> Opinion Paper

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

Opinion Paper 2 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

Table of Figures

Figure 1: Detecon’s Incentive Framework................................................................................ 4

Figure 2: Decision Tree of Incentives....................................................................................... 7

Figure 3: Incentive Framework with Influencing Factors.......................................................... 9

Figure 4: Influencing Variables for Calculating the Effects of Incentives ............................... 12

Figure 5: Calculating Return on Incentives ............................................................................ 13

Figure 6: Implementation of Incentives .................................................................................. 15

Figure 7: Classic Distribution Channel Breakdown on an Emerging Market ......................... 16

Figure 8: Incentive Structure on an Emerging Market ........................................................... 17

Figure 9: Example of a Distribution Channel Structure on a Mature Market ......................... 18

Figure 10: Example of an Incentive Structure on a Mature Market ....................................... 19

Opinion Paper 3 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

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.

Detecon’s Incentive Framework

The Company Environment

Internal External

Quality

Holistic incentives along the value chain

Profitability

Typology Knowledge Motivation

The Individual

Figure 1: Detecon’s Incentive Framework

If developed and implemented holistically, incentives make a major contribution to the

achievement of tactical and strategic sales targets – in both direct and indirect distribution
channels. Clear measurability is required if the success of incentive measures is to be
evaluated.

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%.

Opinion Paper 4 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

2 From the Soloist to the Orchestra

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.

Opinion Paper 5 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

3 Enthusiasm is Measurable

Even though the word “incentive” is frequently associated Incentive

with pleasure trips, incentives as a means of managing
sales can be understood in a substantially broader sense:
The word incentive comes
An incentive is anything which motivates a person or team from the Latin root incendere,
to do something aimed at a specific goal – in terms of meaning to “arouse
sales, to sell something. enthusiasm” or “inflame”.

A major difference from other types of motivation is that the

work to obtain the promised incentive can be done within a specific time period. Rewards, in
contrast, can be given independently of actions aimed at specific goals or on the basis of
unforeseeable or subjective factors. In that case, they do not motivate anyone, and may
even have the opposite effect. The content of any incentive is characterized by two
determinants: why an employee receives something (targets) and what he or she receives.

3.1 Targets and Possible Forms of Incentives

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.

Opinion Paper 6 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

M Measurable: Targets must be measurable. These measurements must be

dependable and be conducted at regular intervals.
A Achievable: Targets should be achievable. Goals which are beyond reach
discourage anyone.
R Relevant: Targets must be meaningful. A target which does not interest anyone
is discouraging, despite an incentive. A discernible relationship between one’s
own work and the corporate goals increases the perception of meaningfulness.
T Timely: An incentive needs a concrete time frame. This includes a starting and
a finishing point as well as the point in time of the reward and feedback.

3.2 The Full Gamut of Incentives

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.

Catalogue of Incentives (extract)

Goal Type of
Target Group Time Remuneration
Incentive

Sales Short
Profit Yes Yes Yes Financial Yes Competition
Force term

No

No Social Yes Event: e.g. feast

Long
Yes Financial Yes Variable Salary
No term

No No

Check Time Social Yes Bestseller Club

Frame

No

Sales Short
Yes Yes Financial Yes Add. equipment
Partner term

No

Figure 2: Decision Tree of Incentives

Opinion Paper 7 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

Common incentives include:

Q Variable salary components, bonuses dependent on performance,
commissions, especially for sales employees
Q High-value non-cash rewards: e.g., vouchers, consumables, entertainment
electronics, accessories, etc.
Q Trips and unusual experiences: the more expensive the same trip is when
booked privately, the greater the incentive
Q Intangible rewards: e.g., “Employee of the Month”, meetings with the
management, public praise, winning of competitions

3.3 Measurability

If an incentive is to function properly, the degree of target achievement must be clearly

measurable. Performance which can only be estimated and not truly measured cannot be
motivated with incentives. Sales figures, for example, can be measured directly, but
customer loyalty can be determined only indirectly.

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.

3.4 Variable Target Systems

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.

Opinion Paper 8 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

4 From the Concept to the Realization of the Incentives

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.

4.1 Factors Influencing the Incentive Procedure

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.

Detecon’s Incentive Framework

Internal External

Direct Factors Indirect Factors Environment Standards

Q Corporate Q Corporate Q Country Q Industry
Strategy Culture Culture Benchmarks
Q KPIs & Q Industry Q Socio-political Q Best-In Class
controlling framework Systems
Q Capabilities Q Legal
Q Measurability boundaries
Q Transparency

Company
Quality

Holistic incentives along the value chain

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

Figure 3: Incentive Framework with Influencing Factors

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.

Opinion Paper 9 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony
4.1.1 Corporate influencing factors – the orchestra
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.
Internal Influencing Factors
Direct internal influencing factors
Strategy/Corporate goals:
The incentive program must be in harmony
with the corporate goals. A company that
values long-term customers should not offer
incentives for the unqualified acquisition of new
customers. In contrast, this would be exactly
the right thing for a company which has set
itself the goal of becoming the market leader.
KPIs and Controlling:
The more similar the measurement variables
for the incentives are to the KPIs applicable
throughout the company, the greater their
acceptance and effect. In addition, the
measurement of target achievement is
simplified if variables are already available as
KPIs.
Measurability:
The measurability of target achievement is
essential for the successful use of incentives.
Transparency and communication:
The communication of the set targets and the
type of incentives influence the success of the
incentive program. For example, regular
reports by the company to the employees
concerning the status of their performance is
necessary when competition incentives are
used.
Indirect internal influencing factors
Corporate culture:
Every company has its own culture, and an
incentive must be appropriate if it is to be
effective.
Industry:
Industries differ from one another in their
circumstances, business models, and the
people who work in the company.
Consequently, the incentives used in
industrial companies with a conservative bent
will not function in Internet startups
characterized by high-paced innovation.
Opinion Paper 10
External Influencing Factors
External influencing factors – environment
Culture of the country:
An incentive program based on competition will
be counterproductive in cultures in which
solidarity and a sense of belonging are more
important than individual successes. This is of
special importance for expanding companies
which transfer the incentive systems marked
by their own culture from the home market to
other markets and cultures.
Socio-economic framework:
An incentive which motivates an employee
responsible for simpler tasks may have a
discouraging effect on another employee from
the same division if it does not take into
account the latter’s long training period, status,
and salary level.
Laws and regulations:
Rights and obligations of co-determination and
data protection are only some of the legal
requirements which must be considered. An
incentive cannot function if it is in violation of
laws.
External influencing factors – standards
Industrial benchmarks and standards:
An incentive which is highly effective in one
industry may fall flat on its face in another if the
basic conditions are not similar. So an
incentive should always be oriented to the
circumstances in the specific industry.
Best-in-class systems:
However, best-in-class incentive systems from
other industries can be adapted to the general
conditions in the company’s own industry if one
is aware of the differences between the
industries and adapts the incentive
accordingly.
Detecon International GmbH
 Sales Incentives – From the Jam Session to the Symphony

4.1.2 Individual influencing factors

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.

4.2 Abuse of Incentive Measures

Individual Influencing Factors

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).

Knowledge / Skills / Influencing possibilities: Incentives do not motivate anyone who is

incapable of achieving the targets set for him or her. The question here is not one of how high the
targets are set, but whether the person is fundamentally capable of carrying out the task. Demands
exceeding someone’s capabilities owing to a lack of knowledge or skills lead to a lack of motivation
to take on further challenges and reduced receptivity to future incentives.

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.

Opinion Paper 11 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

4.3 Return on Incentives (ROI)

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.

Generating incentive results

Commissions Total sales

increase

Travels Non-incentive
- related

Purchases Incremental Incentive related

= sales
sales
Variable salary Direct costs Decreased
storage
Time of
organization
Hidden efforts Economies of
scales
Unplanned add.
production cost Other industry
Administration,
specifics
e.g. reporting
Incremental Incremental
Off times sales cost benefit
force

Short term add. - +

customer care Incentive related costs

Other industry Incentive Incentive related benefits

specifics result Non-incentive related benefits

Figure 4: Influencing Variables for Calculating the Effects of Incentives

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.

Opinion Paper 12 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

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

before after before after

Incremental Profits
ROI =
Incremental Cost

ROI > 1: Profitable (Incremental profits > incremental costs)

ROI < 1: Unprofitable (Incremental profits < incremental costs)

Source: The Incentive Research Foundation, Detecon Research

Figure 5: Calculating Return on Incentives

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.

Opinion Paper 13 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

4.4 Special Features of the Distribution Channels

4.4.1 Direct sales (via own employees, sales organizations)

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.

4.4.3 Direct and indirect sales in comparison

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.

Opinion Paper 14 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

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.

4.5 Implementation of Incentive Measures and Systems

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

Set the individual

Set up the program Communicate Do it Celebrate
goals

Figure 6: Implementation of Incentives

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.

Opinion Paper 15 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

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.

Another aspect of the implementation is the formal acknowledgement of the success.

American companies emphasize this much more strongly than German enterprises, for
example. This is a consequence of differences in the legal situation as well as in the
cultures. But regardless of the culture people come from: celebrating a success and being
publically praised for it motivates a person to do even more. In Asian cultures, the group
praise for the achievement of a team or corporate goal is more important, while in Western
cultures the individual performance takes priority.

4.6 Case Study: Indirect Sales on Emerging Markets

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.

Direct and Indirect Sales of emerging GSM operators

Direct Channels Indirect Channels

Shops Corporate sales Franchise Shops Distributors Dealers

Dealers

Figure 7: Classic Distribution Channel Breakdown on an Emerging Market

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.

Opinion Paper 16 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

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:

Incentive Structure Emerging Markets

Upfront After sales Competitive principle of quota allocation

Q A high upfront Q Component to Q Nr. of cards are allocated to dealers based on a
commission guarantee “ good performance based quota system.
behavior” in
Concept qualitative aspects

Revenues
per indirect = Commission per product-unit x # of product-units
dealer

Q Fixed amount Q Quality based amount Q Performance based

based on mystery O SIM sales target achievement
shopping regarding O Recharge card sales achievement
Q Price loyalty O E-Top up target achievement
Q Brand support Q Fixed quota
Components through shops O Dependent on initial contract conditions
Q Commission
based on airtime usage

Figure 8: Incentive Structure on an Emerging Market

Opinion Paper 17 Detecon International GmbH

 Sales Incentives – From the Jam Session to the Symphony

The components are explained briefly in the following:

Q Upfront commission: A high “upfront” incentive in comparison with the
competition guarantees the dealers’ loyalty, especially for the new entry of an
operator on the market.
Q After-sales quality: The compliance with price agreements, brand loyalty,
service quality, and similar factors of the dealers can be measured with the
help of mystery shopping. An assessment of the service quality is taken into
account as a part of the incentive for the sold products.
Q A fixed incentive amount is, as a rule, based on the agreement between the
operator and distributor association and on the degree of target achievement of
the previous month.
Q The acquisition of customers with a high value contribution can be encouraged
by coupling the incentive proportionately to the airtime usage as well, creating
a negative sanction for the strict orientation to new customer contracts via the
commissioning.
Q Performance-based incentives are oriented to the degree of target
achievement of the individual dealer with respect to the sold products. On
emerging markets, these are usually pre-paid or post-paid SIM card sales and
top-up volumes within a specified observed period.

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.

4.7 Case Study: Direct Sales on Mature Markets

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.

Sales Channel Structure Mature Markets

Handset Vendors Content Provider Operator Service Provider

Handset Vendors Content Provider Operator Service Provider

Direct Channels Indirect Channels

Direct
Own Shops ChannelsCorporate sales Franchise Shops Indirect Channels
Logistic Specialists Distributors

Own Shops Corporate sales Franchise Shops Logistic Specialists Distributors

Provider Owned Specialists National Chain Independent

Figure 9: Example of a Distribution Channel Structure on a Mature Market

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Figure 10 shows the incentive model for the direct distribution channel of an integrated
operator on a mature market.

Incentive Structure Mature Markets

1. Fixed 2. Mobile Weighting Indiv. Target

Q Product Q Product Q Fixed
8 30% #
Group A Group A 8
Q Product 4 Q Product Q Mobile 30% #
4
Group B Group B
Q Product 2 Q Product 2 Q Hardware & 10% #
Group C Group C Accessories
Q Service Quality 30% #
Incentive
per
sales = # Cumulated Points per Employee/Month x Incentive Amount per Month
employee

Q Hardware Q Customer Q Performance based variable based on

Group A 4 Satisfaction 4 individual target achievement
Q Hardware 2 Q Waiting 2 (accumulated & weighted points)
Group B Time
Q Accessories 1 Q etc. 1 Q Fixed salary (no impact on Incentive)
Group
3. Hardware & Acc. 4. Service & Quality

Figure 10: Example of an Incentive Structure on a Mature Market

The components are explained briefly here as well:

Q In the product categories Fixed and Mobile, individual product groups are
awarded a point score based on their value which is incorporated into the
individual target achievement of a sales employee.
Q Analogously to this, points are awarded for the achievement of targets in the
categories Hardware and Accessories and Quality Targets.
Q The awarding of points and the subsequent weighting of the scores makes it
possible for the model to prioritize certain products and service parameters
more specifically.

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.

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 Sales Incentives – From the Jam Session to the Symphony

5 The Task of Sales Management

.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.

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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

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7 The Authors

Rena Wickenheiser is a Senior Consultant working in Detecon’s Competence Practice

Strategy and Marketing at the Bonn office. After earning her degree in psychology and an
MBA, she worked in a number of positions in sales and project management in various
companies. She joined Detecon in 2007. Thanks to her practical experience from
numerous sales projects, she has a broad knowledge base for both the analysis of and the
drafting of concepts for sales organizations and processes.

Telephone: +49 228 700 2577 or

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.

Telephone: +49 228 700 2521 or

daniel.augsten@detecon.com

Holger Biermann is a Senior Consultant working in Detecon’s Sales Strategy Group. He

has had more than eleven 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 2007. The focus of his work
is on the development of sales and marketing strategies, the establishment and
optimization of sales structures and processes, and investigations of economic efficiency.

Telephone: +49 228 700 2567 or

holger.biermann@detecon.com

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Martin Beiten is a Business Analyst in Detecon’s Competence Practice Strategy and

Marketing at the Bonn office where he works for the Sales Strategy Group. He has
concluded various national and international projects at Detecon since 2007. He has
experience in sales for managed services, mobile payment, and fixed-mobile convergence
products and services. The focal point of his work is on the analysis of markets and the
development of competitive strategies.

Telephone: +49 228 700 2529 or

Martin.Beiten@detecon.com

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 Sales Incentives – From the Jam Session to the Symphony

8 The Company

Detecon International GmbH

Detecon International is a leading worldwide company for integrated management and

technology consulting founded in 2002 from the merger of consulting firms DETECON and
Diebold. Based on its comprehensive expertise in information and communication
technology (ICT), Detecon provides consulting services to customers from all key industries.
The company's focus is on the development of new business models, optimization of
existing strategies and increase of corporate efficiency through strategy, organization and
process improvements. This combined with Detecon's exceptional technological expertise
enables us to provide consulting services along our customers' entire value-added chain..
The industry know-how of our consultants and the knowledge we have gained from
successful management and ICT projects in over 100 countries forms the foundation of our
services. Detecon is a subsidiary of T-Systems, the business customers brand of Deutsche
Telekom.

Integrated Management and Technology Competence

We possess an excellent capability to translate our technological expertise and

comprehensive industry and procedural knowledge into concrete strategies and solutions.
From analysis to design and implementation, we use integrated, systematic and customer-
oriented consulting approaches. These entail, among other things, the evaluation of core
competencies, modular design of services, value-oriented client management and the
development of efficient structures in order to be able to distinguish oneself on the market
with innovative products. All of this makes companies in the global era more flexible and
faster – at lower costs.

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.

Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
Telefon: +49 228 700 0
E-Mail: info@detecon.com
Internet: www.detecon.com

Opinion Paper 24 Detecon International GmbH