How does budget influence your sales incentive structure?

Creating an effective sales incentive structure is both “art” and “science”, insightfully driven, creatively constructed and tailored to fit specific organisational challenges or goals.

A good incentive structure motivates performance and must tap into participants' intrinsic motivation, leading to a stronger commitment to success. With so many levers and buttons, finding the right incentive structure for your organisation and workforce can be daunting.

Budget considerations are always a driving factor in incentive structure decisions. In this article, we’ll explore budgeting for sales incentives, comparing open-ended and closed-end budget incentive structures, their advantages and disadvantages. We’ll also share top tips for designing a sales incentive structure and critical steps to formulate a robust, measurable sales incentive plan.

Budgeting rules of thumb

A successful sales incentive achieves results and doesn’t just “pay out.”

When determining the appropriate incentive structure, rewards must be budgeted to grab participants’ attention and meet programme objectives while generating a positive ROI.

For direct sales incentives, rewards should value between 2% to 5% of the average total compensation of the participant base during the programme period. For instance, if the average total compensation is $80,000 a year and you’re designing a three-month programme, the ideal reward budget should be:

$20,000 ($80,000 per year divided by 4) x 2-5% = $400-$1,000 per person

For indirect sales incentives, such as those in the channel, reward budgets are more driven by margin available, distribution model, and regional and product nuances, making percentage rules of thumb more challenging.

Other guidelines include:

• 1% to 5% of total sales revenue for the programme period
• 6% to 10% of incremental sales revenue over historical base period of the same timeframe
• 12% to 24% of incremental profit from revenue during programme period
• 20% to 50% of the savings in a cost reduction programme

Where these budget levels are available, the most impactful incentive structure is open-ended.

However, if the forecast reward and available budget don’t align, a closed-end budget incentive structure is more appropriate.

Other factors to consider

Outside of percentages, several other factors can influence the right incentive budget:

• Compensation and standard of living: While it’s essential to meet basic hygiene factors for motivators to be effective, small luxuries can be impactful across different income levels and economic conditions. Non-cash rewards and recognition eliminate monetary concerns and generally enhance performance.
• Importance of the products: The margin available on a product might not fully capture its market potential. Sometimes, the need to meet market demands and drive sales can outweigh the margin, especially for new products targeting new customer segments, which may require more incentives compared to established products.
• Effort required: High-demand, easy-to-sell products may need lower rewards than those with longer sales cycles or more barriers.
• Product familiarity: New or unfamiliar products might need higher rewards and additional learning resources.
• History of incentives: In order to continuously drive improved performance, historical incentives and their reward levels / formats must be considered and should influence the strategic approach you take.
• Loyalty objectives: Utilising fast start reward opportunities can effectively cut through the noise in crowded loyalty programme markets. However, for indirect channel programmes aimed at fostering long-term loyalty, maintaining consistent budget allocation to strategic priorities is crucial.

What are open-ended budget incentive structures?

Open-ended budget incentive structures often produce stronger results, as participants earn rewards based on performance, often linked to personal objectives and past performance. This structure motivates individuals to push for higher results without the constraint of a reward ceiling. Idiosyncratic fit plays a crucial role here, as it allows individuals to feel uniquely suited to their rewards, enhancing the effectiveness of open-ended structures. This sense of personal alignment makes participants feel they can achieve without barriers.

While this method can significantly boost long-term performance and morale, it carries the risk of exceeding budget expectations. Mitigating this risk requires careful planning and monitoring.

Four basic open-end structure formulas

•  Rewards from Dollar One (or Unit One)
  • X amount of Award Points, per dollar or unit sold
  • (Optional) Y amount per dollar or unit over objective where Y is a multiple of X (e.g. 2X, 3X)
• Retroactive rewards from Dollar or Unit One
  • Once objective has been reached, X amount is awarded for each dollar or unit sold
  • (Optional) Y amount per dollar or unit over objective where Y is a multiple of X (e.g. 2X, 3X)
• Step up rewards from Dollar or Unit One
  • X amount per sales increment up to objective
  • Y amount per sales increment at 100% to 104.9% of objective (note: range may vary based on specific rules)
  • Z amount per sales increment at 105% to 109.9% of objective (note: range may vary based on specific rules)
  • Usually a total of 5 “steps”
• Rewards for Over Objective Only (reward only Incremental Sales)
  • Earn X per each sales increment over objective

Advantages of open-ended incentive structures

• Maximised motivation: Participants are highly motivated, leading to the best results.
• Flexible awards: Rewards can be set as a fixed percentage of sales or incremental sales generated. Incentives can often be categorised as ‘self-funding’.
• Sustained performance: Encourages strong performance behaviours, ensuring sales continue at higher rates even after the reward period ends.
• Increased engagement: Open-ended incentives keep participants engaged throughout the entire programme, as they know their efforts will be continuously rewarded based on performance.
• Greater flexibility: These structures allow for adjustments based on individual performance, making it easier to tailor incentives to different levels of achievement.
• Enhanced accountability: Open-ended budget incentive structures leverage idiosyncratic fit, making participants feel uniquely recognised. This personalised approach boosts ownership and responsibility, driving higher performance.
• Enhanced morale: Reward recipients experience gratitude and loyalty towards the sponsor. When performance falls short of reward thresholds, participants can accept responsibility without harbouring negative feelings towards the sponsor. In contrast, closed-end contests with significantly more losers than winners often generate negative sentiments.
• Improved product knowledge and skills: Participants are motivated to learn more about the products and services they are selling to maximise their rewards. This enhanced knowledge and skill set can lead to better performance even after the incentive period ends.

Disadvantages of open-ended incentive structures

• Cost unpredictability: Despite engaging in historical performance analysis and predictive data modelling, achieving absolute predictability of performance levels remains challenging. This can make it difficult to control costs, particularly in programmes that unexpectedly achieve high levels of success.
• Need for contingency planning: Managing potential budget overruns requires careful contingency planning. Incentive structures inherently link performance to rewards, motivating the sales team to achieve specific business objectives.
• Risk of participant disengagement: Offering uncapped reward potential can lead to top performers disengaging once their personal reward goals are met. To mitigate this, layering recognition-based rewards can motivate continued engagement beyond tangible reward goals.
• Administrative complexity: Managing an open-ended incentive programme can be administratively complex, requiring continuous monitoring and adjustments to ensure fairness and effectiveness.
• Potential for short-term focus: Participants might focus on short-term gains to maximise rewards, potentially neglecting long-term strategic goals.

What are closed-end budget incentive structures?

Unlike open-end-incentive structures, closed-end budget incentives set limits on the total amount of incentive spending. While it provides financial predictability, a closed-end budget incentive usually pre-supposes a contest of some kind and often leads to incentive rules that reward small portions of the audience.

How to get the biggest impact from closed-end incentive budgets

Closed-end programmes are not bad; they simply are not as effective as open-end structures. Sometimes, however, they are unavoidable. For instance, your corporate budgeting culture only permits fixed budgets or when the budget available simply isn’t enough to support an “all can earn” structure.

Closed-end incentive structures usually are budgeted to reward about 30% to 40% of the participants. If a closed-end structure rewards 20% or less of programme participants, most, if not all, of the rewards will likely go to the top 20% of participants depending on the rules structure.

Most of the remaining 80% will quickly realise this and will not be motivated by the incentive programme.

Consider your objectives, if your intent is building relationships and networking with your very best performers then a high-ticket event experience may achieve what you need. However, most of the time you will be looking to motivate the middle 60% to attain the greatest growth. An example of how to do this could be:

• Top 10 performers earn $1,000 in award points
• Next 20 performers earn $600 in award points
• Next 40 performers earn $400 in award points
• Next 130 performers earn $100 in award points

Since there will be a total of 200 winners (40%) out of 500 participants, most people will feel they have a chance to win and, as a result, will participate.

Advantages of closed-end incentive structures

• Controlled budget: Fixed award budgets eliminate the risk of overspending, ensuring financial predictability.
• Strong motivation: Rewarding 30-40% of participants can be a powerful motivator, driving good results.
• Sustained performance: Encourages solid performance behaviours, helping sales continue at higher rates even after the reward period ends.
• Targeted engagement: Typically rewards the top 20% and some of the middle 60% of participants effectively motivating the best performers.
• Predictable costs: The fixed budget allows for precise financial planning and avoids unexpected expenses.
• Simplified administration: Easier to manage and administer compared to open-end structures, as the number of rewards and participants is predetermined.
• Focus on excellence: By rewarding top performers, it fosters a culture of excellence and high achievement.

Disadvantages of closed-end incentive structures

• Limited reward scope: Budget constraints prevent rewarding every eligible activity, potentially leaving some efforts unrecognised.
• Reduced recognition frequency: Smaller budgets mean eligible activities are recognised less frequently, decreasing programme effectiveness.
• Perceived effort vs. reward: Participants may feel that the effort required isn’t worth the chance of receiving an award, leading to reduced motivation.
• Legal challenges: Some closed-end structures, like sweepstakes, pose additional legal considerations that need to be managed carefully.
• Potential demotivation: Participants who do not receive rewards may feel demotivated, negatively impacting overall morale and engagement.
• Short-term focus: Participants might prioritise short-term goals to win limited rewards, potentially neglecting long-term strategic objectives.
• Equity concerns: Concentrating rewards among a small group of top performers can create perceptions of unfairness, which may demotivate other participants.

Incentive mechanics for open or closed-end budget incentive structures

With these 9 proven open and closed-ended incentive structures, you’ll be able to run an unlimited variety of incentives for your direct and indirect sales teams:

Great for open-ended incentive structures

• Do This Get That: A simple sales incentive structure where participants are awarded each time they meet specific criteria.
• Balanced Mix: A ‘Do This Get That’ structure where participants must sell multiple products and/or perform a variety of activities to earn.
• Accelerator: A ‘Do This Get That’ sales incentive structure where payouts increase (accelerate) as key milestone levels are met.

Great for closed-end incentive structures

• Break the bank: Participants earn a portion of a prize pool on a first come-first earned basis, based upon defined sales/activities; when the pool of rewards runs out, the promotion is over.
• Sweepstakes: A ‘Do This Get That’ structure with a chance to earn a reward (probabilistic). People tend to be over-confident in their chances of winning even when presented with mathematical odds.
• Leagues and leaderboards: Eligible participants are ranked on the defined programme metric(s) at one or more pre-set times; the number of reward earners is determined at the start of the programme.
• GoalQuest®: A proven pay-for-performance, all-or-nothing structure where eligible participants self-select a goal at the start of the programme; the higher the goal level, the greater the potential reward.
• Learn and earn: Simple activity-based structure that rewards participants for successful training completion.
• Plateau/Tiered: A simple incentive structure where 3-5 levels are predetermined; participants are rewarded based on the level they achieve at the programmes end.

Seven steps to structuring an incentive plan that works with open or closed-end incentive budgets

Incentive structures can take many different forms, depending on the company, its industry, their overarching objectives and the structure of the teams. These are our seven critical steps when structuring an incentive plan:

• Define clear goals: Align incentives with business objectives and desired outcomes. For example, are you looking to drive sales, change a behaviour, implement a new process or motivate your team? Be clear on what outcomes you are looking for and the design accordingly.
• Identify the metrics: Decide on the specific metrics which will be applied to measure performance. For example, metrics for an incentive that is aiming to increase sales might seem straightforward – measure sales. But consider the steps to that outcome also – can you incorporate measures that incentivise the steps to the sale?
• Understand your team: Tailor incentives and rewards to what motivates your employees - reward, recognition, or career growth. Be aware that most people will say cash is their biggest motivator, but multiple research studies prove in fact that recognition and experiences are far more effective in driving behaviour change.
• Choose the right incentive mechanics: In environments where you are running multiple incentives, try to avoid the hedonic treadmill effect by changing up your structures to sustain long-term engagement.
• Agree the reward schedule: Decide how frequently you want to issue rewards. Consider the type of reward, duration of your incentive programme and how reward issuance can help maintain engagement and drive momentum in your programme.
• Communicate the incentive: Ensure your team fully understands the scope of the incentive and the goals they must achieve. Communication is another key tool in ongoing engagement so don’t overlook the importance, including communications throughout your programme. In fact, due to goal gradient theory, ramping up your communication frequency in the latter stages of your incentive or as goals are close to being achieved can be a very effective technique in accelerating performance outcomes.
• Measure its effectiveness: Review, evaluate and adapt the incentive accordingly to ensure it remains motivating and attainable over time. Consider ROO, ROI, engagement and participant feedback in your measurement to ensure you have a rounded perspective of impact.

Discover a sales incentive structure that works

At BI WORLDWIDE, we bring decades of expertise in helping global businesses reshape and enhance their sales and channel incentives, maximising both ROI and ROO. Our solutions cater to diverse audiences, supporting incentives for both direct sales teams and complex indirect sales channels. Whether your goal is to drive performance or foster loyalty, our advanced technology frameworks and aspirational global rewards marketplace provide the ideal blend of mechanics, communication, measurement, and rewards tailored to your incentive budget.