10 Simple Rules For Improving Your Sales Compensation Plan

10-Simple-Rules-For-Improving-Your-Sales-Compensation-Plan

10 Simple Rules For Improving Your Sales Compensation Plan

As we adapt a new way of conducting business and sales with continued limited in-person contact, hybrid work locations, and curtailed business travel, companies are forced to make short-term changes to allow for disrupted supply chain and shifts in customer demand. As you conduct your business planning for the new year think about the organization’s growth objectives and sales strategy, does your attention turn to questions like:

“Is the sales compensation plan really working?” 
“Can we drive better performance by making improvements to the plan?”

A well-designed and implemented sales compensation program can motivate sellers and drive performance to company goals. An overlooked or poorly designed plan can move the organization in the wrong direction and result in a costly miss in objectives. To correctly develop the plan, understand the core issues, and look to time-tested rules to guide your way.

“What changes can we make to better support our goals without disrupting the organization?”

Top Sales Effectiveness and Sales Compensation Issues

Many sales compensation issues are business alignment issues in disguise. As the company’s markets and strategies change so should the sales strategy, coverage, and compensation. The following sales effectiveness and sales compensation issues are most common to sales organizations. Investigate these areas for ideas on how you might address these issues.

The following sales effectiveness and sales compensation issues are most common to sales organizations. We’ve included some areas to investigate that can provide ideas on how you might address these issues.

Issues and Areas to Investigate

Developing an Actionable Strategy Does the sales organization understand how to execute the strategy on a day-to-day basis? Does the sales compensation plan communicate a clear message about our business priorities?
Increasing Sales Productivity What levers can we pull to increase the capabilities of the sales organization, such as reducing time on non-selling activities? Does the sales compensation plan push sellers in too many different directions?
Selling Solutions Are we selling products to our customers or developing solutions that address their specific business issues? Have we defined what solution selling means in our business and equipped the sales organization with the right tools? Does the sales compensation plan motivate fast cycle selling rather than considered solution development?
Minimizing Channel Conflict Do our sales resources align to the sales process, or do they conflict, lessening our effectiveness? Does the sales compensation plan include measures that motivate these dysfunctional behaviors?
Expanding the Portfolio Are we evaluating the full breadth of opportunities in customer accounts? Does the sales compensation plan motivate sellers to expand our portfolio of products or services in each account?
Building a Sales Culture Is the organization growth-oriented or have we created an environment of mediocrity and entitlement? Does the sales compensation plan drive performance or deliver pay for the status quo?
Paying Top Performers the Most Do we significantly differentiate pay for top performing reps compared to the average rep? Are we overpaying our low performers?
Reducing Plan Complexity Is the sales compensation plan easy to understand? Do reps know how they earn their incentive or is the plan muddled with too many measures and complex mechanics?
Setting Effective Quotas Is the organization reaching its goals overall with 60% to 70% of reps at quota or above? Are quotas set considering market opportunity or are they based on historic performance?
Managing Crediting and Costs Do we have clear crediting rules for sales? Are we crediting multiple reps and channel partners for each sale and driving up costs?

10 Simple Rules

Sales Compensation PlanEvaluating and designing the sales compensation plan can be a daunting task due to its complexity and the implications on the success or failure of the sales organization. It may seem costly to take the step-by-step process of using time-proven and cross-industry best practices, but it will be far less than the cost of missing the company’s sales objectives or losing top salespeople.

1. Align the Plan with the Strategy and Job Roles.
At the foundation of a successful sales compensation program are a clearly articulated sales strategy and coverage model. The coverage model refers to the combination of sales resources such as field sales, telesales, and partners necessary to pursue the sales strategy. Define each sales role in terms of its critical success factors, role descriptions, and competencies. Do the base pay, draw, and performance measures aligned with each job’s actual role, or do pay components reflect a job that has changed over time? The job’s critical success factors should provide direction on target pay, pay mix, and performance measures. Determine the correct relationships between these components based on the top three to five key job priorities for each direct sales, channel management, sales support, service, and management job. These may include role in the sales process, sales cycle, account type, product focus, sales strategy, and management responsibility.

2. Don’t Be a Robin Hood.
The pay mix, the portion of base salary to incentive at target performance, should match each job role. Make sure the pay mix isn’t too aggressive for long and complex sales cycles or too shallow for faster acquisition cycles. Several factors drive pay mix that should consider including the job’s focus on account management vs. account acquisition, buying process complexity, and length of the sales process. In terms of upside potential (the portion of target incentive pay available to top performers) evaluate whether top reps are earning appropriately more than average performers. Depending upon industry, market, and job type, reps in the top 10% should have an upside earnings ratio of one to three times the incentive of an average performer. Are low performers paid too much, resulting in a misallocation of funds to non-producers? Check the plan with the “Reverse Robin Hood Principle” and make sure it’s not taking from the top performers to pay the low performers.

3. Focus on the Right Measures.
Performance measures represent the top sales priorities of each job. These typically include financial measures, strategic measures, and may include leading indicators of success. Do relationships between measures (weights, links, thresholds, multipliers) represent the organization’s priorities? Does the plan communicate objectives to the employee in the clearest way or is the message complicated by unnecessary elements? Best-in-class plans rarely use more than three primary measures. Few have measures that represent less than 10% of the target incentive. Avoid creating a plan that allows reps to pick and choose or creates confusion around the organization’s priorities.

4. Develop a Clear Connection Between Pay with Performance.
At its core, the sales compensation plan is a tool to communicate business objectives and reward for the attainment of those objectives. Does the plan pay for revenue, profit, growth, base retention, or other priorities? Does the plan reward for dysfunctional behaviors or gaming? Tightly link total pay, total incentive pay, and incentive pay for each plan measure to the company’s critical measures of success and clearly communicate how pay is associated with each performance result.

5. Reward for Teamwork and De-Motivate Conflict.
In an environment of complex sales roles and multiple sales channels, it has become increasingly important to ensure the plan promotes congruence among sellers and channels rather than channel conflict. Does the plan motivate direct and indirect channel teaming necessary to execute the sales process or does the plan create conflict between roles? Can the employee significantly influence the team measure, or is the team measure too high level for the employee to control? Test the measures and mechanics to make sure that the plan does not create a recipe for channel conflict on the four major conflict areas of product, sales process, geography, and segment.

6. Check the Plan Mechanics.
Plan mechanics are the inner workings that specify how pay and performance are related across dimensions such as performance and time. Mechanics should be simple and ensure that the plan operates as designed. Determine whether the plan creates a clear line of sight for salespeople so they understand how they’re paid and where they should focus. Is the plan hampered by outdated commission structures or do the mechanics accurately represent performance potential and pay levels for each job and territory? Does the plan pay as much for maintaining the revenue base as for hunting down new business and does it overpay for recurring customer revenue? Develop plan structures that encourage high performance rather than dampen achievement.

7. Know the Economics.
Plan economics are deceptively simple in concept but a challenge to master. Understanding the compensation cost of sales is the first step. The total cost of sales reveals only part of what you’re getting for your money. Look at the components and drivers of the sales and compensation costs. These include cost by strategy (customer retention, customer penetration, new customer selling), cost by product type, cost by customer segment, cost by geography, and cost by job type. The allocation of these costs should mirror the sales strategy and the total cost of sales should fit competitively with the market.

8. Set Equitable Market-Based Quotas.
Setting equitable quotas is one of the major challenges sales organizations are struggling with today. Many organizations fall into the trap of setting quotas based on historic performance, which may misrepresent true opportunity and lower the overall performance and productivity of the organization. Quotas should be set and allocated to the sales organization in a market-based fashion and account for variations in territory size, sales potential, and growth rate. Quality market data on customer and prospect accounts is now readily accessible and can provide organizations with a performance advantage. Do the quotas create “performance penalties” for top performers or support mediocrity? Are the objectives set and allocated equitably? Does the sales organization buy into the quotas with a process that uses the seller’s input? If quotas require future adjustments, are there clear guidelines in place? Is the quota over-allocation from the front line to management adequate or excessive?

9. Get Organization Buy-In Before, During, and After the Plan Design.
Getting the right technical answer on the compensation plan is only part of the battle. To ensure success, the organization must be involved or represented during the evaluation, design, and implementation process. Pull in key executives and the opinion leaders in the organization early in the process to develop shared responsibility for plan development and results. A good plan effectively implemented will produce far better results than a great plan poorly implemented. Many high-performing organizations use a 30, 60, 90 day audit process to check understanding, behaviors, and results from the plan through their sales compensation dashboards. Is there a process in place to communicate plan changes, link them with the company’s strategy, accurately track performance, evaluate plan effectiveness, and make any necessary course corrections? By conducting regular, periodic evaluations and tune-ups along the way, you can avoid reacting to costly business damage and operate a plan that will successfully drive business results.

10. Follow a Proven Evaluation and Design Process.
A redesign of a sales compensation plan is more than a meager re-working of the payout rates and mechanics. Beware of the temptation to jump to the details first, save it to the end of the process. Start by understanding the organization’s sales strategy and the job’s key roles. Then follow a proven process to evaluate and design the plan. Follow the Sales Compensation Design Process through two passes. First, evaluate the plans qualitatively and quantitatively on each of the components. Then design the plans following the process, which continues with how to implement and manage the plan on an ongoing basis through the year. Getting into an evaluation and design cycle like this will allow you to proactively manage the program each year.

Taking Action- Get the Sales Comp Report Card

The Sales Comp Diamond

As you get started, identify your organization’s issues in the areas of sales compensation and sales effectiveness, and remember that they are usually connected. Then follow the rules during your evaluation and design process. To begin, it’s important to understand the strengths and weaknesses of your sales compensation program. One of the most effective ways to get an initial, objective reading is to use a sales compensation report card that grades each major component of the plan. The report card will provide your organization with direction on where to focus and in what priority. With those objectives at hand, you’ll be ready to conduct a rigorous evaluation and plan design process and develop a program that will support your business objectives.