How to Create an Effective Incentive Plan for Sales Staff in a Wooden Flooring Company?

Formulating an Incentive Policy for Sales Staff

Could someone help me in formulating an incentive policy and incentive plan for sales staff? Ours is a wooden flooring company. We have eight salespeople and two sales heads. Please suggest how to formulate the policy.

Minimum Target for Incentives

What should be the minimum target for giving incentives?

Incentive Amounts

What should be the amount of the incentive for achieving the minimum target and above the minimum target?

Timing and Method of Payment

When and how should the incentive be paid? Is it after sales targets are achieved or after payments have been received? Should incentives be paid monthly, quarterly, half-yearly, or yearly?

Please advise me on the other aspects of the SIP as well. I shall be obliged for the help rendered to me.

Regards,
Kavita

There are no standard policies on 'Incentives,' though the objective in most cases is to reward those sales executives who contribute to the growth of sales revenues. The entire cycle starts with the overall sales revenues desired to be generated by the Sales Team during a Financial Year. This is further broken down into quarterly revenues for the team, as well as for different geographies in which your sales force is distributed.

Let us assume Manager A (for one geographic sector) has three sales executives, and the overall sales revenue target is Rs X. He further distributes his target X to the three sales executives equally as (X/3 + x). Please observe that 'x' is to ensure that even if one of the three sales executives falters, the overall target of Rs X assigned to the Manager is somehow achieved. In a case like this, one of the incentive schemes for the team under Manager A could be:
(i) Achievement < X, no incentives
(ii) Achievement = X, incentive = 1% of X
(iii) Achievement = 1 to 1.25 X, incentive = same for case (ii) + 2% of the extra revenue generated
(iv) Achievement = 1.251 to 1.5 X, incentive = same for case (iii) + 3% of extra revenue generated.

You may observe that in the above scheme, it is a total quarterly incentive to the team. Some organizations decide that Manager A would get 40% of the amount, and the balance 60% shall be distributed amongst the 3 sales executives in proportion to their achievements against the targets assigned. Such a scheme helps in maintaining team spirit, yet making the team members compete with each other to earn more.

Well, this is one of the numerous algorithms available to design sales incentives.

Thank you for your quick help, Mr. Bhatia. When should incentives be paid to the salespeople? Should incentives be paid after all payments for sales made are collected, or should they be paid when the dispatch is in transit? If payment is not collected against some sales made, should the incentive be deferred to the next quarter? Or should the incentive plan depend on time-bound performance?

Best,
Kavita

Mr. Bhatia has posted a good solution. I would like to add a few more details.

Why Incentive?

Let's begin like this - Q: Why incentive? A: To stimulate growth and share revenue accrued out of growth. Work standards are difficult to put in place for sales, so let us take a roundabout course.

Steps to Formulate an Incentive Plan

Step 1: Threshold sales volume. Mr. Bhatia is right. However, if the target is too low or too high, you may need to adjust the threshold value.

Step 2: Allow extra benefits for market penetration - this will really boost your sales in the future. Allow some incentive for new customers acquired. If the customer was purchasing other brands earlier, offer more incentive.

Step 3: Allow incentive based on the contribution of the sales. For example, staff A who books an order for Rs. 125 for an item costing Rs. 100 should receive more than staff B who books the same item for Rs. 115.

Step 4: (Very Important) Allow disincentive for increasing sales cost.

The question, therefore, is how to apply all these in one scheme. The solution is simple - gi

Hi Kavita, the replies received so far are very good. However, we found that our sales staff need the targets to be justified, rather than adjusting targets later on (which really defeats the object). So the first thing to do is to set a target, and then the incentive plan.

Setting Targets and Incentive Plans

We take the individual's employment costs such as salary, benefits, and employer costs. To this figure, we add a small percentage of the business's running costs. Then we add a profit margin. This figure gives you the minimum target. Please note the profit margin is where you pay the incentive from (which can be adjusted). In other words, the individual has to earn the incentive. The incentive percentage can be tiered. The incentive must only be paid in the month/quarter following full and final payment of the invoice. I suggest you create a spreadsheet with all the different scenarios and apply the one that fits best for your company.

Regards,
Harsh

Kavita, please refer to your query above:

Payment of Incentives

Normally, the payment of incentives for performance in a quarter is made after the realization of sales revenues. The reason for this is that 'Purchase Orders' may sometimes be canceled by the purchaser. Keeping the above in view, one could maintain a log of all paid/outstanding incentives for each employee.

Regards,

I am quite new to this forum and amazed to see the quick responses to my query. I must thank you for both your replies. Sure, these replies will help me a lot in formulating our Sales Incentive Plan. I may come up with a few more questions if I get stuck somewhere. Hope to get your guidance on that.

Best,
Kavita