FIVE WAYS TO MAKE YOUR SALES COMPENSATION PLANS PAY OFF BIG. Everything you need to know to create more powerful sales incentive plans

Transcription

1 FIVE WAYS TO MAKE YOUR SALES COMPENSATION PLANS PAY OFF BIG Everything you need to know to create more powerful sales incentive plans

2 Executive Summary A bad sales commission plan will cost you more than money. Incentive compensation fuels the motivation that keeps your sales organization and your business successfully running and growing. And yet, most small - to medium -sized companies still use complicated, error - prone spreadsheets to manage this critical function. Automating the design, administration and communication of your incentive compensation is the easiest, most cost-e!ective way for a small business to maximize their incentive compensation investment. While all phases of the incentive compensation process are important, the design phase is particularly signifi cant because mistakes or miscalculations in the design of your plan can ripple through and be compounded across every plan for every sales rep in your company. You need to model and test the assumptions in your plan to ensure that it actually delivers the revenue you expect it to, and that your compensation costs are managed appropriately across all attainment levels. An automated solution that lets you visualize, model and evaluate all of the fi nancial implications of your plan is critical to the success of that plan. Once you ve verifi ed that the assumptions in your plan are sound, you need to be sure that they are applied correctly and accurately when compensation is calculated. If data is lost in translation during the calculation phase, your design work ends up being a lot of wasted time and effort. An automated solution helps solve that problem as well. The data entered in the plan design phase is automatically used in individual sales plan documents, payment calculations and performance reports. You save money, reduce administrative time and effort, and most importantly improve the accuracy and timeliness of your payments. Let s take a look at fi ve key steps that will help you design a more powerful sales compensation plan one that motivates your team, drives expected revenues, and allows you to manage costs. Target Total Compensation (TTC) is influenced by market, budget, and equality.

3 STEP ONE Set Target Total Compensation The first important decision the sales compensation plan designer has to make is setting the Target Total Compensation (TTC). TTC is essentially the amount you have to pay to attract and retain top talent for each job role in your company, and is the start to every great plan. It is influenced by industry, geography, and the skill set required to successfully fulfill the requirements of the job. It is composed of base salary plus at-risk pay such as commissions or bonuses. To accurately determine the TTC for your sales compensation plan, you need to analyze a number of factors: Job role Evaluate and define each specific job role in your company that is involved in the sales process. You can t determine what to pay people until you know who s doing what and exactly what it is you re paying each person for. Market data Review credible, local market data that gives you a clear indication of what compensation the market bears for each job role. The data should be timely and based on a relevant sample set that compares to the job roles you have de ned in your organization. Equity across plans TTC should reflect your company s compensation philosophy. Depending on the level of competition in your industry, are you going to pay at, below or above market for certain skills? Once you determine your approach to compensation, you need to ensure that you apply that formula consistently across all plans. Budget Because TTC is what you will pay a rep when they reach 100% of their goal, you have to be sure you model and compare TTC across all job roles in the sales process. One of the problems with designing your plan in a spreadsheet is that it is very easy to unintentionally design a plan that pays out more than you expect in TTC. Lack of modeling and analysis during the plan design stage can lead to mistakes that you don t discover until your commission expenses start suddenly coming in over plan. Modeling ensures you can actually afford your plan when everyone reaches their goals. Using historical data is a great way for your company to predict what your reps can sell in your markets. Comparing and modeling actual Target Incentive Compensation (TIC) over the previous year provides you with the data you need to ensure your reps will be paid appropriately for the sales they deliver.

4 STEP TWO Allocate the appropriate amount between base and incentive pay Once you have determined the appropriate TTC for your sales organization, you need to determine how much of it will go toward base salary and how much will go toward incentive pay. Determining the appropriate mix depends upon a number of variables. Start by evaluating the requirements of each job role. Determine the amount of influence each role has over the expected sales. The higher the level of control each job role has over the close of the sale, the lower the base salary tends to be in relationship to TTC. Sales Motivator Mix Matrix Also consider the length of the sales cycle, your company s market penetration, the kinds of products your company sells, and any anticipated new products or other marketing initiatives. With industry research, your marketing plan, and careful analysis of the sales rep role and influence, you should be able to confidently establish a minimum / maximum base salary for your sales reps. Adding incentive compensation to the mix is what gives your sales rep the extra motivation that drives them to reach and exceed their sales targets. It is at-risk compensation that is not guaranteed; instead it is only earned as certain attainment goals are met. As a general rule of thumb, the incentive pay for a job role should be at least 15% of the TTC anything less than that would not really influence sales behavior in a positive way, and could result in missed targets and sales opportunities. Most base to incentive mixes fall within the 60 / 40 or 50 / 50 rate. The key to developing a successful mix is to model the effects of different ratios during the plan design phase. The modeling tools in Sales Motivator help ensure that compensation mixes are applied equitably across a team and even across the organization, and can highlight any hidden costs that you may unintentionally build into your plan.year provides you with the data you need to ensure your reps will be paid appropriately for the sales they deliver.

5 Once you set the base to incentive mix for a particular job role, it is time to evaluate the upside earnings potential. This is the additional incentive compensation a sales rep will receive when their performance reaches the point your company defines as excellence. Typically, excellence is considered to be 150% of quota. In general, the greater the risk, the greater the reward, so the higher the incentive amount you allocate, the higher the upside potential. From a planning perspective, reps with a lower base relative to TTC have a much higher earnings opportunity at excellence. STEP THREE Set and fully allocate your sales quota Setting the right quotas is critical to the success of your sales compensation plan. And yet, for many companies, setting a quota can become as rote as saying Let s just up it 20% across the board this year. But, as with every other aspect of sales compensation, there are many variables to consider. Quotas need to be grounded in reality and they need to be achievable. Effective sales quotas take into consideration the relationship between quotas and results, and they need to be based on market opportunity. To keep your sales force motivated, you want at least 60 75% of the team to successfully achieve their goals. At that rate, you can create a team of winners where the sales reps are not just personally motivated, but motivated by each other s success as well. Setting the bar too high and making the goals too difficult to achieve can have a negative effect on motivation your reps may give up trying if they don t believe they actually have a chance to be successful. And setting the bar too low clearly means you are leaving revenue on the table. You have fully allocated your quota when the sum of all quotas assigned equals your total revenue goal for the year. To help you determine appropriate individual quotas, evaluate the following: What opportunities are in the pipeline Real opportunities in each territory Each rep s work load How each rep has performed in prior years Why some reps made their quotas and others didn t How well the territories are divided

6 STEP FOUR Evaluate what your plan pays at various attainment levels Many plans are unintentionally designed to payout a different amount at goal than the Target Total Compensation (TTC) because the designer never took the time to add up the various commission and bonus amounts at 100% attainment to see if they equal the planned TTC. Another mistake many small businesses make when designing their incentive compensation plans is neglecting to evaluate what the plan will pay out at various attainment levels. If you do not analyze your compensation costs at a number of attainment levels prior to setting your plan in motion - it is far easier than you think to design a plan that actually ends up paying out more than you expected. And you re not going to fi nd that out until you start cutting commission checks that are quickly adding up to more than you budgeted. It s important to review what your plan pays out not just for target performance, but for under - and over-performance as well. Typically, under-performance is defi ned as reaching somewhere between 50% and 75% of goal. By modeling what these payouts will actually look like at these performance levels, you can determine whether or not you are over-paying for under-performance. Conversely, it s important to model what your plan pays for over-performance, which is usually considered to be anywhere between 125% and 150% of goal. Typically, the amount of incentive a rep will earn at an excellent or over-performing level is between two and three times what they will make at goal. Modeling these outcomes and comparing possible payouts side by side gives you the confi dence you need to know that you can actually afford the plans you re designing. Be sure to understand the company s exposure when a rep closes a large, unexpected sale. You want to encourage aggressive sales but you need to be sure your costs will not swing wildly out of line with your revenues when you get them. Four benefits of modeling your TTC: 1. Make sure your plan is paying the right amoung at goal 2. Make sure you can afford your plan 3. Ensure you aren t overpaying for under performance 4. Ensure you are paying enough for excellence

7 STEP FIVE Compare projected vs historical earnings One final, important step in designing an effective sales compensation plan is to compare the projected earnings that the plan is expected to deliver to your sales reps against their historical earnings. Modeling projected revenues against historical revenues allows you to visualize how the new plan will impact the earning capability of your reps. When analyzing the earnings your reps can expect to receive, you should look closely at your top performers to ensure that there are no surprises in their earnings. But you should also take the time to gauge how underperformers may be impacted as well. This step is a good way to ensure that your team has a reasonable ability to make the compensation you have outlined in their plan. Taking the time for this evaluation allows you to spot inequities and address them before they cause problems that can ripple across the sales force. It goes a long way toward creating a team that is motivated, challenged and inclined to stay. Brought To You By Cornerstone Software cornerstonesoftware.com

8 CONCLUSION If you don t invest in the right sales compensation tool, your company will pay for it. Designing a powerful compensation plan that motivates your team, delivers the revenues you expect, and helps you manage costs, takes planning, modeling and analysis. The challenge for a small business is to do all of that in a way that maximizes every investment you make and every resource you have. Spreadsheets are not an effective tool for managing a process that has such an enormous impact on your bottom line. Automating sales compensation from plan design through payment allows you to streamline the process, improve accuracy, design plans that align with corporate strategy, better motivate your sales force, and increase your revenue and profits. Sales Motivator, affordable, web-based software designed specifically for small businesses, allows you to: Design powerful compensation plans Model your plans to forecast revenues and manage profits Automatically calculate commissions Pay your reps quickly and accurately Easily generated graphical commission plan documents and performance reports To learn more about how Cornerstone Software can help you design a powerful incentive compensation plan that drives revenue, motivates your sales team, and allows you to more effectively manage cost and risk, visit us at or contact us at Sales Motivator is a registered trademark of Cornerstone Software, Cornerstone Software, Inc.