Sales Management Association is excited to feature a blog series from sales performance management (SPM) consulting experts OpenSymmetry on tips and best practices for sales compensation plan design. At the end of the series, OpenSymmetry will host a webcast bringing all principles from this series together in a hands-on setting.
Sales compensation has become increasingly complex in today’s frenetic business environment, with multiple and fragmented sales channels, changes in customer buying patterns, as well as the evolution of sales roles and the expectations of those in them. Many sales organizations struggle to find the “right” sales compensation plan to deliver the desired performance and results, changing designs annually to find something that works. Others retain the same plan or make tweaks to their program, in fear of creating turmoil or turnover in their sales force.
To create an optimal compensation plan for your salespeople, it is critical to start with the correct principles. These principles not only provide the framework in which “best-in-class” sales compensation plans can be developed; they guarantee that the resulting designs will meet the needs of the primary stakeholders in the go-forward sales climate: the customer, the company, and the salesperson. Successful plans create a balance among these stakeholders. Whether it is setting targets, applying commissions or ensuring desired sales outcomes, all stakeholders must have their needs met to some degree or the plans will not work.
So what are the sales compensation design principles that are necessary to make your plans irresistible to stakeholders? They are not plan measures, qualifiers or payout frequencies, but guidelines:
1. Design plans specific to the sales role
Often to achieve simplicity, companies will try to find a common measure or measures that can be utilized for all positions. This makes it easier to track and calculate incentives. The most common example of this is sales revenue. While it is an all-purpose measure of sales performance, what does paying commission or measuring achievement of sales revenue targets for all positions communicate to the salespeople? Simply, it says “sell anything to anyone for whatever you can.” Different sales channels (e.g. territory, dealer, national accounts) all sell differently, to different audiences, with unique processes. Further, the types of compensation plans required for “hunters” versus “gatherers,” as well as pre-sales support roles and sales management, have different deliverables and require different processes to achieve their goals. To measure them all the same will initiate and reinforce the right activities and behaviors for some but have little or a negative impact on the selling behaviors of others. Trying to incorporate multiple metrics in your plans to achieve a common performance yardstick can lead to a very complex program that is confusing to sellers. Creating plans that focus on clearly-defined measures of success specific to each discrete sales role will provide a better assessment of performance and align the sales effort with the desired results.
2. Accentuate the link between performance and reward
To ensure that all the bases are covered in the sales compensation plan and that incentive payouts are not generated without the company making its numbers, companies often select plan performance measures that have no impact on behavior and results. A perfect example of this in the past is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). While well-intentioned, as it might be to link sales results to corporate performance, it is a fallacy to think that such a high-level measure of financial well-being will have any impact on sales rep performance or behavior. Theories of reinforcement clearly document the fact that the closer the desired behavior and outcome are to the reward, the greater the influence it has and likelihood that the behavior will be repeated. When this is prevalent in their incentive plan, salespeople see how they can impact sales results and get rewarded for it.
3. Make targets and upside in the plans meaningful
Commission incentive plans drive sales, particularly on a transactional basis because they create a strong link between the outcome and the reward. However, in many sales roles, the process and cadence of activities are different. This principle in your plans with an impact at the primary performance measurement goals (i.e. threshold, target, and excellence) will make achievement have greater meaning. Whether it is a bonus payout, change of commission rate, or access to additional compensation components, once within striking distance, these payouts should inspire the behavior required to reach them. The reward for overachievement also needs to reinforce the effort to go past the target level of performance toward achievement and rewards at the excellence level.
4. Reward the “right” salespeople with the payout curve
The rate of incentive payout is always a critical factor in plan design. It influences not only the amount of incentive paid for a defined level of sales performance, but it also communicates the value of that level of performance. Different roles, particularly when a team effort is desired (e.g. when there is limited product availability, or solutions necessitate multiple contributors), should be rewarded at different rates of payout. Overpaying at the low end of the performance spectrum not only leaves less incentive budget for top performers, but it also communicates the wrong message to underperformers, who may assume, “As long as they are paying me enough and I can live on it, I must be doing alright.” Apply this principle and you will see changes in performance or self-selection out of the role.
5. Ensure that crediting supports both revenue and margin
Gross sales are most often easy to measure and are a convenient yardstick of sales performance. But does it send the correct message to the sales rep if they can influence margin? Revenue without margin is typically an easier sell but does nothing for the company other than supplying production with orders. Conversely, margin without volume does not support growth, the holy grail of sales. In your design effort, whether it is using modifiers, creating linked measures or separate measures, make sure your plans support both revenue and margin.
The same plan design will not usually transition successfully to other organizations. Why? Each organization, its role structure, business objectives, management style, and expectations are not typically common across businesses. However, these key design principles, when applied to each unique corporate sales situation, result in better and more effective sales compensation designs.
We will be publishing a series of articles that demonstrate these and other design principles. The principles to be outlined in the individual articles over the next several weeks, when applied in the sales compensation plan designs, create focus to the company selling efforts and provide clarity to the expectations, behavior, and deliverables required for sales success.
Our experience in working with sales organizations of all sizes and industries has shown that consistency in utilizing research-based analysis, customer-focused metrics, clearly-defined design processes, and qualifiers that reduce the need to interpret expectations produce exciting and irresistible sales compensation plans.
Join us for our webcast on September 4, 2019 to see how key design principles drive effective sales compensation.