We recognize the critical role that sales compensation plays in driving growth and maximizing performance. We also understand that creating a top-tier sales compensation program is essential for companies that want to retain high-performing salespeople and boost sales growth. Our team has partnered with many clients to design and implement sales compensation plans that align with their business objectives, while simultaneously rewarding the sales reps team for their performance. This article is designed to walk you through some of the steps we take when helping companies design best-in-class sales compensation programs.
Understanding The Company Strategy
When companies approach us with a sales compensation challenge, we understand that the compensation plan may not be the root of the problem, but a symptom of something bigger. Therefore, we start by gaining an understanding of the company strategies, because after all, the strategy should be driving the compensation plan and not the other way around.
When reviewing the company strategy, we use our Revenue Roadmap, which identifies 4 major competency areas and 16 disciplines that must connect for the organization to grow profitability. While we won’t get into all the disciplines, below is a brief description of each layer and how they help us to identify the company strategy.
Layer 1: Insight
The first layer of the revenue road map is Insight. The goal of the Insight layer is to inform the organization about customers, the market, competitors and how the business is performing. In this step, we help the organization to gain an understanding of the voice of the customer, the macro environment, competitor highlights as well as the performance of the business. This understanding will help to drive certain decisions regarding Sales Strategy (the second layer).
Layer 2: Sales Strategy
The goal of this layer is to define the sales organization action plan to achieve its goals. The Sales Strategy will help to drive decisions by:
- Defining the products and services being offered.
- Organizing customers and prospects through segmentation and targeting.
- Differentiating the organization from its competitors through its value proposition.
- Developing the organization’s approach to the market.
Layer 3: Customer Coverage
The third layer is Customer Coverage. In this layer the company will identify how the organization will use its channels, roles, processes and resources to go-to-market.
Layer 4: Enablement
The final layer to consider is Enablement. This layer supports the upstream disciplines within Customer Coverage, Sales Strategy, and Insight. The enablement layer:
- Aligns sellers to the sales strategy through incentive compensation and quotas.
- Defines the current inventory of talent to help determine how the organization will attract and retain employees.
- Builds the capabilities of the organization through training and development.
- Enhances the effectiveness of all layers by providing leverage through tools and technology.
Outlining the C-Level Goals
The next step in our process includes outlining the company’s C-level goals. These goals help determine the priorities for the organization, while simultaneously providing clarity for how the sales compensation plan will be designed and the behaviors it will drive. The 5 areas of the C-level goals include the following:
- Customer: describes priorities in terms of buy types and segments.
- Product: identifies which products and/or services will get the most focus.
- Coverage: articulates the major methods of matching sales resources to each customer segment.
- Financial: specifies the company’s monetary goals such as profit and/or revenue growth.
- Talent: defines who the sales organization needs in its coverage roles to reach its goals
Once the business objectives and C-level goals are clearly outlined, it is important to determine which roles are eligible for the sales compensation plan. To be eligible for sales compensation, we look at factors such as revenue generation and the complexity of the sales process. Additionally, roles that are eligible for sales compensation plans are often assigned sales quota, revenue targets or customer acquisition metrics.
Once we understand which roles are eligible for sales compensation, we then move into plan design. As we are working on the design, we use a tool we developed called the Sales Compensation Diamond. This tool is divided into four parts including framing the plan, linking pay and performance, aligning team and financials, and operating for results. This section will cover the first two sides of the diamond, including framing the plan and linking pay and performance.
Total Target Compensation
The first thing we look at is target total compensation. Target total compensation consists of base salary and target incentive. A base salary pays for the core responsibilities of the job like being a good corporate citizen and some level of sales performance. Target incentives on the other hand are the amount of pay reps can earn based on the performance of reaching goals or quotas. Some sales compensation plans have no salary but instead have a draw which is a predetermined recurring amount provided to the rep as cash flow while working on earning incentives. Typically, when draws are concerned earn-out arrangements where incentive pay is applied to the draw amount until the draw is fully recovered.
After the total target compensation is determined we move to pay mix which is the ratio of base salary to total compensation versus incentive to target total compensation. For example, if a sales rep pay mix is 70/30 and they have a target total compensation of $100,000, then 70% ($70,000) is their salary while the other 30% ($30,000) is incentive or the amount of pay at risk.
Pay mix varies by job type and is driven by factors including but not limited to sales process characteristics, types of sale, and types of customers. For example, a role focused on new customer acquisition for mid-size accounts may have a 50/50 mix while a role focused on current customer management for major accounts may have a mix of 70/30. Sales roles that involve more direct customer interactions may have more pay at risk to incentivize goal achievement.
Upside potential is the pay available for top performers. Typically, this is reserved for those in the top 90th percentile. This is crucial in attracting and retaining top talent.
The next part of the plan design is establishing performance thresholds. Performance thresholds are the entry point of achievement where the plan starts to pay incentive. Thresholds typically contain the minimum acceptable level of performance. This threshold may vary depending on the type of role. For example, an account manager may have a hard threshold with a significant base of retained business or a new business developer may have no threshold as every sale is considered incremental growth.
Measures and Priorities
As we move into the second part of the SalesGlobe Compensation Diamond, we start to look at how to link pay and performance. First, we look at measures and priorities. Performance measures define the focus area that is most important to each role. Far too often we see companies creating sales compensation plans that contain measures that should be core expectations of the job. Measures included in the plan should be the top two or three financial/strategic priorities that align to the company strategy. It is also important to ensure sales reps have control over the measures in their plan.
Levels & Timing
Once the measures are determined, it is important to understand at what level the measures will be applied and when they will pay out. These decisions will have a direct impact on the sales team behaviors. When we talk about levels, we are talking about whether the measure should be tracked at individual, team, division or regional levels. Measurement levels should match the sales rep’s ability to impact the sale.
Timing simply means when the incentive will be paid. Incentives should be paid as close to the event as possible and match the rhythm of the sales cycle.
Once measures have been agreed upon, it is time to think about the plan mechanics. We tend to see sales executives jumping straight to this step without first working through the previous steps, which is not considered best practice.
Mechanics create the connection between performance and pay, and can be divided into three types of mechanics: Rate Based, Quota-Based, and Link.
- Rate-Based mechanics typically pay a certain percentage of revenue or gross profit, or a certain dollar amount, per unit of sale. Rate based mechanics are often known as a commission.
- Quota-Based mechanics typically pay a target incentive for reaching a specific quota or goal. These types of mechanics may scale its payout above or below the established performance levels.
- Link mechanics create relationships and interdependency between two measures or mechanics.
It is important that the mechanics in a sales compensation plan are not only easy to understand/calculate, but also create alignment to goal attainment.
SalesGlobe is committed to helping our clients design, implement, and manage effective sales compensation plans that drive growth and maximize performance. Our expertise and proven approach can help you design a sales compensation plan that aligns with your business objectives and motivates top-performing sales representatives. Contact us today to learn more.
SalesGlobe is a leading sales effectiveness and data-driven creative problem-solving firm. We specialize in helping Global 1000 companies solve their toughest growth challenges and helping them think in new ways to develop more effective solutions in the areas of sales strategy, sales organization, sales process, sales compensation, and quotas. We wrote the books on sales innovation with The Innovative Sale, What Your CEO Needs to Know About Sales Compensation, and Quotas! Design Thinking to Solve Your Biggest Sales Challenge.
Consultant with SalesGlobe
Result-oriented, dedicated leader with tactical and strategic compensation experience.