Incentive compensation design: Factoring forecast accuracy into your plans

Have you considered how your incentive compensation plans can improve sales forecast accuracy? Probably not. By most accounts, it’s not a good idea to include sales forecasting as an incentive measure. After all, it’s management’s responsibility to ensure that sales reps are updating the sales pipeline and accurately reporting their sales forecast each period.

However, consider the relationship between compensation and forecasting by approaching it from the opposite direction. Although your compensation plan probably won’t improve your sales forecast, a good understanding of your forecast can definitely improve how you design compensation incentives.

When sales operations professionals and compensation administrators work together to design incentive plans, they often begin by asking questions like:

• How much of our product offerings do we need to sell to successfully achieve our sales quota targets? Is the health of the sales pipeline supporting our goals?
• How has each sales rep performed historically by product sales and by key customer? What is the average sale cycle for comparable deals?
• When is the right time to sell to each customer account, and what is the likelihood these customers will make another purchase?

These questions are all vital to businesses that want to achieve sales performance excellence. Better forecast accuracy can lead to many great benefits, including improved sales performance management, confidence in managing investor expectations, stock price stability, accurate sales quotas, and of course, motivational incentive compensation plans.

Focusing in on the impact that forecasts have on compensation, let’s consider an example. You’re looking at a healthy sales forecast for a period of time with a significant number of deals that are in the “contract negotiation” stage and most likely will close within the quarter. What does this mean in terms of the cost of compensation? Depending on how the incentive compensation plans are structured, the cost of compensation could be very high for that period.

Upon further analysis, you discover that this has been a trend for several prior periods, and your forecast shows that this will remain a trend for the remainder of the year. That’s a good thing—business is good, revenue is trending up, profit margins are good—but if this trend continues, you will need to review your incentive compensation plans to stay within budget. Now you start asking questions like:

• Have we set our sales quotas too low and are the quota attainment tiers effectively structured?
• Do we need to raise the threshold built into the incentive compensation plan to push sales reps to drive more revenue?
• Are the accelerators correctly set in the incentive compensation plan to challenge sales reps to sell more while keeping them satisfied with the potential total earnings value?

Donya Rose, Director, Sales Effectiveness and Rewards Practice at Tower Watson joined us in a webinar to discuss how an organization’s sales forecast can impact the design of the incentive compensation plan. Tough questions were answered, including:

• How should forecast accuracy affect incentive compensation plan design?
• What can you do to make sales quotas more accurate, even when your sales forecast accuracy is just what it’s always been?
• How about forecast accuracy as a sales incentive measure—if it’s so important to the business, should we incentivize it?

And as you reconsider the design of your incentive compensation plans, watch our 3-minute demo and see how you can define the right incentive compensation plan for every sales rep and maximize your sales results.

Topic: Incentive Compensation