AT A GLANCE
- Your incentives program should reflect the changing needs and expectations of your employees.
- You can run incentive simulations if you want to fine-tune your existing program or design and implement a new and agile one.
- By running incentive simulations you could see what is likely to happen before making significant moves — all without risk.
Steven Levitt, the Freakonomics author, once said: “An incentive is a bullet, a key: an often tiny object with astonishing power to change a situation.” Indeed, the right incentive could nudge people to extend their capabilities, achieve beyond expectations, and become a top performer with a little bit of luck. That, though, begs the question: What constitutes the right incentive?
An incentive that encourages salespeople to perform at high levels must reflect the changing business environment. After all, adaptability to change is itself a hallmark of a successful incentive program.
The problem is, the COVID-19 pandemic was a wake-up call, reminding us that the only constant in life changes. In an ever-changing world, where your five-year-plan became a 5-week plan, it is impossible to build a future-proof incentive scheme. That’s where incentive simulations come in to play.
By running simulations, you could understand how your incentives would work under different conditions. Simulations could also help you determine your assumptions’ correctness and efficiency before you start designing your incentive system.
Here is a four-step process that we use to structure a sales incentive plan through simulations.
1. CULTIVATE SALES PERFORMANCE DATA
You can start by extracting and analyzing historical sales data. That will allow you to understand what has happened in the past.
Armed with that knowledge, next, ask yourself the following questions:
- Are we fair to our salespeople?
- What disrupts the relationship between sales performance and payout?
- Do we set appropriate targets for sales performance?
- Is it possible to perform better in a particular sales region?
- How will our salespeople perform in the future?
- How would the company’s target performance change based on the current targets?
When processing sales performance data, you may want to zero in on target achievement, basic salary, and incentive payout attributes. Likewise, discovering the correlation between target achievement and the payout is critical. We also analyze employee status regarding target achievement and payout.
Another analysis from which you might benefit is the ratio of overall sales performance to employee status. You could deepen your advanced sales performance analysis by comparing target achievement variations among sales regions.
If you have access to industry metrics, you could also compare your salesforce’s performance to best practices. That should help you to identify and address areas of improvement in incentive planning.
2. CONSTRUCT TARGET ACHIEVEMENT SCENARIOS
Scenario planning enables you to evaluate multiple futures. Robust scenarios provide both good and bad outcomes. They must factor in extreme events — like the current global health crisis.
When creating your incentive plan scenarios, you should take your existing target achievement state as your basis. Then, you can start playing with your target achievement tendency. By beginning to narrow down your assumptions, you can slowly decrease uncertainty. That way, you can assess why your decisions would succeed and fail.
You could use your simulation to answer the below questions:
- Under which scenarios would our company target achievement meet its objective?
- Which salespeople would over-achieve under the expected company target achievement level?
- How would sales at a low target achievement level differ from our current performance?
Your findings should help you further narrow down your initial set of scenarios. Keep in mind that it is critical to stay true to your company target and incentive budget.
3. ADJUST INCENTIVE PLAN LEVELS
- Under which target achievement scenarios, would we underpay the over-achievers, or overpay the under-achievers?
- Would low company target achievement cause salespeople to benefit less?
- To motivate sales performance in a fair yet attractive way, do we prioritize: salary multipliers, fixed slabs, or revenue shares?
Finding the right answers to those questions is vital for adjusting your incentive plan.
By simulating alternative achievement and payout levels, you can determine how sensitive your reward mechanism depends on fluctuating sales performance and business environment.
If you want to enrich your simulation, try to factor in salary-based incentives, revenue-share incentives, or fixed slabs.
4. PURSUE INCENTIVE BUDGET
The final component of simulation is budgeting. When creating target achievement scenarios, always respect your budget limitations. At this stage, your simulator could help you answer the following questions:
- How can we increase the accuracy of our incentive budgeting?
- Under which scenarios would incentive payments surpass our budget
- Would our incentive budget suffice in a high target achievement period?
The business environment is becoming increasingly unpredictable. In times like this, creating a range of possible scenarios could make your business decisions more robust. Likewise, by running simulations, you can build a well-designed and up-to-date incentive plan that ensures sales performance motivation under business constraints.
If you have further questions regarding incetive planning simulations, please contact Maven Insights and Solutions.