For performance-based pay to be effective, companies have to think about how to improve sales through the financial incentives they offer.

A recent Harvard Law School blog post suggests that “performance-based pay can better align incentives between the company and individual, potentially leading to higher performance and improving the company’s bottom line.” But the key is understanding how to improve sales with that performance-based pay.

What is performance-based pay?

Performance-based pay is any financial incentive offered to an employee apart from standard wages. These incentives usually involve reaching certain targets, like sales quotas or “management by objectives” (MBOs), and are frequently paid out by way of commissions or bonuses. These types of incentives have been relatively common in the sales industry for years, but previously the primary focus was on how to motivate salespeople rather than on how to improve sales.

For example, car salespeople are traditionally paid only via commission. If they don’t sell, they don’t get paid. Of course, that creates plenty of incentive for the salesperson to do a good job. However, it also puts the employee’s focus entirely on making a sale to get paid. This can hinder the number of sales because the employee may neglect new models, push a sale too hard on a customer who isn’t ready, or sell less expensive models instead of promoting the lines that will generate more revenue for the company.

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how to improve sales with performance based pay

The changing face of sales

For this and other reasons, sales isn’t just about earning commissions anymore. Progressive leaders in sales also tie performance to company revenue, teamwork, and rewards for going beyond the minimum.

Let’s go back to our car salesperson example. If, instead of commission only pay, you pay that salesperson a salary of $40,000 a year, it takes some of the stress off of having to make a sale to receive a check. Of course, there’s still plenty of money to be made through commissions, but now the salesperson can focus on actually selling rather than on his or her own bottom line. This tends to motivate employees while also improving dealership revenue streams at the same time.

how to improve sales with performance based pay

Management by objectives

Another incentive that’s becoming more common across the sales industry is MBOs. The primary difference between MBOs and commission is that MBOs require meeting objectives rather than reaching sales quotas. (These two types of incentives can also be used together.) So a car salesperson may be asked to write five blog posts in a month promoting a new product line, and if he or she does so effectively, they receive a bonus on top of standard wages and commission.

MBOs may be an even better answer than commission when it comes to discovering how to improve sales, particularly in an industry that relies heavily on the latter. The reason is that well-written MBOs, while results-oriented, should enhance an employee’s career growth in addition to driving productivity and revenue for a company. If one of an employee’s MBOs is to attend training on unique or unusual sales techniques, that’s bound to result in a win-win situation, even if it costs the company a couple hundred dollars.

how to improve sales with performance based pay

Risk versus reward

Despite knowing how to improve sales through commissions and MBOs, the reality is that performance-based pay can sometimes backfire for managers. In the commission example above, performance pay can focus too heavily on the individual and undermine teamwork and cohesion within a company. MBOs can sometimes be too vague and therefore difficult to interpret, which can result in pay disputes. And if an employee doesn’t meet his or her objectives or quotas, they can become discouraged and demotivated, which can have an adverse impact on employee engagement and retention.

It’s important, then, to make sure that any performance-based pay is reasonably achievable without being easy. MBO targets should use “SMART” objectives (Specific, Measurable, Achievable, Relevant, and Timely) to avoid vagueness and to improve measurability. Commission goals should challenge an employee to do well, but without being so high the employee has no hope of reaching them within a given timeframe.


Beyond the bottom line

If you want to understand how to improve sales through performance-based pay, the first step is realizing that incentives can’t be about a single bottom line. You have to take multiple factors into consideration, including revenue generation and employee rewards. Otherwise, you’ll run the risk of having a team that works for themselves more than they work for you, which will almost always result in lagging sales and stagnant engagement.

Leverage incentives to work to the advantage of both the employee and the company, and you’ll win on all fronts.

lead-managerlead-managerEnhance performance-based pay through sales automation. Schedule a free demo of our lead management software to help you maximize your  success!

Have you had performance-based pay before? How did it help improve your revenue? Tell us about it in the comments below.