Feature Article - March/April 2008

Danger Zone

Are Your Sales Incentives Created in a Vacuum?

By Catherine Eberlein Pfister

By benchmarking data on sales, in addition to operational and financial measures, and analyzing it very early on in the process, the company was able to determine the effect of increased sales on finance, operations, procurement, production and human resources.

"Developing an incentive program with a focus on sales growth alone is myopic," explained Dr. Srinath Gopalakrishna, lead researcher and associate professor of marketing at the University of Missouri-Columbia, who designed and executed the study. He emphasizes that a preoccupation with sales growth without consideration for other business functions can produce a damaging domino effect including:

  • An adverse effect on cash flow.
  • A possible disruption in supplies.
  • Unforeseen procurement expenditures because of the need to purchase additional raw materials, often at short notice.
  • The acquisition of new accounts may involve other aspects, such as customer quality. Some new accounts may delay paying their bills, causing an increase in accounts receivable, which can hurt bottom-line profitability, specifically cash flow and short-term capital management.
  • Planning for additional workers—even though it may be temporary—involves considerable expense that includes the costs of hiring and training new workers.

According to the IRF, the results of this research show that it may be naïve to plunge into a sales incentive program without any regard for its impact on other parts of the organization.

"Such a short-sighted view can generate serious and often unanticipated side effects for the business operation that may turn out to be detrimental in the long run.

"A business process approach, on the other hand," the IRF reports, "enables the planning and creation of needed infrastructure and additional investments wherever necessary, to support the results from the sales incentive program."

These study results also illustrate how taking a cross-functional, business process perspective affects outcomes and return on investment analyses. For example, if the hand-tool manufacturer had focused its distributor sales incentive solely on sales growth, the program ROI would have been -92 percent. But by using a business process approach, the company achieved approximately 84 percent ROI.

(For more information on how related financial and operational measurements were used in this study and to obtain a full copy of this research, contact f.katusak@theirf.org, or visit The Incentive Research Foundation's Web site at www.theirf.org.)

Developing a business process approach is a huge first step toward developing more effective corporate-wide incentive programs and determining ROI.

"A lot of companies have successfully driven themselves out of business because they've gotten too many orders. It's a heck of a situation to be in," Stotz said. "It's important to look at the linkage between sales impact and how to support that impact all the way back through the organization."

Doing so will help you answers questions such as: What effect will it have on hiring, training, outsourcing, financing and cash flow? Do we have to employ a third shift or go 24x7? What's that going to do to our call center, credit checks, accounting and our company-wide personnel? How can we link the processes that support each other across the organization? How do we structure incentives to ensure that we're able to support that improvement when it comes? And when the improvement comes, how do we encourage people to do their part?

"When people in other departments are not informed, are caught off guard and are not motivated to prepare for increased orders, it can create havoc in an organization," Stotz cautioned. "Your sales people may be cheering themselves for having a great program—enjoying that trip to Hawaii or relishing the high-value merchandise they just received—while the financial and operations people are back home digging out of the situations created by increased orders," he explained.

"An incentive program is not your business plan," Stotz added. "Remember that your business plan is what you're trying to focus on and energize people about. So integrate your incentive plans—design and deliver them in a way that is supportive of the business plan, and energizes and focuses everyone on that plan."