Rethinking Sales Compensation

What happens when the sales leadership team takes a hard look at its sales compensation plan? Do they talk with their calculators? Is a spreadsheet the primary conversation piece? Think about what happens at meetings about sales strategy or sales roles and the question of sales compensation comes up. People start talking about whether the commission rate should be increased or decreased. Comments like, “Let’s put an accelerator in place to drive performance. Maybe we need to uncap the plan, or add a threshold for the low performers,” fly through the room.

The team has just started with the middle of the process and is on its way to a non-strategic answer. Only once they’ve aligned their Revenue Roadmap disciplines should they start to rethink the sales compensation design process.

The illustration below shows the sales comp design process after the C-Level Goals℠ and sales roles (shown here in the red middle circle) have been established.

Sales Compensation Diamond

There are four facets in the process of evaluating and designing a sales compensation program.These include framing the major components of the plan, linking pay and performance, aligning the team and financials, and operating the plan for results. We’ve developed this process over the course of designing thousands of incentive compensation plans. The facets contain steps the organization can use in two passes. First, work through these steps while analyzing the plan, gathering technical, strategic, and behavioral information about the performance of the plan. Then, go back and follow the steps while designing the plan.

We’ll cover the first part of the Sales Compensation Diamond:

Framing the Plan

1. Determine Target Pay. Consider the relevant labor market. The market targeted for talent may be different than the market in which the business competes for customers. Depending upon the strategy, a sales organization may not source people from the same talent pool as its competitors. Within the relevant labor market, a company may choose not to pay at the same level or in the same way as its labor market competitors. The strategy and value proposition to the sales talent are factors that help determine target pay for each role. Target pay for each role will result in a target total compensation (TTC), which will be the starting value that will flow through the design of the incentive plan. Has the organization defined its relevant labor market? Is it aiming toward the organization and roles of the future or is it referencing past strategies or assumptions?

2. Set Pay Mix. Pay mix defines the proportion of salary and incentive at target performance, meaning performance to goal or quota. The total of the salary and incentive at target should equal the TTC for the job. Pay mix will vary by job type in an organization and is driven by about ten factors that include sales process characteristics, types of sale, and types of customers. For example, a role that is focused on new customer acquisition for mid-sized accounts will likely have more incentive pay as a percentage of target total compensation (perhaps 50 percent base salary and 50 percent target incentive) than a role focused on current customer management for major accounts (perhaps 70 percent base salary and 30 percent target incentive). Do pay mixes align by role? Are there any plans with significant pay at risk driving aggressive behaviors that are out of sync with the desired sales process? Are plans with high base salaries creating a pay entitlement culture?

3. Establish Upside Potential. Upside potential is the incentive pay available to top performers, typically the 90th percentile, and is often determined as a multiple of target incentive. Upside is a critical component to help the organization attract and retain the best talent in its market. Define high performance for the organization. Are the top earners really the top performers? Do we significantly differentiate incentive pay for top performers from average performers?

4. Establish Performance Thresholds. Threshold refers to the entry point of achievement where the plan begins to pay incentive.  Threshold usually represents the minimum acceptable level of performance, below which a rep would not typically stay employed with the organization. A company may have a hard threshold, in the case of an account manager with a significant base of retained business. Or it may not have any threshold, in the case of a new business developer for whom every sale is incremental growth. What’s the minimum acceptable level of performance for a rep to keep her job or to earn any incentive? Are underperformers overpaid?

Next we’ll take a look at Linking Pay and Performance Then we’ll cover Aligning the Team and Financials, and Operating for Results.

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 This post was updated on 10/7/19.