Sales incentives are one of the biggest motivators for the sales team. When your salesforce is happy with their incentive compensation, they're highly likely to perform well in their job and exceed those targets. That's why it is imperative to calculate sales incentives accurately. Any error will not only demotivate your salesforce but also cut down your profits.

This blog post will give an overview of the importance of sales incentives, different types of incentives, how to calculate them, and the most common mistakes to avoid. Make sure you read this blog till the end.

‍Types of Sales Incentives

There are three broad sales incentive programs: Performance-based, Cash-based, and Commission-based.

 1. Performance-based sales incentive programs pay employees based on their performance (for example: if a salesperson hits their quota).

2. Cash-based sales incentive programs pay employees based on the amount of money they bring in (for example: if a salesperson brings in $50,000 in revenue).

 3. Commission-based sales incentive programs pay employees a certain percentage of the sales they make (for example: if a sales representative sells a product worth $5000 she gets a straightforward commission of 10%).

‍The Importance of Sales Incentive Plan

Before we move on to the calculation, it's essential to understand the role of a sales incentive plan. A sales incentive plan is a framework or a planned structure to decide how you want to reward your sales professionals. It's a strategic tool that aligns the interest of your sales team with the company's overall objectives. The key components of the sales incentive structure include sales quotas, commission rates, bonuses, and tiered rewards. 

The sales incentive plan is a deep subject and deserves a separate blog. We recommend checking out our guide in the below link to get all the details. 

‍Read now: The Step-By-Step  Guide to Designing a Sales Incentive Plan

‍How to Calculate Sales Incentives

Here is a simple incentive calculation formula to effectively calculate sales incentives for your employees :

‍1. Calculate the Cost of Goods Sold

To calculate sales incentives, start by calculating the cost of goods sold (COGS) for your business. Then subtract any expenses related to selling the product or service—such as advertising and shipping—from the COGS to get what's left over after paying your costs.

2. Divide by the Revenue

Next, divide this figure by revenue from your product or service. This will tell you how much each additional sale would bring in if it were sold at full price. Finally, multiply this number by 100 and add it together: that's your sales incentive calculation!

‍Common Mistakes to Avoid While Calculating Sales Incentives

Calculating sales incentive can be a complicated process especially if you're new to it. It's also common to make mistakes; to help you avoid that, here's a round up of the most common mistakes committed while calculating sales incentives:

1. Not factoring in employee discounts or incentive bonuses.‍

2. Not taking into account tax implications when calculating your sales incentives.

3. Not considering whether the product is taxable or non-taxable when calculating your sales incentives.

4. Misunderstanding what type of commission an employee receives from their employer and how that impacts their earnings potential when calculating their sales incentives (remember, commissions come in two forms: cash and stock).

5. Not having reliable sales commission software to back up, recheck and verify all the payouts and keep all the employee records and performances in check to make efficient decisions.

The Pros and Cons of Sales Incentive

Sales incentive has both good and bad sides. Knowing both puts you in an advantageous position to make the right call:

Pros 

• Motivation: Incentives motivate salespeople, boosting morale and goal achievement.

• Goal Alignment: Incentives align sales efforts with company objectives.

• Performance Improvement: Encourages skill development and better sales performance.

• Competitive Advantage: Fosters healthy internal competition.

• Flexibility: Can be customized to suit company needs.

• Retention: Attractive incentives can improve employee retention.‍

Also Read: Five Hacks For  Performance Improvement

Cons

• Costs: Implementing incentives can be expensive.

• Short-Term Focus: May lead to short-term sales focus overlong-term goals.

• Unintended Consequences: Poorly designed programs can encourage unethical behavior.

• Employee Discontent: Unfair or overly competitive programs can create dissatisfaction.

• Complexity: Administering incentives can be complex and resource-intensive.

• Risk of Burnout: Pressure to meet targets can lead to burnout among salespeople.

‍Conclusion

Calculating sales incentives accurately is recognizing the hard work of your sales team and motivating them to perform even better in the future. However, calculations can be tricky especially when you don't have a formal sales incentive plan. Creating a sales incentive plan is the foremost step that any HR team should perform. It lays down the foundation for long-term success. Once you have that in place, and a sales incentive program, your calculations are going to be fair and precise.

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Find out how Compport can help you manage all your Sales Incentive process, book a demo today!

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Frequently Asked Questions (FAQs)

1. What is incentive compensation, and how is it different from other forms of compensation?

Incentive compensation is a system where employees are rewarded for achieving specific goals or working hard. It differs from other forms of compensation like time based or hourly pay because it's based on outcomes or revenue earned by employees.

2. What are the three broad types of sales incentive programs mentioned in the blog?

The three types are Performance based, Cash based, and Commission based sales incentive programs. Performance based rewards employees for hitting specific targets, Cash based rewards them based on the money they bring in, and Commission based rewards them based on the commission they generate.

3. Why do sales incentives matter, and how do they benefit businesses?

Sales incentives matter because they motivate sales teams, align individual and company goals, boost productivity, enhance employee retention, and foster healthy competition. They can also improve customer satisfaction and drive revenue growth.

4. What's a simple way to calculate sales incentives for employees, as mentioned in the blog?

To calculate sales incentives, start by calculating the Cost of Goods Sold (COGS) for your business. Then, subtract expenses related to selling the product or service from the COGS figure. Divide this result by revenue and multiply by 100 to get your sales incentive calculation.

5. What are some common mistakes to avoid when calculating sales incentives?

Common mistakes include not factoring in employee discounts or incentive bonuses, neglecting tax implications, not considering product tax status, misunderstanding commission types, and lacking reliable sales commission software to verify pay-outs and employee records.