hkp.com spoke to hkp/// group experts David Voggeser and Joachim Kayser about the challenges of developing effective sales compensation systems, in particular the use of hard and soft targets.
What is the difference between hard and soft targets in sales?
David Voggeser : Soft targets are used to show salespeople what they should do in order to achieve actual sales. Employees need to know what approach to take.
Joachim Kayser: Hard targets, on the other hand, form the backbone of sales performance and are always clearly measurable. They include targets such as sales revenue, margin contribution, incoming orders, the number of new customers, repeat purchases, and so on.
It is often said that soft targets reflect actual performance where the purchase decision is a lengthy process.
Joachim Kayser: That's right. For example, in large-scale construction projects such as power stations, oilrigs and refineries. In such cases it can make sense to reward interim targets.
Are soft targets necessary in order to achieve the corresponding hard targets? What is your experience working with clients?
David Voggeser: Many firms define sales performance and create incentives on the basis of the number of items sold, sales revenue achieved, and so on. To correct this somewhat one-sided perspective, they then introduce soft targets, too. That makes perfect sense: You need to look at the "how" as well as the "what" when it comes to selling.
Joachim Kayser: You need to strike a balance. That balance will differ between industries, product groups and even companies. It's no use to anyone if the soft targets are met but sales revenue and profits are down.
So the biggest drawback of soft targets is that they may create incentives for goals that have no financial impact.
David Voggeser : Often firms spend money on targets that do not directly help the business. In sales the key thing is actual sales success, which means selling products and services profitably. If you create financial incentives for soft targets, you can end up with high sales costs but no sales volume.
Joachim Kayser: Only the most important targets should be anchored in the compensation system. The firm gains nothing if sales staff are rewarded for over-fulfilling their client meeting quotas but those clients don't actually buy any of the firm's products.
Are hard targets more important than soft targets in sales?
Joachim Kayser: Yes. At the end of the day, the sales department is not there just to serve its own needs. Like many other parts of the organization, its job is to help achieve the corporate goals. Soft targets are necessary…
David Voggeser: … as a step towards ultimately achieving sales. If you visit a lot of customers, then the chances of securing a new order increase. If you work well with your colleagues, you lay the foundation for the success of the whole team.
Yet people are often skeptical about including soft targets in the compensation system.
David Voggeser: We come up against that a lot in our work with clients. On closer inspection, however, it often turns out that the firm is using its soft targets to show sales staff how they should work. They are confusing steering with leadership – and that is asking for trouble.
What do you mean exactly?
David Voggeser: Good sales people know what they have to do in order to be successful. If they can meet their individual targets by visiting just a few clients, then you shouldn't force them to fulfill a specific quota for client meetings just so that they can meet the compensation requirements.
So, what should you do?
Joachim Kayser: Managers need to provide appropriate coaching. They should guide the salesperson using soft targets. The sales compensation system can't do this, as its job is to reward hard sales.
David Voggeser: If salespersons are failing to meet their final sales targets on an ongoing basis, then the question is rather whether they are really suited to the role. And that's not a problem you should try to solve using the compensation system.
One common argument for including soft targets in the sales compensation system is that it creates financial sanctions for undesirable behaviors.
Joachim Kayser: In the case of undesirable behavior – as long as it's not immediately damaging for the firm, of course – the manager is the only person who can help. Behavior that cannot be tolerated should be handled via disciplinary actions. That can include escalating the matter, giving the employees an official warning, excluding them from compensation increases, or ultimately letting them go.
What do you recommend, then?
David Voggeser: Instead of spending money on soft targets, firms should spend their money effectively – on training sales managers and rewarding successful salespeople who meet their hard targets.
Finally, what about sustainability – another hot topic in sales.
Joachim Kayser: Sustainability certainly is an important topic. Sales must be structured in a sustainable fashion with regard to customer satisfaction and retention. Sales activities must not go against the firm's compliance guidelines. Compensation should not focus just on the short term, but also – where appropriate and feasible – take a long-term perspective.
But isn't that precisely where soft targets come in?
Joachim Kayser: Yes and no. Customer satisfaction, recommendations, repurchase rates and the like are all important indicators for long-term performance. But they don't have necessarily to form a part of the sales compensation system. They can also be used as key indicators in the sales steering cockpit only, for example.
David Voggeser: Here, again, it is important that compensation does not replace leadership. Soft sales targets should be controlled by means of leadership, for the reasons outlined above. Compensation is just a means of providing leadership with additional support.
Mr. Kayser, Mr. Voggeser, thank you very much!