Incentive, Compensation and Sales Performance Management

Google "Key Performance Indicator" and you will find enough KPI information to feel dizzy. It is important to know the difference between a performance indicator - some metric that we want to track - and the "key Performance Indicators" - or the most crucial performance indicators, those on which people are generally compensated on.

A recent article “Measuring Sales Force Performance” at gulfnews.com gives a few examples of performance indicators.

Customer and product related Measures:
- Number of new customers acquired
- Sales by product
- Sales by customer segment
- New product sales

Process Measures:
- Productivity
- Channel mix
- Turn-around time
- Number of calls made
- Number of prospects generated

Financial Measures:
- Sales value by geography
- Profitability
- Cost of acquisition
- Attrition
- Book growth
- Fee Income

Measuring metrics is one thing, but interpreting all the data collected is essential and usually the biggest challenge. There are a lot of industry benchmarks that can be used as indicators of how the company is performing compared to their competitors. Measures can also be compared against some framework, analyst point of view or analytics.

However I think the author of the article is entirely correct when he says that internal benchmarks are better because “they tell you what the best team can do in the same situation”. I think that performance indicator’s most valuable insight comes from comparing the metrics against historical data.

John Fletcher posted an interesting article "Why Quantitative Measures Often Make Performance Worse, not Better" on the Slow Leadership Blog about how quantifiable objectives is more about office politics than performance.

The article takes the point of view that performance measurement does not work well because typically what is measured is not what matters the most, and that performance often delines when it is measured because once people reach their target there is no incentive to exceed it.

I previously shared some information on performance measurement as well as some personal stories. I agree with John that sometimes quantifiable objectives can be more about office politics and that they can have undesirable effects and he raises a several good points. However, I will say that performance cannot be evaluated without well defined criteria. The article also seems to say that any quantifiable objectives are not as good as less tangible measures, a statement which I can't agree with.

The example of setting set targets also shows what to avoid; In the example, the goal is to answer 90% of inquiries - answer less than 90% and the employee does not get a bonus, answer more than 90% and the employee receives a bonus. This strategy could lead to employees doing the bare minimum of work to reach 90%, but not strive to achieve 100%. If the department's goal was to answer as many queries as possible, a better solution would be to use a quota approach: achieve target and receive a bonus, answer between 90 and 95% of inquiries and receive a bigger bonus, answer between 96 and 99% of inquires and receive an even bigger bonus, and answer 100% of inquiries and get the max bonus. This way, at least in theory, employees will always be motivated to exceed the target.

Choosing "good" performance measures and metrics is one of the most critical aspects of designing an incentive plan, while"bad" measures could result in encouraging undesired behaviors. It is important to know exactly what the desired behaviors and goals are before choosing any measurement. Also, as David Cichelli from The Alexander Group and Liz Cobb from Makana Solutions pointed out earlier, too many measures can ruin a compensation plan by making it overly complex and confusing the payees.

Sales performance incentives are relatively straightforward to figure out. At the simplest level, sales incentives are calculated by determining sales targets, measuring sales performance, and rewarding employee for their performance against the objectives.

However, performance-based incentives are harder to figure out in areas not involving sales. The key ingredient for incentives to work is to define MEASURABLE objectives.

There are other areas beside sales, where it is also possible to define quantifiable metrics. For example, for an employee working on an assembly line , we could measure the number of units manufactured in a certain period of time and the defect rate. We could measure the number of items shipped on time for a postal worker. We could also measure the response time and the number of complaints per call for a customer service associate.

The Harvard Business School created some of the best performance measurement articles and videos [UPDATED Apr 22, 08] I have found on the Internet. They focus more on enterprise performance measurement versus individual performance indicator, but some of the topics could offer good ideas for measurable goals.

Before implementing an incentive program, it is important to understand how affected employees feel about the planned metrics. In some cases, bad metrics could result in effects opposite to what was intended and lower moral!

In my next posts I will discuss some of my personal experiences with incentive compensation.