Designing Sales Compensation For ROI
Almost everyone involved in the sales compensation plan, at one time or another, asks about the ROI of the plan. In order to answer that question, we have to evaluate how the sales compensation plan is designed.
Luckily, sales compensation design follows a predictable process. We begin by defining sales roles and clearly articulating the sales strategy, and from that foundation, we build out the components for the plan, including answers to these fundamental questions:
- What kind of pay are we going to deliver to a particular job to be market competitive? How are we going to develop that pay mix in terms of the base salary and incentive ratio at target? (The pay mix will vary by the sales process and the sales strategy.)
- How much upside should somebody earn for top performance?
- How much downside should they earn for lower performance?
- What types of measures should we put in the plan to connect performance and pay? Should we measure revenue, profitability, etc.?
- How do we build an effective plan without overloading it? How do we keep the message simple, and stick to the rule of three or fewer measures, with no measure less than 10% weight of target incentive?
Once we’ve answered these questions around sales roles and strategy, we can look at the mechanics of the plan. All too often people jump to the mechanics of the plan first, before defining the roles and strategies. Calculators come out, and people start adjusting commission rates. But that’s actually several steps into the process, when we start talking about the specifications to connect those pieces together.
It’s also important to look at quota setting and objectives, as well as governance –how we operate and evaluate the plan on an ongoing basis.
Looking at sales compensation as the sum of all of these elements, we can see several hot buttons in terms of what might drive ROI:
- The amount that we’re going to pay in the market.
- The pay mix: the amount that we’re going to pay in fixed versus variable costs.
Some CFOs debate how much money they actually want to commit versus tie to
performance. Another common debate between CFOs and sales is why we can’t put
more pay at risk and have less fixed pay. - The upside and threshold. How much are we going to pay our top people and how
little are we going to pay our bottom people? Do we employ the Reverse Robin
Hood Theory, which takes from the underperformers to pay the over performers? - The mechanics. Accelerators are a driver of costs and ROI.
- How we set our objectives and goals, relative to target pay, and how we allocate
those goals out to the organization. What we expect back is a big driver of
ROI.
Check out our report entitled What’s Your Sales Comp ROI, which features a panel discussion of experienced sales executives on evaluating the return on sales compensation.
Download the PDF here: The Art and Science of Quota Setting.
We believe the findings in this report will provide valuable insight for your business. If you have questions or require assistance in addressing these topics or other sales effectiveness challenges in your organization, please contact us at www.SalesGlobe.com or (770) 337-9897.
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