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Sales Incentive

A sales incentive is a reward or compensation given to salespeople for performing up to a level, mainly for selling a particular amount of goods or services. In simple words, sales incentives are rewards that a salesperson receives to be able to sell more products or services.

The term "sales incentive" is used by businesses to describe a strategy where rewards or compensation are tied to salespeople for reaching a predetermined goal. An incentive can be a big motivator. When employees are paid partially or wholly based on sales, they often work harder to increase the number of sales they produce.

What is a sales incentive?

Sales incentives are monetary rewards that a company gives to its sales team. The purpose of it is to encourage the salespeople to increase sales volume and productivity. Incentivizing your sales team has multiple benefits. It helps increase sales, enhance the size of each deal, and get more repeat business from buyers.

What is a sales incentive plan?

A sales incentive plan is a type of compensation that's commonly used in commercial businesses, which comes either as a personal sales performance incentive fund or as a reward to work with sales reps. 

Sales incentive plans are a perfect way to incentivize or motivate your sales team to reach or exceed quotas. It accomplishes two goals: one, it encourages a salesperson to achieve their targets, and two, it helps the business to drive more revenue and growth. 

In addition to a standard compensation plan, an incentive plan can include SPIFs (Sales Program Incentive Funds) or other non-monetary rewards such as exceptional opportunities, choice assignments, additional home office support, recognition, and cash bonuses.

What are sales incentive best practices?

Incentives are a powerful way to get your sales team members to do what you want them to do. The best incentives reward the right behavior, not just sales volume or revenue.

Here are some tips for getting the most out of sales incentives:

  • Make sure they are clearly defined and well-communicated.
  • Give the sales team time to achieve their goals before you take away their rewards.
  • Make sure everyone on the team is included in your incentive program, not just top performers.
  • Give employees at all levels of the organization access to training and coaching to become more effective at selling your products or services.

How to create a sales incentive program?

A good sales incentive program must aim to provide complete visibility into expectations, targets, and reward structure to sales reps.

Here’s a step-by-step process to creating a sales incentive program:

  • Step 1. Set the eligibility criteria: Determine whom to include in the scheme. Define eligibility criteria clearly and communicate about them to your sales team. Without proper communication, you’ll run into the risk of creating confusions, which can undermine the incentive program’s success rate.
  • Step 2. Choose the outcomes to incentivize: Define the performance measures that you want to reward. Make sure they align with your business priorities and have a positive impact on the employee behavior. While you consider ‘revenue’ as the most important metric, rethinking the true 'profit' metric makes more sense.
  • Step 3. Focus on pay mix: This is the ratio between the incentive pay and base salary at target performance. Your decisions must closely relate to the type of sales roles you have, factoring-in the complexity and length of the usual sales cycle, and the impact of salespeople on customer buying decisions.
  • Step 4. Total target cash value: When it comes to competitiveness of your inventive pay, don't just look at the median total cash data. The key is to make sure you aren’t under-paying the top performers and over-paying the under performers.
  • Step 5. Calculate the incentives: Calculate the earnings using the right formula, the acceleration rate, and the payout curves. This might also involve a threshold (minimum performance level which should be accomplished before earning an incentive), and mechanisms or caps that give financial risk protection.
  • Step 6. Decide on the payout frequency: Determine how often you want to pay the incentive earnings to your sales. As a thumb rule, the ideal time to pay is when the sale closes, as it maximizes the motivational impact. On the other hand, environments where sales have the shortest transactional type, quarterly or monthly payments work the best.

How to calculate incentive for sales teams?

One challenge with incentivizing sales is that you need to figure out how much of a commission each salesperson should receive, which means you need to decide how to calculate incentives for sales. 

Here’s the formula to calculate:

Sales incentive payment = Total sales profit x Allocated commission percentage

Example: Let’s say Martin, a salesperson is responsible for achieving a $100,000 target this year with an incentive commission of 10%. Then, his payout at the end of the year will be as below:

Martin’s sales incentive = $100,000 x 10% = $10,000

No matter the type of sales incentive program you use, the number will be determined in one of two ways: the gross profit or the net profit. 

Pro tip:

Forget the hassle of calculating incentives for your sales teams with Compass. Manage and automate sales incentive programs easily, from launching to calculating and disbursing incentives. 

How to incentivize sales staff?

Incentivizing sales staff is a vital part of any company's sales team, but motivating this group of employees can be difficult. Here are tips for creating an incentive program that works for them:

  • Make sure they know what their targets are for the year and month: If they don’t have clear targets, then there is no way for them to see if they are doing well or not. This will lead to low morale and demotivation among the team.
  • Offer commission on a per-deal basis: The best way to motivate sales staff is by paying them based on performance. One of the simplest ways to do this is with a commission structure that pays out a percentage of each sale, with higher rates available for higher-value deals or larger volumes.
  • Match payments with company values: Jot down the factors and on what basis should your sales staff be paid based on their skills and experience level, but remember that compensation doesn't just reflect how well someone does their job — it also sends signals about what kind of business you're trying to run. 
  • Consider other perks than just cash bonuses: If you have an extra $100K lying around this month but don't know how to spend it on incentives for your sales force without going into debt.

How to motivate a sales team with incentives?

Sales motivation can be tricky, but it's essential. If you have a sales team, you'll want them to be motivated and excited about their job. Here are a few tips to boost your sales team with incentives.

  • Find out what motivates your sales team: Before you can start motivating your sales team, you need to know what motivates them. Some people are motivated by money, while others are inspired by recognition and praise. You need to figure out which category each team member falls into to tailor your incentives accordingly.
  • Set goals for each team member: Your goal should be for every member of the team to exceed their quota or reach their target number within a specific timeframe — say six months or one year from now. 
  • Create a reward system based on performance: Once you've set up your incentive program, create a reward system based on performance.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.

eNPS:

eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

Are sales incentives taxable?

Yes, sales incentives are taxable income, so you want to be sure that you're paying the appropriate taxes on them. These can include employee commissions, bonuses, and other forms of compensation for meeting or exceeding sales goals. 

The IRS considers these payments part of your employee's regular salary, so they must be included in their yearly income tax return.