 

Implementing these four steps will take time but they can make the difference between and low performing team and a high performing team that has a huge impact on company profitability.

 

John Sylvester

John is responsible for the motivation division of p&mm ltd and a Director on the board of the IPM. Specialising in developing, implementing and directing many large scale staff motivation, recognition and employee communications programmes.

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