Don’t be stuck settling with the top 20% of your sales when real gains can come from the middle 60 by applying the Pareto Principle to your sales incentives. Time for a short history lesson and your action items.
Vilfredo Pareto was studying population and land ownership statistics in 1896 when he came up with the 80/20 rule – a.k.a. the Pareto principle.
One hundred and one years later, British writer Richard Koch published The 80/20 Principle. The book was a reinterpretation of the Pareto principle and extended the idea that the top 20% in any group is likely to produce 80% of the results.
The book, which has sold more than a million copies and been translated into 35 languages, has been called one of the most important business tomes ever written. For anyone whose job it is to analyze sales results – The 80/20 Principle is a must-read.
Not So Fast!
That said, while the analysis is accurate, the theory has holes when it comes to sales incentive programs (no disrespect intended to Mr. Pareto and Mr. Koch!).
Let’s look a little closer at the typical breakdown of talent in sales organizations. Although somewhat generalized, and even a little harsh, sales professionals can often be divided into four performance categories:
Group One: 20% Pareto Principle elites
Group Two: 30% steady, reliable but not spectacular
Group Three: 30% marginal, yet active and interested
Group Four: 20% disinterested low-level
Untapped Potential = Unrealized Profit
Performers in groups two and three, which we’ll call the “Middle 60,” have great potential for growth. And yet, most organizations’ incentive programs leave the Middle 60 uninspired. The quotas are, frankly, unrealistic. The programs are often closed-ended, capped at the Top 50. (Hey #51 – you almost made it, sorry!)
A potential cause of top-heavy incentive structures is the attempt to create a self-liquidating incentive program; whereby the incremental sales of qualifiers generate a significant bottom-line even after the cost of the trips won is factored in.
Research conducted over the last decade proves that paying more attention to the Middle 60 can have a favorable long-term impact on profits, market share, and customer retention. Further, the mathematics of improving the performance of the Middle 60 is compelling because this group is the bulk of any organization’s workforce. Efforts to get the best out of these folks typically yield modest per-person gains, but the collective impact? Well, that can be significant!
So, What’s the Solution?
Do we just lower the quotas so that everyone has a chance of earning a prestigious incentive travel award? Of course not. While this might be popular with the sales team, the bottom-line results would be horrendous. Let’s look at the options with the goals of your incentive program in mind:
Tiered Qualification Program vs. Measured Program
A tiered program creates stages of qualification providing challenging yet realistic targets for participants at all sales levels. These programs often consider each participant’s market potential and set targets accordingly. This is perhaps the easiest way of providing the Middle 60 with a motivating target that will drive sales, yet still, challenge top performers.
If the goal is a program that is completely self-liquidating, then the two or three-tier concept might be your best bet.
However, if your goal is to gain market share that will have an impact on your bottom line long after the incentive program ends, partial liquidation of costs can be considered, and the balance is an investment with obvious payoffs down the road.
Or perhaps you want your team to focus on establishing a new product in the market. Here again, full liquidation may not be necessary. The cost of awarding an incentive to those who don’t fully liquidate the costs can be likened to marketing and advertising spend. But, the key difference in the case of a measured incentive program? The investment has a more defined impact on the objective.
While organizations have different metrics, margins, and objectives, there are many situations when full liquidation is either not necessary or it is simply unrealistic.
Setting effective and inclusive sales goals requires analysis, communications with the target audience, and yes, a bit of elbow grease, but the rewards are worth it. Time spent upfront in establishing objectives and fair targets will motivate a greater percentage of the team, and that, in turn, will yield success and healthier profits.
How to Apply the Principle: Step by Step
Step One: Understand Your Objectives
Take a look at your goals and define them. Are you looking to drive market share, increase sales, drive a specific line of products, or something else?
Does the incentive have to be self-liquidating, or is a portion of the budget considered a necessary investment towards the desired gains?
Step Two: Review Data
What do available sales numbers tell you about your current position as it relates to the objectives?
Analyze previous performance and current market conditions to ensure that the goals required for qualification are realistic and motivating.
Step Three: Engage Your Performers
Have conversations with a good cross-section of performers. Obtaining buy-in is paramount to success. This is the time that you’ll hear real and perceived obstacles to success; work through these so that a motivating, realistic, and profitable target can be set for each level of performer. Fair yet challenging goals create a win-win and positive environment.
Step Four: Keep it Simple
Cut the red tape: Complex rule structures demotivate.
Step Five: Launch with Energy
Sell the excitement! An energetic and motivating launch that clearly demonstrates the willingness of your organization to reward your team for achieving objectives will position you on the path for success — right out of the starting gate. Where possible, engage Senior Leadership in the launch. By demonstrating that they are fully behind the initiative, they will lend caché and adrenaline.
Step Six: Measure, Report and Promote
Keep the performers informed of their progress towards the goal, celebrate successes along the way and continually dangle the carrot in front of your team.
In summary, with careful analysis and the right partner, you can design an incentive program that drives motivation deep into your organization. Don’t settle on the top 20% when your real gains can come from the Middle 60!
This content originally appeared on the SITE Motivate blog.