In part five of OpenSymmetry’s seven-part blog series on effective sales compensation plan design, we’re looking at the impact that an “agile” sales comp plan can have on sales performance. To read the entire blog series, start with blog one.
When we think about the term agility, it is usually in describing the physical attribute of an individual who is nimble, flexible, and can adjust quickly to changing situations. The term has also spawned a revolution in the software development world related to processes and the “agile” programming approach. This is a project management behavior that is a mixture of methodologies and technology that purports to be highly responsive, allowing the developers to deliver the product or service the way that the customer desires and in the timeframe and format that the customer needs it. It incorporates ongoing change through development, design, testing, delivering, and evaluating until the customer is satisfied with the result.
The qualities of agility outlined above are consistent with what is required by organizations from their sales compensation program. Many plans, however, are rigid and inflexible with annual targets that may be out of alignment several times during the plan year. Companies today need agile sales compensation plans.
In today’s fast-paced business environment, static has been replaced by dynamic. Building agility into your sales compensation plans can be what determines if your sales force and organization miss their financial goals OR create and sustain a competitive advantage in your markets that drive the success of the business.
What are “Agile” Sales Compensation Plans?
Sales compensation does not operate within a vacuum. Many factors influence the sales performance of individuals and how your plans reward results. Some of these factors are beyond the control of the salespeople. Things like economic policy, corporate investment, and strategy can impact the individual’s sales results (positively or negatively) without any action on their part. Other factors, however, such as the accounts they go after, activities they chose to perform, and product or solutions they offer will impact their sales focus. Clearly, these are things that we should hold them accountable for and reward accordingly. To enable your sales compensation plans to become “agile”, there are plan elements that become important in the change. Some of these that support agile plan design are:
Target setting, always critical in plan performance, is even more so an area that must be addressed in creating agile plans. While the company may desire an annual target (revenue or margin) to align and evaluate strategic plan performance, operational sales targets that align closely to current fiscal business plans need to be flexible and accommodating of change. This can be accomplished by breaking down the annual target into five discrete targets, one for each quarter and the fifth for achievement of the annual number. Depending upon the amount of change in your markets, the incentive allocation can be equal across all the targets (5 x 20% each) or can focus more on the quarters (4 x 22% = 88% + 12% for the annual). This would be beneficial during times of considerable change where you may need to increase or lower targets each quarter to address market shifts (e.g. stock market performance) or internal change (e.g. new product introduction). While more frequent target setting requires time and resource allocation to accomplish, it is an essential management function to deliver sales success. A hint here is to include additional voices to the monthly or quarterly target setting process. Marketing, finance, operations, and HR all have a valuable perspective on the process.
Mid-year price changes (increases or decreases) or a price cut by a competitor, designed to increase their market share, may require an adjustment to your plan design. A measure change shift from growth to retention or at the very least a combination of retention and growth may be advisable prior to year-end as a response. Waiting until the end of the year to respond may put you at a disadvantage until you do make a change.
The sales compensation plan at its essence is a communications tool for management to create an impact on the salesperson’s behavior and choice of sales activities. The plan needs to tell them what you value and where to spend their time and efforts. Shifting your production measure or introducing a retention measure for the last two quarters or adding a modifier to your revenue growth measure linked to retention accommodates the required change in activities to counteract the change in the selling environment.
In high-growth markets or where product or solutions offered change more frequently than annually, it may be advisable to keep your product-focused plan measures flexible. Where the sales offerings vary on margin or scale, the need to focus the plan on a product, service, or solution may need to change during the plan year. This can be accomplished through variable commission rates by product (or product group) or by creating a focused product category that is assigned quarterly or monthly (depending upon your sales cycle) that provides enhanced commissions for the target performance period. Many companies use short-term SPIFFS or contests to accomplish this focus, but often this reduces the impact of the sales compensation plan, which in the end is designed to deliver the business plan sales results.
The sales compensation plan is management’s most impactful tool to initiate and reinforce desired sales behavior. When there is a strong link between performance and payout, it creates a focus on those deliverables that are top priorities for the business. Keeping your plans focused throughout the year requires the “agility” that gives stakeholders what they need, the way that they want it and, in the time, and format required.
This article is a continuation of a series of guest posts, by OpenSymmetry for the Sales Management Association, on optimizing sales compensation plans for any organization. For a deeper dive into designing high-performance sales compensation plans, join us for our webinar on September 4, 2019.