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Sales Incentives
From the Jam Session to the Symphony
2009 / 03
www.detecon.com
Sales Incentives – From the Jam Session to the Symphony
Table of Contents
1 Executive Summary ............................................................................................ 4
2 From the Soloist to the Orchestra ....................................................................... 5
3 Enthusiasm is Measurable .................................................................................. 6
3.1 Targets and Possible Forms of Incentives .................................................. 6
3.2 The Full Gamut of Incentives ...................................................................... 7
3.3 Measurability ............................................................................................... 8
3.4 Variable Target Systems ............................................................................. 8
4 From the Concept to the Realization of the Incentives........................................ 9
4.1 Factors Influencing the Incentive Procedure ............................................... 9
4.1.1 Corporate influencing factors – the orchestra ........................................... 10
4.1.2 Individual influencing factors ..................................................................... 11
4.2 Abuse of Incentive Measures .................................................................... 11
4.3 Return on Incentives (ROI)........................................................................ 12
4.4 Special Features of the Distribution Channels .......................................... 14
4.4.1 Direct sales (via own employees, sales organizations)............................. 14
4.4.2 Indirect sales (sales via sales partners, e.g., supplied dealers) ................ 14
4.4.3 Direct and indirect sales in comparison..................................................... 14
4.5 Implementation of Incentive Measures and Systems................................ 15
4.6 Case Study: Indirect Sales on Emerging Markets..................................... 16
4.7 Case Study: Direct Sales on Mature Markets ........................................... 18
5 The Task of Sales Management ....................................................................... 20
6 Recommended Reading ................................................................................... 21
7 The Authors....................................................................................................... 22
8 The Company.................................................................................................... 24
Table of Figures
1 Executive Summary
Incentives are intended to arouse the recipients’ enthusiasm so that they will sell more
successfully. Virtually all industries make use of incentives – but the complexity of this tool in
the interaction of dependencies and the related effects is frequently not fully appreciated.
The bank crisis of 2008 makes this clear in a vivid manner. In today’s atmosphere of political
discussions about extravagant manager bonuses or the irresponsible granting of loans to
real estate customers, a consideration of incentives appears to be called for. However, the
goal of this paper is not to evaluate the economic events now going on, but to take a look at
incentives per se.
So Detecon describes the possibilities, the challenges, and the possible forms for incentives
in a practice-oriented approach. The basis for this paper is the “Incentive Framework”
developed by Detecon which considers the corporate and individual influencing factors from
a holistic standpoint.
Internal External
Quality
Profitability
The Individual
The most important performance indicator here is the return on incentives (ROI). This ratio is
calculated by comparing the additional profit generated by an incentive with the expenditures
for the incentive itself. Successful incentives have a return on incentive ratio of as much as
120%.
The more complex a market, the more demanding the sales management. The days are
long gone when a product could be sold in large quantities via a single distribution channel.
The interaction of sales partners at widely varying levels and the many sides of direct sales
are today standard. Whereas in the past it was possible to fall back on a few very good
soloists, it is now necessary to manage a large number of capable players and direct them in
a specific direction.
The challenge today is not, “What new distribution channel can I add to increase my sales?”,
but rather, “How can I optimize the interaction of the channels without losing sight of the
profitability of each individual one?”
When it comes to sales, companies must be where the customers are; that is why they try to
cover as many channels and locations as possible. But the number of visiting customers
(footfall) and the buying rate (conversion rate) can be increased long-term only “in the
orchestra” of the entire company and across all stages of added value. For example,
incentives given for the acquisition of new customers in sales can lead to a resource
bottleneck in the downstream departments Customer Care or Billing if the measures have
not been coordinated. Empirical studies document the effectiveness of the holistic procedure
and reveal substantially higher return on incentives when such approaches serve as the
foundation for the programs.
3 Enthusiasm is Measurable
An incentive defines both: the performance and the related reward. The performance can be
managed by the following measures:
Q Targets which must be achieved;
Q Competitions in which the aim is to be better than anyone else;
Q Mixed forms: e.g., competitions which presume the achievement of a target.
Whereas target incentives measure the performance in terms of the degree of achievement
of a target which has been defined in absolute terms, it is the relative performance in
comparison with the other participants which counts in competitions. The point in the latter
case is to be better than anyone else.
If competitions are to have a motivational effect, each person’s own performance must be
transparent – just like that of every other participant. The information required for this
purpose is generally confidential, which makes it difficult to carry out competitions in an
environment with strict rights of co-determination and for indirect sales in general.
One possible solution is the combination of target and competition incentives: the best
performances are determined on the basis of the degree of achievement of the targets. This
combination has an advantage for the company in that the number of winners of the
competition is limited (e.g., the best 10) and costs can be calculated more exactly.
The majority of incentives are managed by means of targets or the degree of achievement of
targets. The precise definition of the target values is a prerequisite for ensuring that the
targets are set correctly and consequently are motivational. The SMART method provides an
ideal approach:
S Specific: Targets must be defined precisely. This includes a clear definition of
the measurement value, e.g., whether cancellations are deducted from
turnover.
The more specifically an incentive measure can be utilized, the more useful it is for sales
management. Since there is such a broad range of possible measures, the decision tree in
Figure 2 will aid in the selection of the right incentive on the basis of four relevant variables:
the target, the target group, the time frame, and the nature of the incentive.
Goal Type of
Target Group Time Remuneration
Incentive
Sales Short
Profit Yes Yes Yes Financial Yes Competition
Force term
No
Long
Yes Financial Yes Variable Salary
No term
No No
No
Sales Short
Yes Yes Financial Yes Add. equipment
Partner term
No
3.3 Measurability
The measurement variables and points in time must be defined very precisely so that there
is as little room for interpretation as possible. Furthermore, they must not be changed for the
duration of the incentive program. The participants must be able to depend on the reliability
of the general conditions.
In variable target systems, the overachievement of a target can compensate for the failure to
meet other targets. However, the motivation to achieve the difficult targets as well is
somewhat limited in this case. Moreover, a large number of detailed targets does not
motivate anyone if the failure to achieve them individually does not have perceptible
consequences.
In both cases, the corporate strategy plays an important role. It is the guide for weighting the
individual targets and determining the extent to which overachievement of targets can
compensate underachievement in other areas.
The selection of the right reward is the first step in the definition of an incentive, but it does
not conclude the process by any means. There are numerous other influencing factors which
make successful incentive definition too complex for a simple “pick and choose” procedure.
Just as a written score does not turn into an extraordinary concert until it is interpreted by the
conductor, the incentive process lives from the subtleties of skilled performance.
In the Detecon Incentive Framework, the influencing factors on the part of the company and
of the individual are shown in relation to one another.
Internal External
Company
Quality
Profitability
Individual
Typology Knowledge Motivation
Q Long term orientation Q Education Q Hierarchy of needs
Q Individualism Q Experience Q Intrinsic motivation
Q Brain type Q Career Level Q Extrinsic motivation
Q Risk Aversion
Q Value set
Q Uncertainty awareness
The model shows what factors must be taken into account if an incentive program is to have
the greatest possible benefits. This also includes the balancing of incentive effects which are
potentially contrary to one another.
It is important to coordinate incentives holistically, across the entire value chain. This is the
only way, for example, that new customers successfully acquired through a sales incentive
can be supplied properly with products and services.
From the company standpoint, a distinction can be made between internal and external
influencing factors. The internal factors are determined by the company itself. They influence
the results of incentives measures – sometimes directly, sometimes indirectly.
People are different: what is boring for one and a sporting challenge for another may seem
threatening to a third person. Nevertheless, not every single employee can be given an
individual motivation program tailored to his or her exact needs. But being aware of personal
differences contributes to a willingness to empathize with individuals to a certain degree and
thereby to increase the effect of incentives.
Typology: Although no two people are alike, only a small number of characteristics are important
for a general incentive program. They include the time orientation, the degree of individuality, and
the attitude towards risk along with the capability to motivate oneself (intrinsic motivation).
Motivation: Incentives are supposed to motivate. So the common motivation theories can serve as
a basis for successful incentive programs. They include arguments explaining why money as the
sole motivator does not have a sustained effect and why factors such as public recognition and
attention are often more suitable.
An intrinsically motivated person is active on his or her own accord. Extrinsic motivation is
the persuasion of people to do something because of an outside factor, e.g., money. The
situation may also arise in which a higher reward is sought without producing the required
performance. That is why the borders between the “testing of the gray areas” and out-and-
out fraud are fluid.
The playful testing of limits is more likely to be found where there is still adequate intrinsic
motivation, but the company has a pronounced competitive culture. Conscious abuse is most
likely to occur when the employees’ identification with the company is weak. But both
situations lead to results which do not correspond to the company’s intentions. Besides the
higher costs, negative effects with respect to third parties are noticed above all.
A clear form of the incentive system helps to prevent abuse. The more precisely targets are
defined, the better they can be measured, and the more exact the instructions, the less room
there is for employees to abuse the system. But beyond this, there should be clarity about
the reasonableness of the means chosen. Doing away with incentives to prevent their abuse
reduces the motivation of all of the employees. So the opportunity costs from lost sales could
be much higher. Slight abuse should be punished consistently, while serious abuse should
be punished with the appropriate severity.
Most of the time, the direct costs of an incentive are simple to express in figures. The indirect
effects such as the period of absence in the sales department when the best sales
employees are on an incentive trip are often more difficult to determine. Nor is the added
value of an incentive discernible at first glance. The greatest difficulty here is the
determination of causality. Is a sales employee able to increase his or her turnover
significantly because of the lowered prices, the changes in market conditions, or the
increased size of the sales territory?
Figure 4 gives an overview of the various factors on the cost and benefit side.
Travels Non-incentive
- related
The most important indicator for measuring the success of incentive measures in companies
is the return on incentives.
Ideally, the return on incentives is determined in a field experiment. Two groups are formed:
one of them receives an incentive, the other does not. The more similar all of the other
variables are, the easier it is to attribute the difference in results to the incentive. However,
very few companies will be in a position to manage one group of sales employees with an
incentive and a second group without one. Justifying the experiment would require good
arguments for both employees and works councils or similar workers’ representatives.
The situation is different for companies which have never before utilized any incentive
measures. In this case, it is possible to compare the figures before and after the
implementation of the incentive program with one another. The variables which can be
influenced, e.g., price development, should be kept as comparable as possible. This is
generally easier if the incentive program has a short term rather than a long one.
If it is not possible to conduct a field experiment, the return on incentives can be determined
on the basis of historical data. However, this will not be possible unless detailed data which
make it possible to distinguish between the experiment and control groups are available.
The principles for the calculation of a return on incentives is shown in Figure 5. The return on
incentives compares additional profits realized through an incentive program with the costs
of the program. The results show whether the additional profits are higher than the additional
costs. A value less than one reveals that an incentive program did not result in enough
additional profit to cover the costs of the program.
Return on Incentives
Profit Cost
Incremental
Profits
Incremental
Cost
Incremental Profits
ROI =
Incremental Cost
Studies in the telecommunications sector show return on incentives of as much as 120% for
successful incentive programs.
The determination of the return on incentives is highly dependent on the quality of the data.
The more precise the data, the more confidently the additional profit can be attributed to the
incentive and considered in relation to the costs.
Owing to its direct influence on the employees, the sales management is responsible for
achievement of the corporate goals to a high degree. It is responsible, for example, if too few
transactions are concluded with current customers and too many transactions with new
customers.
4.4.2 Indirect sales (sales via sales partners, e.g., supplied dealers)
Creating incentives for sales management is more complex for indirect sales operations than
for direct sales. Due to the specific structures, there are fewer incentive instruments which
can be used. Less information about competing products is available for the decision about
which group of persons should have incentives and how influence should be exercised.
The value of one’s own incentives in ratio to those of other parties can only be estimated. If a
store is regarded as an indirect sales partner, for example, the direct competitors are not the
only ones clamoring for the seller’s attention. Products from other industries sold in the same
store must also be considered.
An added difficulty is that two different groups of people must be considered: the contact
person who has the commercial responsibility for the sales partner and the actual
salesperson. Direct access to the salesperson is consequently the exception rather than the
rule. A sales manager will make the commercial contact person very happy by granting a
higher margin – but it is questionable whether this will lead to greater commitment on the
part of the salesperson and subsequently to higher sales figures.
Since the relationship between performance and monetary award is not directly recognizable
for the salesperson, the significance of the emotional reward becomes greater. As a
consequence, it is important to gain his or her enthusiasm for the products. The means to
achieve this include demonstration products and training sessions as well as giveaways and
opportunities for unusual experiences.
However, the agreement of the employer and the reasonableness of the means must be
assured in every case. In 2006, many companies returned tickets to World Cup matches
which they had received as incentives. This conduct shows how narrow (and individual) the
line can be between a motivating gesture and attempted coercion.
The effects of the company’s influencing factors vary in their intensity for direct and indirect
sales. In contrast, the influence of the individual factors is independent of the channel.
Whereas the internal factors have more noticeable effects on direct sales, the external
factors affect indirect sales more strongly. The main reasons are the availability of
information and the comparison values in the evaluation of incentives.
The sales partner knows the conditions that exist on the market. If there are two comparable
products, he will tend to recommend the one for which he has a better margin. So an
important factor for satisfying an indirect sales partner is the external comparison.
Whereas the sales partner compares the incentives of two producers, the employee from
direct sales is competing with his or her colleagues. The internal comparison with team
colleagues is more important for his or her individual motivation than external reference
figures. The internal factors of transparency and communication play a great role for internal
sales. For example, motivation and satisfaction are raised by establishing and
communicating clear rules for incentives (e.g., only a target achievement greater than 100%
will qualify someone to take part in a trip).
When defining an incentive, the sales management must take all factors into account so as
to address direct and indirect channels. Yet direct and indirect channels on growing or
saturated markets each have specific advantages which should be considered in setting up
the incentive program.
Whereas the sales costs dependent on turnover are extremely variable in indirect sales, the
variable share of the sales costs in direct sales is lower. This is why direct selling on markets
with strongly fluctuating turnover figures is more cost-intensive because the costs remain
stable even when turnover is lower. On the other hand, the costs of direct selling remain
relatively stable even when turnover figure rise sharply.
On saturated markets with cut-throat competition, indirect sales have the advantage that
customers with a demand for impartial advice by sales partners can be served. The
incentives for the sales partner must as a minimum be at the level of the competition. The
incentives in direct sales, on the other hand, compete with the competition only in the war of
talents.
Any incentive is only as good as its implementation. That starts with the definition of the
targets and target groups, continues with determining the details and setting the target
values in each case as well as the prediction of costs and returns, and goes on to the actual
implementation.
Implementation
Communication plays an essential role during implementation. Just as the violinist must
know his cue, the sales employees must know what they have to do – but also when any
further processing will be counterproductive. If they know the background of the incentives,
they will have a better understanding of how their targets have been determined and can
plan their own work more effectively.
Communication also includes regular feedback and reports concerning the extent to which
individual sales employees have already reached their targets, which targets need more
effort if they are to be achieved, and which targets may be given a lower priority for the time
being because the level of achievement is already high. The foundation of the
communication is effective measurement procedures: a reporting system that does not
produce results until months after the conclusion of an incentive measure is not helpful.
The majority of the sales to end customers on emerging markets are handled via indirect
distribution channels. An overview of the classic breakdown of common distribution channels
is shown in Figure 7.
Dealers
As a rule, the structures of the indirect distribution channels display characteristics which are
also reflected in the incentive program models:
Q Individual dealers have direct contracts with the network operators and operate
either shops franchised by the operator or retail stores with their own branding.
Q There are frequently distributors between the dealers and the operator. Their
task is to provide the logistics and infrastructure for the dealers. Consequently,
the distributor also handles the incentive program / commissioning.
Q Another characteristic usually found on emerging markets is an
overproportional share of distributors, frequently resulting in a lack of
transparency in the incentive models and making it difficult to compare them.
A major point of attack for new players on such a market is the development of an incentive
system featuring transparent KPIs which
Q is attractive for the distributors or indirect channels,
Q increases the loyalty of the participants in the distribution channel,
Q does not cause the incentive costs for the operator to rise overproportionately,
and
Q avoids any opportunistic conduct on the part of the dealers.
The structure of an incentive or commission model described below has been developed and
successfully implemented for the market entry of a mobile operator on an emerging market
which already had a number of established competitors:
Revenues
per indirect = Commission per product-unit x # of product-units
dealer
An incentive structure of this type supports in particular the focus on the quality parameters
important for the network operator and encourages the sustained development of customers
with a higher value contribution for the company.
The market structures on a mature market are generally more complex and cannot be
determined by the operator alone. Other players, especially the providers of end devices and
content, are part of a more complex channel logic, as is shown in Figure 9.
Direct
Own Shops ChannelsCorporate sales Franchise Shops Indirect Channels
Logistic Specialists Distributors
Figure 10 shows the incentive model for the direct distribution channel of an integrated
operator on a mature market.
The weighting of product categories in particular and the greater emphasis on qualitative
parameters in the direction of customer satisfaction and loyalty are characteristic of incentive
models on mature markets in comparison to the models found on emerging markets.
.Within the company, the sales management realizes the requirements from the corporate
strategy as specific incentives and ensures a balance in the overall picture by adjusting the
individual channels.
When incentives with a specific direction are offered, short-term turnover targets as well as
the strategic orientation of the company can be taken into account and realized. By heeding
the individual needs of the sales employees, sales management can achieve a holistic
treatment of all of the factors influencing sales. The approach of an indiscriminate distribution
to everyone is avoided and sales are promoted where action is meaningful and has a
positive influence on achievement of the corporate goals. At the same time, less efficient
product-channel combinations are minimized, thereby increasing profitability.
This procedure is initially applicable to all market situations. However, differences in the
various market and product phases must be taken into account by sales management. The
consistency and understandability of the measures are important for the participants in every
market phase. The measurability and correct calculation of the return on incentives are other
major success factors.
The fact that an orchestra is made up of a large number of talented individuals does not by
itself automatically lead to a magnificent performance. The jam session does not turn into a
symphony until a conductor comes along to handle the coordination. Successful sales
people also need coordination. Playing together successfully comes to fruition only in the
combination of conductor and orchestra, sales management and sales force.
6 Recommended Reading
Q Gerstenberger, Rico; Plogmann, Stefan; Stanat, Thomas; Willand, Sebastian;
Zülz, Corinna: Motivation und Motivationstheorien
Q Gopalakrishna, Srinath: Measuring the RETURN-ON-INCENTIVE of Sales
Incentive Program, 2004
Q Häusel, Dr. Hans-Georg: Brain Script. Warum Kunden kaufen, 2004
Q ITA-Group: Using Audience Segmentation and Targeted Strategies to Boost
the RETURN-ON-INCENTIVE of Performance Management Programs, 2007
Q Kehr, Dr. Hugo M.: Motivation und Volition: Zwischen impliziten Motiven und
expliziten Zielen, 2001
7 The Authors
rena.wickenheiser@detecon.com
Daniel Oliver Augsten is a Senior Consultant working in Detecon’s Sales Strategy Group.
He has had more than eight years of experience in the ICT industry, including several years
in various positions in marketing and sales in the mobile network sector. He has been
involved in national and international projects at Detecon since 2004. His focus is on the
sales and marketing strategy development for Tier 1 fixed and mobile network operators as
well as on the establishment and operation of marketing and sales organizations on
emerging markets.
daniel.augsten@detecon.com
holger.biermann@detecon.com
Martin.Beiten@detecon.com
8 The Company
Detecon offers both horizontal services that are oriented towards all industries and can entail
architecture, marketing or purchasing strategies, for example, as well as vertical consulting
services that presuppose extensive industry knowledge. Detecon's particular strength in the
ICT industry is documented by numerous domestic and international projects for
telecommunications providers, mobile operators and regulatory authorities that focused on
the development of networks and markets, evaluation of technologies and standards or
support during the merger and acquisition process.