Are Your Goals and Incentives Aligned?
Over the past few years, I’ve heard a lot of discussion about strategies and best practices for motivating your sales reps. One of my favorite articles suggests that there is no one right way to motivate an entire team—different types of salespeople need different forms of motivation.
Despite all this talk about how to motivate your sales team, I haven’t heard much about coordinating sales incentives and company goals. Motivated teams can fail if their incentives are not in line with the strategic goals of the organization.
Below are three examples of common incentive strategies can negatively affect a company’s ability to maintain steady growth and achieve goals.
Monthly quotas are a great choice for many businesses. However, there are times when a monthly quota cycle can inhibit growth. A friend recently told me about one of those times at her last company.
She worked for a SaaS (Software as a Service) startup for two years. The company started out selling to small businesses. This meant short sales-cycles and lots of small, transactional deals. Their success led to funding, which meant more aggressive sales goals that required selling to midsize and enterprise companies.
The sales team’s quotas were raised in anticipation of bigger deal sizes, but the quota cycle was not extended. She and her colleagues were faced with a tough choice: close a few extra small deals each month (and get paid), or spend 60-90 days filling their pipelines with big deals (but not getting paid).
Despite having a great product and enjoying early success, the company went out of business. Their failure to adjust the quota cycle created a situation where the sales team had little incentive to do what was best for the company.
This may have been avoided by transitioning salespeople to a three-month quota cycle. Paying salespeople during the first quarter represents some risk, but it’s far less risky that misaligned goals and incentives.
Minimum Payout Threshold
Many inside sales teams require that salespeople attain a certain percentage of their quota in order to get paid. I’ve seen companies set this “pay cliff” anywhere from 25% to 75% of quota.
Creating a pay cliff is reasonable. It saves the company from paying commission low performing salespeople. But a pay cliff that is set too high can create an incentive to “sandbag” deals.
If a salesperson knows that he is unlikely to reach a 70% pay cliff, then it is in his best interest (financially speaking) to slow a few deals down. He knows that there is nothing to lose by delaying the rest of his pipeline until next month, and it increases the chances of being paid next month.
As a one-off, it may not be a big deal. But if delaying deals becomes common practice, it can have a devastating effect on a company. Uneven growth looks bad to investors and can make accurate forecasting nearly impossible.
Accelerated Commission Tiers
Accelerated commission tiers are an excellent way to motivate salespeople to exceed goals. Unfortunately, they can also become a strong incentive for your salespeople to intentionally delay deals.
Consider the following payout structure:
|0-50% of Quota||50-100% of Quota||101-150% of Quota||151-200% of Quota|
|0% commission||8% commission||14% commission||20% commission|
This type of compensation schedule is common, especially at SaaS companies. It’s a great way to reward your top performers and avoid paying for poor performance. But if your company is small or your sales aren’t yet predictable month to month, it can backfire.
Like pay cliffs, the structure above creates a strong incentive for your team to intentionally delay deals. If a salesperson is unlikely to achieve 101% of quota, then she can make more money by stalling every deal after achieving 50% in the hopes of reaching 151% next month.
When a salesperson stands to make more money by having 0% months followed by 200% months, you have a problem. This creates a strong incentive for uneven performance, which is bad for the company.
Because steady growth is more important to the company than a single good month, you should find a way to incentivise consistency. I like the idea of an accelerated commission structure that rewards consistency instead of strong one-month performance.
Never force your salespeople to decide between what’s best for the company and what’s best for them.
The aforementioned sales management practices are not necessarily bad. In fact, they are fine for most companies. They only represent a problem when sales leaders fail to consider whether their incentives are in line with the company’s goals.