March 06, 2017
by Mark Donnolo, Managing Partner, SalesGlobe
The sales compensation plan is one of the single largest expenses a company will incur, commonly tens or hundreds of millions of pounds. It guides and motivates the actions of the sales organisation more than any other single factor, trumping leadership messages, sales strategies, sales management, and sales training.
But if the plan’s message isn’t clear or to their liking, sales reps will interpret it in their own financial interest. As a corporate leader, you’ll get what you measure and what you pay for – and it may not always be what you expect. So how can you get the most impact – drive the correct behaviors leading to revenue growth – from this powerful, expensive device?
The answer does not begin with your calculator, jumping into pay mixes and mechanics. Sales compensation has to start with the C-Level Goals℠. What is the sales strategy, specifically around products, financial goals, customer segmentation, and sales coverage models? These strategic questions prescribe what you want the sales reps to do and are therefore the foundation of the sales compensation plan. Do you want them to focus on one product or customer segment? Then the plan will pay more for these activities.
Another important factor to consider is sales roles. If your strategy is to acquire a significant number of new customers, you need a team full of hunters who will be aggressive enough to go after new customers. If your strategy is to retain current customers and possibly increase the amount they’re spending with you, a team of hunters might be too forceful; instead, you’ll need farmers.
After the CC-Level Goals℠ and sales roles have been established, there are 12 steps in the process of evaluating and designing a sales compensation program. These involve framing the major components of the plan, linking pay and performance, aligning the team and financials, and operating the plan for results.
1. Determine Target Pay. Consider the relevant labour market and decide what the total target compensation for each role will be.
2. Set Pay Mix. Pay mix (the proportion of salary and incentive pay) varies by job type and is driven by factors that include sales process characteristics, types of sale, and types of customers.
3. Establish Upside Potential. Upside potential is the incentive pay available to top performers, typically the 90th percentile, and is a critical component to help the organisation attract and retain the best talent.
4. Establish Performance Thresholds. Threshold refers to the entry point of achievement where the plan begins to pay incentive.
5. Develop Measures and Priorities. Performance measures define the focus areas that are most important for each role. Each measure should represent the most significant pieces of the sales strategy that the role can control.
6. Set Levels and Timing. For each measure, the organisation must define the level at which that measure will be tracked for the plan (individual, team, company) and the timing for payment (monthly, quarterly, annually).
7. Design Mechanics. Mechanics create the connection between performance and pay through devices including rates, hurdles, gates, accelerators, and point systems.
8. Align the Team. A full sales compensation program will include a range of sales, sales support, and management roles. To work together as a team, plan designs must interface as a complete system.
9. Set Objectives and Quotas. Quotas are the linchpin between the sales compensation plan and performance. Objectives and quotas should be market based, representing the relative opportunity in each account assignment or territory, and be created with a process that’s well-understood by reps, optimally incorporating their input.
10. Institute the Governance Process. A good governance process is like the constitution of the sales compensation plan that advances it from a set of plans to an effective and impactful program that helps the company grow.
11. Operate the Program. Consider leveraging technology to track performance, administer pay, and provide a communications portal for the reps and management.
12. Evaluate the Program. Program evaluation should be ongoing throughout the year, drawing upon the dashboard and tools to monitor relationships between pay and performance, attainment of goals, and differentiation of high and low performers.
One of the keys to great sales compensation design is having a playbook for your team that everyone references to make sure you’ve considered each step. With your team’s playbook defined, you can then layer in your strategic alignments, business performance and results, best practices from similar businesses, and the creativity you’ll need to develop an impactful solution for your business.