How to build a better sales compensation plan
How do you improve your sales compensation plan to ensure you drive profitable growth? Here are the challenges to overcome and the best practices to follow.
High-performing sales organisations know the importance of their sales incentive plans and work diligently to design, communicate, tweak and evaluate those plans.
Following are three sales compensation challenges many organisations may encounter when creating a sales compensation plan:
#1. Setting effective quotas
About 30% of companies do not have quotas ready at the beginning of the fiscal year. The first thing any sales representative wants to know is what their quota is, and how it ties into the plan. If the quota is not viewed as achievable the plan will not motivate the salesperson or drive the desired behaviours.
#2. Plan complexity
As businesses and solutions have become more complex, the risk of putting “too much” in the plan has increased as well. While the early pioneers of sales compensation may have paid simply on revenue or units sold, modern plans may not only pay on revenue, units, or profit, but also on the type of revenue, the type of customer, product and service mix. The possible combinations can make a rep’s head spin, and dilute the C-level goals.
#3. Managing cost and ROI
C-level executives want to know the answer to two questions:
- What are we getting out of our sales compensation plan?
- How much does it cost?
Sales compensation plan best practices
Given these challenges, here are some best practices to put into action that will ensure your plan drives profitable growth.
Understand C-level goals - Before creating the plan it’s critical that the sales team understands what the goals are for the organisation. C-level goals can best be described in the context of five key areas:
- Products: What products and services do we offer, and what are the top priorities?
- Talent: Do we have the right type of sales talent? How do we align our talent with our objectives?
- Financial: What are our financial goals for the year?
- Customer: How do we want to position ourselves? What customer priorities do we have?
- Coverage: What are our priorities to support the roles, process and engagement model?
Once you have established and achieved leadership alignment around the top priorities for the organisation, your sales compensation plan is the best tool an organisation has to drive the right behaviours and achieve the results it expects to achieve. It’s now time to develop your compensation plan.
Framing the plan:
First, consider the relevant labor market (and remember the market targeted for talent may be different than the market in which the business competes for customers). Total target compensation is the combination of base salary and incentive that you expect a role to earn at the expected level of performance.
- Set. "Pay mix" defines the proportion of salary and incentive at the expected level of performance. Pay mix will vary by sales role and is driven by the type of sale and the behaviours you want to drive. For example, a role that is focused on new customer acquisition will likely have a greater proportion of incentive pay opportunity in order to drive the behaviour of hunting for new business. A customer service role that is tasked with protecting existing revenue would have less pay at risk to drive a behaviour of managing the customer instead of focusing on new business development.
- 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. Define high performance for the organisation, and make sure you differentiate incentive pay - significantly - between top performers and average performers.
- Establish performance. "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 organisation.
Linking pay and performance:
- Develop measures and priorities - "Performance measures" define the focus areas that are most important for each role. Each measure should represent the key priorities of the organisation, and that which is in control of the role. The key point is to have a goal of no more than three measures in the plan with none less than 20% weight.
- Set levels and timing - For each measure, the organisation must define the level at which that measure will be tracked for the plan. For example, the organisation may define a revenue measure for a sales rep at an individual level or a region level. Each measure will also be measured and paid close to the sales event as possible.
- Design mechanics create the connection between performance and pay and can be divided into three types. A rate-based mechanic (or, commission) usually pays a certain percentage of revenue or gross profit, or a certain dollar amount per unit of sale. A quota-based mechanic typically pays a target incentive for reaching a specific quota or goal and may scale its payout above and below that performance level. A link creates a relationship and interdependency between two measures or mechanics.
- Align the team - A full sales compensation programme 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. The programme should promote teamwork; seek out points of potential conflict and try to resolve.
- Set quotas - Quotas are the linchpin between the sales compensation plan and performance. Quotas should be market-based and created with a process that’s well-understood by reps. Over time, quota processes for an organisation will usually move from historically based approaches to more market-based approaches as the market and organisation become more developed.
- Institute the governance process - A good governance process is like the constitution of the sales compensation plan. Without a clear approach to governance, the organisation will probably create the governing laws throughout the year as it goes, sometimes in a reactive mode.
Operating the programme throughout the year will draw from all the strategic connections made, components designed and governance established. From a tactical standpoint, technology may also be leveraged to track performance, administer pay and provide a communications portal for the reps and management.
Continue to evaluate the programme 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. Track areas where improvements can be made, and then before you know it, get ready to start the process over again.
Mark Donnolo is a sales effectiveness thought leader, speaker and writer. He is the author of several books including "What Your CEO Needs to Know About Sales Compensation."
Michelle Seger has more than 20 years of cross-industry experience working with global companies developing solutions to their change management challenges. On June 5th , 2018, Mark and Michelle will host Europe’s largest sales compensation conference in London. For more information: https://www.e-reward.co.uk/events/exhibitions/showcase-sales-compensation-2018