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The Complete Guide to Sales Force Incentive Compensation
Andris A. Zoltners
In a sentence
A comprehensive guide for designing, implementing, and managing effective sales force incentive compensation plans that motivate salespeople, align with business strategy, and drive company success.
This book helps firms harness the power of sales force incentives while avoiding common pitfalls. It provides a complete, practical roadmap for designing and implementing compensation plans that truly work, moving beyond theory to offer actionable advice grounded in decades of experience with hundreds of companies. Readers will learn how to diagnose existing plan issues within the broader sales management system, make the four critical design decisions (pay level, salary-incentive mix, performance measures, and payout relationships), set fair and motivational goals, and manage the often-difficult transition to a new plan. Through a strategic framework, hundreds of real-world examples, and proven analytical techniques, this guide equips sales, marketing, finance, and HR leaders to build a compensation structure that attracts and retains top talent, directs sales effort effectively, and ultimately drives bottom-line results.
The four lenses
- Science
- Statistics
- Systems
- Strategy
Tags
The model
A causal model showing how Sales Force Effectiveness Drivers, including the key decisions in incentive compensation design, influence the psychological and behavioral states of the sales force, which in turn drive customer satisfaction and ultimately company performance results such as sales and profit.
Incentive Pay Leveldesign lever
The decision regarding the target total compensation (salary plus incentive) for a sales role and the variation in pay across different performance levels. A key design lever in the compensation plan.
Incentive Pay Mixdesign lever
The decision regarding the proportion of a salesperson's total target pay that is fixed (salary) versus variable (incentive). This lever influences risk, culture, and management control.
Performance Measures Selectiondesign lever
The decision regarding which metrics (e.g., sales revenue, profit, market share, activities) are used to determine incentive payouts. This lever directs sales force focus and effort.
Payout Relationship Designdesign lever
The decision regarding how incentive payments vary with performance, including the use of thresholds, accelerators, caps, commissions, and bonuses. This lever shapes the motivational power of the plan.
Goal-Setting Process Qualitydesign lever
The effectiveness of the process used to set territory-level performance goals, encompassing fairness, realism, and motivational challenge. A key 'Controller' lever that enables goal-based plans.
Sales Strategy and Designcontextual condition
The upstream strategic decisions that define the sales job, including customer segmentation, go-to-market strategy, sales process, and sales force structure, roles, and territory alignment. These conditions shape the context for the incentive plan.
Sales Force Motivationpsychological state
The degree to which the sales force is energized, engaged, and inspired to exert effort towards achieving company goals. This includes perceptions of fairness, achievability, and the value of rewards.
Sales Force Attraction and Retentionoutcome metric
The organization's ability to attract desirable candidates to sales roles and retain its high-performing salespeople, while facilitating the departure of low-performers.
Sales Force Activity Allocationbehavioral pattern
The way in which salespeople distribute their time and effort across different customers, products, and selling activities (e.g., prospecting vs. servicing). This is a key behavioral pattern influenced by incentive measures.
Customer Resultsoutcome metric
The outcomes related to the customer base, including customer satisfaction, loyalty, and retention. These are intermediate outcomes that drive long-term company success.
Company Resultsoutcome metric
The ultimate financial and market performance of the company, including key metrics such as sales revenue, profit, growth, and market share. This is the final dependent variable in the sales management system.
How they connect
- incentive pay level → influences sales force attraction and retention
- incentive pay mix → influences sales force motivation
- performance measures selection → influences sales force activity allocation
- payout relationship design → influences sales force motivation
- goal setting process quality → influences sales force motivation
- sales force motivation → predicts sales force activity allocation
- sales force activity allocation → predicts customer results
- sales force activity allocation → predicts company results
- customer results → predicts company results
- sales strategy and design → moderates sales force motivation
The process
The book's operating playbook provides a comprehensive, end-to-end methodology for managing sales force incentive compensation as a strategic lever for business success. The overall process begins with a rigorous assessment of the existing compensation plan to diagnose its effectiveness and identify areas for improvement. This assessment uses the '3 Cs' framework—evaluating the plan's Consequences, its Consistency with corporate strategy, and its Compatibility with other sales management systems. The insights from this review are used to formulate clear objectives for a new plan design. The design phase is a structured, multi-step process that addresses four fundamental decisions: determining the appropriate pay level, finding the optimal salary-incentive mix, selecting meaningful performance measures, and defining the performance-payout relationship. Once one or more candidate plans are designed, they are subjected to a thorough evaluation process that includes quantitative modeling to predict costs and motivational impact, qualitative review to check for strategic alignment and potential adverse behaviors, and a 'future-proofing' assessment to ensure adaptability. This allows for the selection of the most effective plan before rollout. Finally, the playbook details the critical implementation phase, treating the transition to a new plan as a formal change management project. This involves mobilizing stakeholders, communicating the plan's features and benefits clearly to the sales force, and aligning the necessary administrative systems. The methodology is supported by parallel processes for setting fair and motivational sales goals—a crucial component of most incentive plans—and for designing supplemental programs like contests and SPIFFs to drive short-term focus and excitement. The entire system is underpinned by the design of a robust plan administration process to ensure ongoing accuracy, timeliness, and insight.
Assess Current Incentive Plan and Set New Objectives
To systematically review the effectiveness of an existing sales incentive compensation plan and establish clear, strategic objectives for a new or revised plan.
When to use: This process is used when there is a need to adapt to market or strategy changes, a desire to improve sales force performance, or a general sense that the current compensation plan is no longer effective.
Step 1Perform an initial diagnosis to confirm the problem source.
Entry: A sales performance issue or a strategic shift has been identified.
Exit: A preliminary hypothesis on the root cause of the issue is formed.
- Is the incentive plan the primary problem?
In: Performance data, Sales leadership concerns · Out: Initial diagnosis of the problem
Step 2Assess the downstream consequences of the current plan.
Entry: Initial diagnosis suggests the incentive plan is a contributing factor.
Exit: A clear understanding of the plan's positive and negative effects is documented.
In: Historical sales and payout data, HR statistics (turnover, recruiting success), Sales force and customer feedback · Out: Assessment of plan consequences
Step 3Assess the upstream consistency and compatibility of the plan.
Entry: Consequences have been assessed.
Exit: A list of misalignments between the plan and other business systems is created.
In: Corporate and marketing strategy documents, Sales force job descriptions, Descriptions of other HR and sales management programs · Out: Assessment of plan consistency and compatibility
Step 4Develop new plan objectives.
Entry: A comprehensive assessment of the current plan is complete.
Exit: A formal document of 'Guiding Principles' or 'New Plan Objectives' is approved by leadership.
In: Assessment findings · Out: Approved new plan objectives
Design the Incentive Compensation Plan
To structure the core components of a new sales incentive compensation plan based on a set of strategic objectives.
When to use: After new plan objectives have been established and approved.
Step 1Determine the appropriate pay level.
Entry: New plan objectives are defined.
Exit: Target pay level and range are established for each sales role.
- Will the company pay at, above, or below the market median?
In: New plan objectives, Compensation survey data, Job value assessment, Company budget · Out: Target pay level and pay range
Step 2Determine the salary-incentive mix.
Entry: Pay level has been determined.
Exit: The target pay mix (e.g., 70/30) is defined.
- How much of a salesperson's pay should be at risk?
In: Sales process documentation, Data on sales force causality and measurability, Industry norms · Out: Target salary-incentive mix
Step 3Select the performance measures.
Entry: Pay mix has been determined.
Exit: A specific set of performance measures is selected.
- Should the plan measure results or activities?
- Should performance be measured against a goal or an absolute number?
In: New plan objectives, Data availability assessment · Out: Selected performance measures
Step 4Determine the performance-payout relationship.
Entry: Performance measures have been selected.
Exit: A complete mechanical structure for the incentive plan is designed.
- Should the plan be a commission or a bonus plan?
- Should there be a cap on earnings?
In: Selected performance measures, Data on market volatility · Out: Candidate incentive plan(s)
Evaluate and Select the New Incentive Plan
To quantitatively and qualitatively test proposed incentive plan alternatives to select the best option and anticipate its financial, motivational, and behavioral impact before implementation.
When to use: After one or more candidate incentive plans have been designed and before a final decision is made to implement one.
Step 1Conduct a quantitative assessment.
Entry: One or more candidate plans are fully designed.
Exit: A set of financial and motivational projections for each candidate plan is produced.
In: Candidate plan designs, Historical sales force performance data, Next year's sales forecast · Out: Quantitative impact analysis report
Step 2Analyze individual and group impacts.
Entry: Initial quantitative assessment is complete.
Exit: The redistributive effect of the plan on the sales force is understood.
In: Quantitative model outputs · Out: Individual impact analysis
Step 3Conduct a qualitative assessment.
Entry: Quantitative assessment is complete.
Exit: A qualitative scorecard for each candidate plan is completed.
In: Candidate plan designs, New plan objectives, Feedback from key stakeholders · Out: Qualitative assessment report
Step 4Conduct a future-proofing assessment.
Entry: Qualitative assessment is complete.
Exit: The plan's robustness against future scenarios is evaluated.
In: Candidate plan designs, Company strategic plans · Out: Future-proofing assessment
Step 5Select the final plan.
Entry: All assessments are complete for all candidate plans.
Exit: A final, approved incentive plan is ready for implementation.
- Which candidate plan best meets the objectives?
- Are any final tweaks to the selected plan needed?
In: All assessment reports, New plan objectives · Out: Final approved incentive plan
Implement the New Incentive Compensation Plan
To manage the transition to a new sales incentive compensation plan effectively, ensuring sales force understanding, acceptance, and motivation while minimizing disruption.
When to use: After a new incentive plan has been finalized and approved for implementation.
Step 1Design the transition strategy.
Entry: Final plan is approved and a 'who gets helped/hurt' analysis is complete.
Exit: A formal transition plan is documented and approved.
- Is a transition plan needed?
- Which mechanism (guarantee, dual plan, etc.) is most appropriate?
In: Final plan design, Individual impact analysis · Out: Transition strategy and plan
Step 2Mobilize key stakeholders.
Entry: Transition strategy is designed.
Exit: A coalition of supporters is established and key departments are aligned.
In: Final plan design, Communication plan · Out: Stakeholder alignment
Step 3Develop communication and training materials.
Entry: Final plan and transition strategy are approved.
Exit: A complete set of communication and training materials is ready for distribution.
In: Final plan design, Transition plan · Out: Communication materials, Training aids
Step 4Execute the field rollout and training.
Entry: Communication materials are complete and stakeholders are mobilized.
Exit: The entire sales force has been officially informed and trained on the new plan.
In: Communication materials, Training plan · Out: Trained sales force
Step 5Align and launch supporting systems and processes.
Entry: Field rollout is underway.
Exit: All necessary systems and processes are live and functioning correctly for the new plan's start date.
In: Final plan design, Goal-setting process outputs · Out: Operational administration system
Set Sales Force Goals
To develop and allocate fair, realistic, and motivational territory-level sales goals that align with the national business forecast.
When to use: Typically conducted annually or quarterly as part of the incentive plan implementation and administration cycle.
Step 1Establish the national sales goal.
Entry: The business planning cycle for the next incentive period has begun.
Exit: An official national sales goal is approved.
In: Shareholder expectations, Marketing forecasts, Sales leadership input · Out: National sales goal
Step 2Analyze historical territory data.
Entry: National goal is set.
Exit: Key drivers of territory performance are identified.
In: Historical territory-level sales data, Market potential data · Out: Territory performance driver analysis
Step 3Develop alternative goal-setting formulas.
Entry: Territory data analysis is complete.
Exit: A set of 2-3 viable goal-setting formulas is created.
In: National sales goal, Territory performance driver analysis · Out: Alternative goal-setting formulas
Step 4Evaluate formulas and select the best approach.
Entry: Alternative formulas are developed.
Exit: A final goal-setting methodology is selected.
- Which formula provides the fairest allocation?
In: Alternative goal-setting formulas, Historical data · Out: Selected goal-setting methodology
Step 5Review, adjust, and finalize goals with field management.
Entry: A goal-setting methodology has been selected.
Exit: Final, approved territory-level goals are communicated to the sales force.
In: Formula-generated territory goals, Field manager input · Out: Final territory goals
Design Supplemental Incentive Programs (Contests, SPIFFs, Recognition)
To design and manage short-term sales contests and SPIFFs to drive specific behaviors, and longer-term recognition programs to honor top performers, in a way that complements the main incentive plan.
When to use: When there is a need to focus sales force attention on a specific short-term goal, create excitement, or formally recognize top performers.
Step 1Define the program's purpose and scope.
Entry: A specific business need that cannot be fully addressed by the main incentive plan is identified.
Exit: The program's purpose, audience, and budget are approved.
- Is a SPIFF, contest, or recognition program the right tool?
In: Business objectives, Sales performance data · Out: Program charter
Step 2Design the program mechanics.
Entry: Program charter is approved.
Exit: The complete rules and structure of the program are documented.
- Should the award be cash or non-cash?
- Should there be a limited number of winners or should everyone who achieves a certain level win?
In: Program charter, Sales force demographic data (to help choose appealing awards) · Out: Program design document
Step 3Launch and administer the program.
Entry: Program design is complete.
Exit: The program has run its course and winners have been identified.
In: Program design document, Communication plan · Out: Performance tracking reports
Step 4Deliver awards and recognition.
Entry: Winners have been identified and verified.
Exit: All awards and recognition have been delivered.
In: List of winners · Out: Delivered awards
Step 5Assess the program's effectiveness.
Entry: The program has concluded.
Exit: An ROI analysis and lessons learned are documented.
In: Sales data from before, during, and after the program, Program cost data · Out: Program effectiveness report
Design the Incentive Compensation Plan Administration System
To design and implement the people, processes, and tools required to accurately and efficiently administer the sales incentive plan on an ongoing basis.
When to use: When a new incentive plan is being implemented, or when the current administration system is proving to be inefficient, inaccurate, or unable to support business needs.
Step 1Define system requirements based on business goals and complexity.
Entry: A need for a new or improved administration system is identified.
Exit: A formal requirements document for the administration system is created.
In: Incentive plan design, Sales force structure, Data source inventory · Out: System requirements document
Step 2Design the system elements: people, processes, and tools.
Entry: System requirements are defined.
Exit: The people, process, and tool components of the system are designed.
- Should the company make or buy the software tools?
In: System requirements document · Out: System design specification
Step 3Decide on the sourcing model.
Entry: System elements are designed.
Exit: A decision is made to keep administration in-house or to outsource.
- Should the ongoing administration be outsourced?
In: System design specification, Cost-benefit analysis of sourcing options · Out: Sourcing decision
Step 4Build, test, and implement the system.
Entry: Sourcing model is decided.
Exit: A fully functional and tested administration system is operational.
In: System design specification, Sourcing decision · Out: Operational IC administration system
A candidate measure
The Complete Guide to Sales Force Incentive Compensation — derived measurement candidates
Incentive Pay Level
Median total compensation (salary + incentive); Total compensation at 10th and 90th performance percentiles; Comparison of company pay levels to industry benchmark data for similar roles
self-report suitability: low
Incentive Pay Mix
Ratio of target salary to target incentive compensation; Ratio of actual salary paid to actual incentive paid over a period
self-report suitability: none
Performance Measures Selection
List of all metrics included in the incentive plan formula; Weights assigned to each metric in a multi-measure plan; Presence of qualifiers or gates
self-report suitability: none
Payout Relationship Design
Payout curve visualization; Commission rates at different performance levels; Bonus amounts at specified thresholds; Floor (threshold) percentage of goal for payout start; Ceiling (cap) on earnings
self-report suitability: none
Goal-Setting Process Quality
Distribution of goal attainment across the sales force; Percentage of salespeople achieving their goal; Correlation between goal attainment and non-performance factors (e.g., territory potential) to check for bias; Sales force survey ratings of goal fairness
self-report suitability: medium
Sales Strategy and Design
Clarity of sales role definitions; Degree of sales force specialization (e.g., hunter/farmer roles); Equity of territory potential distribution; Defined steps in the sales process
self-report suitability: none
Sales Force Motivation
Engagement Rate (% of sales force receiving an incentive payout); Excitement Index (average incremental reward rate for last dollar/unit sold); Survey ratings of plan clarity, fairness, and motivational impact
self-report suitability: high
Sales Force Attraction and Retention
Annual voluntary turnover rate of top 20% performers; Annual voluntary turnover rate of bottom 20% performers; Acceptance rate for job offers extended to top candidates; Average tenure of sales force
self-report suitability: none
Sales Force Activity Allocation
Number of calls per period on new vs. existing customers; Percentage of time spent selling strategic vs. core products; Sales results broken down by product line or customer segment to infer effort allocation
self-report suitability: low
Customer Results
Customer satisfaction scores (e.g., NPS); Customer retention/churn rate; Repeat purchase rate; Share of wallet
self-report suitability: low
Company Results
Total sales revenue; Year-over-year revenue growth; Gross profit or contribution margin; Market share
self-report suitability: none
The story
The reader A sales, marketing, finance, or HR leader responsible for driving sales force performance.
External problem
The company's sales incentive plan is failing to deliver results; it may be too complex, motivating the wrong behaviors, causing turnover of top performers, or costing too much.
Internal problem
They feel frustrated and uncertain, fearing that any change they make could backfire, demotivate the sales force, and fail to achieve critical business objectives.
Philosophical problem
It's fundamentally wrong that a company's primary tool for motivating its sales force often becomes a source of confusion, conflict, and strategic misalignment.
The plan
- Understand incentive compensation's role within the complete Sales Management System.
- Systematically assess your current plan to pinpoint its strengths and weaknesses.
- Design a new plan by making four critical decisions: pay level, pay mix, performance measures, and payout relationship.
- Rigorously test your proposed plan to anticipate its financial and motivational impact before launch.
- Implement the new plan with a structured communication and change management process.
Success
- A highly motivated sales force that is aligned with company strategy and focused on the right activities.
- The ability to attract and retain top-performing salespeople.
- Achievement of sales, profit, and market share goals.
- Recognition as a strategic leader who has solved a critical and complex business challenge.
At stake
- The sales force remains demotivated, confused, and focused on the wrong things.
- The best salespeople leave for competitors, taking key customer relationships with them.
- The company continues to waste money on an ineffective plan while failing to meet its financial targets.
- Credibility is lost, and the underlying sales performance problems persist or worsen.
Chapter by chapter
ch01Sales Force Incentive Compensation and the Successful Sales Organization
This chapter investigates the critical role of sales force incentive compensation in driving performance and aligning organizational goals, emphasizing the complex interplay between incentive design and sales effectiveness.
ch02Reviewing a Current Incentive Compensation Plan and Setting Objectives for a New Plan
This chapter tackles the essential yet often overlooked review process for incentive compensation plans, asserting that understanding their true impact is critical for aligning sales behavior with business objectives to ultimately enhance sales effectiveness.
ch03Plan Design Fundamentals
Designing a sales compensation plan involves navigating intricate decisions about pay structure, performance metrics, and market influences, each significantly impacting a sales force's motivation and earnings potential.
ch04Plan Design Part 1: Determining the Correct Pay Level
This chapter elucidates the critical balance in setting sales force compensation, emphasizing that determining the right pay level is essential for attracting talent while avoiding complacency and underperformance.
ch05Plan Design Part 2: Finding the Best Salary–Incentive Mix
This chapter argues that the correct balance between salary and incentive pay can significantly shape a sales force's effectiveness, ultimately influencing both employee satisfaction and organizational success.
- The salary-incentive mix is critical in shaping both the culture and effectiveness of a sales force, fundamentally influencing employee behavior and company results.
- An overemphasis on variable pay can lead to complacency and dissatisfaction; a balanced approach is necessary to sustain long-term sales force engagement.
- Effective pay plans require a clear understanding of sales roles and processes, focusing on behaviors that align with organizational objectives.
- Continuous assessment and adaptation of compensation strategies are essential for maintaining alignment with market demands and internal culture.
ch06Plan Design Part 3: Selecting Performance Measures
This chapter argues for careful selection of performance measures in sales incentive plans to ensure they align with company goals and drive desired behaviors, serving as critical determinants of sales success and organizational profitability.
- Incorrectly chosen performance measures can drive behaviors away from organizational goals and customer satisfaction.
- Effective incentive plans require a balanced approach that incorporates measurable, adaptive performance metrics.
- The '3 Cs test' serves as a valuable tool for evaluating the suitability of performance measures in an incentive plan.
- Keeping performance measures simple reduces confusion and enhances the motivational impact of incentive programs.
ch07Plan Design Part 4: Determining the Right Performance–Payout Relationship
This chapter argues that the performance–payout relationship is critical in incentive plan design and must align with sales objectives, territory potential, and market conditions to foster equitable and motivating compensation structures.
ch08Evaluating Proposed Sales Incentive Compensation Plan Alternatives and Selecting a New Plan
This chapter discusses the critical evaluation and selection process for sales incentive compensation plans, emphasizing both quantitative and qualitative assessments to anticipate consequences and behaviors that may arise from the implementation of these plans.
- Effective sales incentive plans must undergo thorough testing before implementation to avoid costly mistakes and unintended consequences.
- Quantitative assessments provide invaluable insights into the financial risks and expected outcomes of candidate sales incentive plans.
- Qualitative insights from the sales force can significantly enhance the acceptance and perceived fairness of new compensation structures.
- A compensation plan’s success is entwined with its ability to adapt to both internal dynamics and external market conditions.
ch09p01Setting Effective Goals and Objectives (part 1/2)
This chapter explores the intricacies and challenges of setting effective sales force goals, emphasizing the need for realistic and motivating targets that align with both company objectives and sales force capabilities.
ch09p02Setting Effective Goals and Objectives (part 2/2)
The chapter explores the complexities of effective goal setting for sales teams, emphasizing the importance of clear communication, systematic adjustment, and the role of technology in enhancing both understanding and performance.
ch10Increasing Sales Force Motivation Through Sales Contests, SPIFFs, and Recognition Programs
This chapter argues that while sales contests, SPIFFs, and recognition programs can effectively motivate sales forces and align their efforts with corporate goals, improper implementation can lead to confusion and misalignment with strategic priorities.
- Sales contests and SPIFFs can generate immediate excitement and performance spikes, but excessive reliance on them can lead to distraction and ethical dilemmas.
- Successful contests align closely with company priorities and maintain clarity on objectives for the sales force.
- Recognition programs can foster long-term motivation and morale more effectively than frequent contests.
- A balanced use of both cash and noncash incentives can appeal to diverse motivational drivers within sales teams.
ch11Making an Effective Transition with a Major Incentive Compensation Plan Change
This chapter explores the complexities of implementing significant changes to sales incentive compensation plans, emphasizing the importance of understanding company culture, employee morale, and strategic alignment to ensure a successful transition.
ch12Incentive Compensation Plan Administration
This chapter unveils the essential components and complexities involved in effectively administering incentive compensation plans to motivate sales forces and drive company performance.
Questions this book answers
- How can a company design a sales incentive plan that motivates the right behaviors and aligns with its strategic objectives?
- What is the optimal pay level and salary-to-incentive mix for a specific sales role and business environment?
- Which performance measures should be used to ensure the sales force focuses on what truly matters?
- How should the relationship between performance and payout be structured to drive motivation and control costs?
- How can a company assess the effectiveness of its current compensation plan and quantitatively test proposed changes before implementation?
Glossary
- Incentive Pay Level
- The target amount of total cash compensation (base salary plus target incentive) for a salesperson who meets performance expectations, along with the planned distribution of pay for low and high performers. It is a strategic choice about how to position the company within the labor market.
- Incentive Pay Mix
- The relative proportion of a salesperson's target compensation that is delivered as a fixed salary versus a variable, performance-based incentive. This decision reflects the company's philosophy on risk sharing, control, and culture.
- Performance Measures Selection
- The selection of specific metrics and criteria used to evaluate salesperson performance and calculate incentive payouts. These measures signal strategic priorities and direct sales force effort.
- Payout Relationship Design
- The rules and mechanics that define how performance on a given measure translates into an incentive payment. This includes the shape of the payout curve, which determines the marginal reward for incremental performance.
- Goal-Setting Process Quality
- The extent to which the process for establishing individual sales goals is perceived as fair, produces realistic and challenging targets, and aligns individual efforts with overall company objectives. It is a critical enabler for any goal-based incentive plan.
- Sales Strategy and Design
- The set of high-level choices that define the nature of the sales job, including who to sell to (customers), what to sell (offering), how to sell (process), and through which channels and structure. This context determines the environment in which the incentive plan must operate.
- Sales Force Motivation
- The internal psychological state that drives a salesperson to initiate and persist in job-related behaviors and activities. It encompasses the direction, intensity, and persistence of effort.
- Sales Force Attraction and Retention
- The organization's effectiveness in sourcing and hiring salespeople with the desired profile and in keeping its most valuable salespeople while managing out poor performers.