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Outside the Box: Rethinking Incentive Program Planning

Several years ago, our company created a sales incentive program for a client in the sanitation products business. Their products were sold in dispensers, so the promotion was designed to motivate their distributor sales network to sell a new touch-free dispenser line.

The incentives were well designed and the new products were a hit. Sales went through the roof, actually almost tripling versus the previous incentive program.

Great results, to be sure…with the exception of one small problem: The client hadn't forecasted the sales increases, so the factories could in no way keep up with the demand. What ensued was a chaotic scramble to ramp up production, provide damage control in the distributor network, and calm down angry end users whose products were back-ordered by six months.

The lesson learned? Today's incentive planning has to go far deeper than the usual steps the industry has used for years, such as guessing sales numbers, budgeting, and deciding on an "open-ended" or "close-ended" rewards structure.

In fact, the right way to look at incentive program design is as a serious exercise in true ROI analysis. Anything short of that can leave the sales manager vulnerable to financial and delivery problems.

As Robert Dawson, longtime incentive market thought-leader and founder of The Business Group writes: "Incentive motivation is not about trips, toaster ovens, TV sets, and gift cards. Rather, incentive motivation is about investing. You are investing in something that can provide your company with the lowest risk and bring your company the highest return of any business investment you can make."

Ideally, a well run sales organization builds an incentive program to deliver a measurable ROI. The performance plan may include some or all of the following elements: market research, manufacturing and logistics capabilities, ROI budget analysis, performance goals (team and individual), alignment and inclusion of sales channel stakeholders, product mix, and applicable metrics.

Let's delve into the applicable action steps:

1. Estimate potential sales increases. Through formal and/or informal market research, sales managers must determine what potential sales increases are possible for the duration of the incentive program and in the months that follow. This information will necessarily have an impact on manufacturing, accounting, logistics, incentive program budget, and so forth.

Sales increases are a factor of many variables, including overall economic environment, product mix and new product roll-outs, competitive situation, strength of distribution channel partnerships, etc.

Marketing intelligence can be gleaned relatively quickly and easily from forecast surveys of salespeople, dealers, and distributor principals. Professional marketing intelligence firms can provide a more in-depth analysis of sales growth potential and product focus.

2. Determine manufacturing, services personnel, and logistics needs. Once you have estimated your sales for the incentive period, it is critical to work with internal resource providers to ensure the products or services you sell will be available in a timely fashion. Manufacturing, warehousing, and logistics stakeholders all need to be in the loop.

If you have materials made in China, for example, forecasting errors will have a big impact on your ability to deliver, due to the obvious timing issue of getting products to the U.S. Failure to have the goods during the incentive program will not only cost you sales, but may also damage your organization's credibility going forward and put future sales growth at risk.

3. Identify sales channel needs. The best sales incentive plans have channel alignment; all people in the channel are in the loop and focused on helping each other to grow sales with the identified product mix. It is critical for sales managers to identify all of the stakeholders in the channel who can have an impact on sales and include them in some way in the incentive process.

For example, if you are running incentives focused on driving sales through contractor sales representatives, you may provide an override to your employee salespeople and contractor managers. At the very least, everyone in your sales channel needs to be communicated with about the program goals and their potential benefits in pulling together.

4. Determine the ROI metrics. For years, the incentive business has used "rules of thumb" to determine incentive program budgets, and these rules have in fact been useful and effective. Examples include using one percent of gross sales or 10 percent of incremental sales to fund the incentive program.

Today, however, with financial, sales, and projection metrics available through enterprise information systems, a sales manager must attempt to weigh all of the costs associated with the incentive program against the anticipated incremental sales profits to estimate an ROI for the program.

Determining an ROI will deliver the real value of the incentive program both in good times and bad can provide solid justification for continuing to invest in sales incentives.

5. Determine the budget. Once you have identified the estimated ROI metrics, you'll have a good idea of what to budget for the program, including incentive compensation, value of rewards, communications budget, and training. Maybe the one percent of sales mentioned above is the right number, but it could also be two percent, or perhaps only half a percent. Without the ROI analysis, you're really just guessing.

6. Performance goals. Once you have established sales metrics and goals as part of your normal sales forecasting and performance management process, you can break those goals down to the appropriate level for the applicable sales channel stakeholders. This group may include company salespeople, rep groups, contractors, VARs, distributors, or DSRs.

There can be entire chapters written about each of the above steps, but the important takeaway is to view planning as a serious business exercise that will provide financial rewards in good and bad business times.

Next month, we'll take a look at how creating a communications campaign can power your incentive program to success.

SMM columnist David Chittock is president of Incentra.