Risk Mitigation in Sales Compensation Design
Whether or not the idea of “Growth at all costs” is dead, organizations are nevertheless revising sales incentive plans to limit incentive costs if organizational goals are missed. Sales incentives and commissions are a significant contributor to Operating Expenses and are early candidates for cost-cutting areas. Fortunately, organizations can protect against high costs while maintaining target pay levels, and still provide significant incentives for high performance.
There are multiple options to reduce the overall cost of sales compensation:
- Reduce pay levels: On-Target Earnings (OTE), target incentive, and/or base salaries.
- Include thresholds or minimum performance levels for sellers to earn incentives and/or commissions.
- Introduce payout caps to limit incentive payouts based on overall performance, deal size, etc.
The guiding principles for optimizing compensation plans to protect against downside include:
- Do not resort to reducing OTE or base salaries unless absolutely necessary due to potential disruption to morale.
- Use thresholds or lower payout rates for low performing individuals (those who achieve less than 100% attainment to quota), therefore reducing payouts to low performers (this is the main protective measure against underperformance).
- Increase accelerator rates for high performing individuals (those who achieve greater than 100% quota attainment).
These changes can be made cost-neutral, meaning that the estimated cost of the old and new plans remains the same if targets are achieved. Cost modeling (using analytics to estimate sales compensation costs under a range of theoretical performance scenarios) is a critical step to ensure the plan changes result in a favorable cost profile.
Not to be overlooked, cost-saving measures in compensation plans usually have a negative impact on the sales organization (disgruntled employees, low morale, decreased motivation, and turnover). For this reason, organizations must make tradeoffs (positive adjustments) to limit the potential impact of negative adjustments.
Especially in turbulent economic climates, companies will limit the risk associated with poor performance. Fortunately, there are approaches to achieve this while maintaining (or enhancing) rewards for high performers and motivational impact of sales incentive plan designs.
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.
Senior Manager, Consulting Services
Seasoned expert in consulting, sales compensation, and revenue operations, with extensive experience in SaaS, manufacturing, and private equity, known for his strategic insights and ability to drive revenue growth through tailored solutions and effective team leadership.
