10 Simple Rules for Improving Your Sales Compensation Plan Mark Donnolo It s the time of year when many companies are deep into executing to their business plans, evaluating performance, and thinking ahead to how they ll make adjustments, or strategic changes, to the plan for next year. As you conduct your business planning and think about the organization s growth objectives and sales strategy, attention invariably turns to questions like: Is the sales compensation plan really working? Can we drive better performance by making improvements to the plan? How can we make a change that better supports our goals without disrupting the organization? Now that you ve established your financial objectives, determined your market and product priorities, and developed your sales coverage model, the sales compensation program becomes a critical link between your goals and sales results. If it s designed and implemented well, the sales compensation plan can motivate sellers and drive performance to company goals. If overlooked or poorly designed, the comp plan can move the organization in the wrong directions and result in missed objectives at a high cost. To develop your plan correctly, understand the core issues and look to a set of time-tested sales compensation rules that will guide your way. The Top Sales Effectiveness and Sales Compensation Issues Many sales compensation issues are actually business alignment issues in disguise. As the company grows and evolves, its markets and strategies change, requiring changes in sales strategy, coverage, and compensation. Understanding these issues and their potential meanings can give you some clues on how you might improve the plan and what other adjustments might need to be made to the strategy or sales coverage model. 1
The following sales effectiveness and sales compensation issues are most common to sales organizations. We ve included some areas to investigate that can provide ideas on how you might address these issues. Issue Developing an Actionable Strategy Increasing Sales Productivity Solution Selling Minimizing Channel Conflict Cross-Selling Building a Sales Culture Paying Top Performers the Most Reducing Complexity of the Compensation Plan Setting Effective Quotas Managing Crediting and Sales Compensation Costs Areas to Investigate Do the sales organization and sales channel partners understand how they should execute to the strategy on a day-to-day basis? Does the sales compensation plan communicate a clear message about our business priorities? What levers can we pull to increase the capabilities of the sales organization? Are sales jobs too broad, trying to encompass too many different roles? Do sales people spend too much time on non-selling activities? Does the sales compensation plan push sellers in too many different directions? Are we selling products to our customers or developing solutions that address their specific business issues? Have we defined what solution selling means in our business and equipped the sales organization with the right tools? Does the sales compensation plan motivate fast cycle selling rather than considered solution development? Do our channels and sales resources align in the sales process or do they conflict, lessening our effectiveness? Does the sales compensation plan include measures that motivate these dysfunctional behaviors? Are we evaluating the full breadth of opportunities in customer accounts? Does the sales compensation plan motivate sellers to expand our portfolio of products or services in each account? Is the organization growth-oriented or have we created an environment of mediocrity and entitlement? Does the sales compensation plan drive performance or deliver pay for the status quo? Do we significantly differentiate pay for top performing reps compared to the average rep? Are we overpaying our low performers? Is the sales compensation plan easy to understand? Do reps know how they earn pay or is the plan muddled with too many measures and complex mechanics? Is the organization reaching its goals overall with 60% to 70% of reps at quota or above? Are quotas set considering market opportunity or are they based on historic performance? Do we have clear crediting rules for sales? Are we multiple crediting too many reps and channel partners for each sale and driving up costs? Ten Simple Rules Evaluating and designing the sales compensation plan can be a daunting task due to its complexity and the implications on the success or failure of the sales organization. Everyone has an opinion about the sales compensation plan and everyone is an expert. However, moving ahead without a clear understanding of how to evaluate and approach the issues is a recipe for disaster. The costs of taking the process step-by-step, according to a set of time-proven processes and knowledge of cross- industry 2
best-practices, is far less than the cost of missing the company s sales objectives or losing top sales people. Use the following rules to guide your way and start by checking your Sales Compensation Report Card, available at www.salesglobe.com. 1. Align Your Plan with the Strategy and Job Roles. At the foundation of a successful sales compensation program are a clearly articulated sales strategy and coverage model. The coverage model refers to the combination sales resources such as field sales, telesales, and partners necessary to pursue the sales strategy. Each sales role should be defined in terms of its critical success factors, role descriptions, and competencies. Are your base pay, draw, and performance measures aligned with each job s actual role or do pay components reflect a job that has changed over time? The job s critical success factors should provide direction on target pay, pay mix, and performance measures. Determine the correct relationships between these components based on the top three to five key job priorities for each direct sales, channel management, sales support, service, and management job. These may include role in the sales process, sales cycle, account type, product focus, sales strategy, and management responsibility. 2. Don t Be a Robin Hood. The pay mix, the portion of base salary to incentive at target performance, should match each job role. Make sure your pay mix isn t too aggressive for long and complex sales cycles or too shallow for faster acquisition cycles. There are a number of factors that drive pay mix that should be considered including the job s focus on account management vs. account acquisition, buying process complexity, and length of the sales process. In terms of upside potential (the portion of target incentive pay available to your top performers) evaluate whether top reps are earning appropriately more than average performers. Depending upon industry, market, and job type, reps in the top 10% should have an upside earnings ratio of one to three times the incentive of an average performer. Are low performers paid too much, resulting in a misallocation of funds to nonproducers? Check your plan with the Reverse Robin Hood Principle and make sure you re not taking from the top performers to pay the low performers. 3. Focus on the Right Measures. Performance measures represent the top sales priorities of each job. These typically include financial measures, strategic measures, and may include leading indicators of success. Consider whether performance measures directly mirror the sales strategy and each job s critical roles. Do relationships between measures (weights, links, hurdles, multipliers) represent the organization s priorities? Does the plan communicate objectives to the employee in the clearest way or is the message complicated by unnecessary elements? Best-in-class plans rarely use more than three primary measures. Few have measures that represent less than 10% of target incentive. Don t create a plan that allows reps to pick and choose or creates confusion about what s important to the organization. 4. Develop a Clear Connection Between Pay with Performance. The sales compensation plan, at its core, is a tool to communicate business objectives and reward for the attainment of those objectives. Does your plan pay for revenue, profit, growth, base retention, or other priorities? Does your plan reward for dysfunctional behaviors or gaming? Total pay, total incentive pay, and incentive pay for each plan measure should be tightly linked to the company s critical measures of success and should clearly communicate how pay is associated with each performance result. If a simple regression analysis shows a pay to performance correlation of less than 0.5 for your most important business measures, then the plan may be off-track. 5. Reward for Teamwork and De-Motivate Conflict. In an environment of complex sales roles and multiple sales channels, it has become increasingly important to ensure the plan promotes congruence 3
among sellers and channels rather than channel conflict. Does the plan motivate direct and indirect channel teaming necessary to execute the sales process or does the plan create conflict between roles? Do team measures incorporate a group on which the employee has significant influence, or are team measures too high level for the employee to control? Test your measures and mechanics to make sure that the plan does not create a recipe for channel conflict on the four major conflict areas of product, sales process, geography, and segment. 6. Check Your Mechanics. Plan mechanics are the inner workings that specify how pay and performance are related across dimensions such as performance and time. Mechanics should be elegantly and simply designed to finalize the plan and ensure that it operates as designed. Determine whether the plan creates a clear line of sight for sales people so they understand how they re paid and where they should focus. Is the plan hampered by outmoded commission structures or do the mechanics accurately represent performance potential and pay levels for each job and territory? Do you pay as much for maintaining the revenue base as for hunting down new business and are you over paying for recurring customer revenue? Develop plan structures that encourage high performance rather than dampen achievement. 7. Know Your Economics. Plan economics are deceptively simple in concept but a challenge to master in reality. Understanding your compensation cost of sales is the first step. However, your total cost of sales reveals only part of what you re getting for your money. Look at the components and drivers of your sales and compensation costs. These include cost by strategy (customer retention, customer penetration, new customer selling), cost by product type, cost by customer segment, cost by geography, and cost by job type. The allocation of these costs should mirror your sales strategy and your total cost of sales should fit competitively with your market. 8. Set Equitable Market-Based Quotas. Setting equitable quotas is one of the major challenges sales organizations are dealing with today. Many organizations still fall into the trap of setting quotas based on historic performance, which usually does not represent true opportunity and lowers the overall performance and productivity of the organization. Quotas should be set and allocated to the sales organization in a market-based fashion and account for variations in territory size, sales potential, and growth rate. Quality market data on customer and prospect accounts is now readily accessible and can provide organizations, that know how to use it, with a performance advantage. Do your quotas create performance penalties for top performers or support mediocrity? Are your objectives set and allocated in an equitable manner and does the sales organization buy in to their quotas with a process that uses their input? If quotas require future adjustments, are there clear guidelines in place? Is your quota over-allocation from front line to management adequate or excessive? 9. Get Organization Buy-In Before and After You Design the Plan. Getting the right technical answer on the compensation plan is only part of the battle. To ensure success, the organization must be involved or represented during the evaluation, design, and implementation process. Pull in key executives and the opinion leaders in the organization early in the process to develop shared responsibility for plan development and results. A good plan, effectively implemented will produce far better results than a great plan poorly implemented. Many high-performing organizations use a 30, 60, 90 day audit process to check understanding, behaviors, and results from the plan through their sales compensation dashboards. Do you have a process in place to communicate plan changes, link them with the company s strategy, accurately track performance, evaluate plan effectiveness, and make any necessary course corrections? By conducting regular, periodic evaluations and tune-ups along the way, you can avoid reacting to costly business damage and operate a plan that will successfully drive business results. 4
10. Follow a Proven Evaluation and Design Process. At the first mention of the sales compensation plan, many executives tend to pull out their calculators and start re-working the payout rates and mechanics. Beware of the temptation to jump to the details first because that s really the end of the process. Start by understanding the organization s sales strategy and the job s key roles. Then follow a proven process to evaluate and design the plan. Follow the Sales Compensation Design Process through two passes. First, evaluate the plans qualitatively and quantitatively on each of the components. Then design your plans following the process, which continues with how you implement and manage the plan on an ongoing basis through the year. Getting into an evaluation and design cycle like this will allow you to proactively manage the program each year. Taking Action- Get Your Sales Comp Report Card As you get started, identify your organization s issues in the areas of sales compensation and sales effectiveness and remember that they are usually connected. Then follow the rules during your evaluation and design process. To begin, it s important to understand the strengths and weaknesses of your sales compensation program. One of the most effective ways to get an initial, objective reading is to use a sales compensation report card that grades each major component of the plan. The report card will provide your organization with direction on where to focus and in what priority. With those objectives at-hand, you ll be ready to conduct a rigorous evaluation and plan design process and develop a program that will support your business objectives. For more information, visit TheSalesLeadershipForum.org, SalesGlobe.com, or call (646) 306-6606. 5