Leading vs Lagging Indicators
Are You Using leading or lagging indicators of sales performance?
I am frequently asked for ideas on how to more closely align incentives and rewards to the desired behaviors when designing a sales incentive plan.
It’s a logical question. You want your sales incentive plan to drive the behavior you need in the field. Therefore, you need to reward that behavior right?
Yes & No
At a basic level – Sales management want to see an increase in the quantity and quality of customer-facing activity. This could be measured in terms of customer visits, proposals presented, conversion rates etc – the LEADING indicators of sales success. Or it could be measured in terms of Purchase order value, gross margin value, revenue, cash collected, net profit etc – the LAGGING indicators of sales success.
So the issue is – should you reward the leading indicators, the lagging indicators or both?
Most managers would agree you need a solid weighting on the lagging indicators. After all, it’s the purchase orders and cash coming in that is paying the commissions and incentives. The debate gets heated around what weighting should be applied to the front end – the leading indicators.
I don’t pretend to have a “correct” answer. Not because I am a fence sitter. But because different businesses with different HR strategies will have different decisions to make.
What I can offer is some key points for thinking this through.
The first point planners need to understand is that their current incentive plan currently sits somewhere on a spectrum in terms of leading v lagging. Think of the most immediate leading indicators on the left-hand side and the longest lead time lagging indicators on the right-hand side.
For example, monthly sales revenue is regarded as a lagging indicator of success. But annual sales revenue is further to the right of that and Annual profit would be further to the right again. Invariably we make trade-offs when we design incentive plans. If we go too far to the ‘right’ (this is not a political metaphor but for incentive compensation perhaps there is a bit of “left and right wing” going on here?), we alienate our sales force – they’ll “starve” before they get paid for their sales success. Likewise, if we go too far to the left – the danger is that the financial foundations of the plan are undermined. We pay for a whole bunch of activity but the profitable sales revenue is falling well short – so our cost of incentive increases dramatically.
So the second point is to go back to the core purpose of your plan. If aligning sales costs to sales revenues is your number one goal then you should not be weighing incentive dollars on pre-sales activity such as proposals or customer visits. You also need to look at your measurement systems. If the measurement of leading indicators is not robust or prone to manipulation – you should be steering clear of leading indicators.
So I tend to be a bit “right wing” on preferring lagging indicators over leading measures of sales performance.
Your preferences will be influenced by your unique business drivers and your own guiding principles. The challenge as always is to get everyone on the same page.