One of the keys to great a sales compensation plan is having a playbook for your team to reference as you go through the design. The team can stay on track not only during the design phase, but as you govern the plan throughout the year and evaluate the plan for the next year.
A solid framework for your sales compensation plan allows you to proactively build a program that aligns to your C-level goals, year after year, rather than merely reacting to last year’s poor performance or higher than expected cost of sales.
And, before starting on compensation, don’t forget to set the foundation by identifying the C-level goals and defining sales roles. Understand the key requirements of every job to isolate the critical strategies and success factors of each. Then, take these four steps into consideration to proactively design a world class sales compensation program.
1. Frame the Plan
Set the total target compensation and the pay mix for each sales role, and determine the upside potential. For example, will hunters and farmers have the same total target compensation? If so, how will you split the pay mix? Since hunters typically put more of their pay at risk, with perhaps a 60-40 pay mix (with 60% in base pay and 40% in incentive pay), will they have additional 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. Upside is a critical component to help the organization attract and retain the best talent in its market. Take a close look at high performance for the organization. Are the top earners really the top performers? Do you significantly differentiate incentive pay for top performers from average performers?
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2. Link Pay and Performance
Determine performance thresholds -- the entry point of achievement where the plan begins to pay incentive. What’s the minimum acceptable level of performance for a rep to keep her job or to earn any incentive?
Develop performance measures, and define the level at which that measure will be tracked for the plan. For example the organization 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 on a certain timeframe, for example monthly or quarterly.
At this step you’ll also design the mechanics of the plan. For example, a rate-based mechanic (also known as a commission) usually pays a certain percentage of revenue while a quota-based mechanic typically pays a target incentive for reaching a specific goal.
3. Align Team and Financials
A full sales compensation program 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. Quotas are the linchpin between the sales compensation plan and performance.
On average, only 42% of reps achieve quota; however in high performing sales organizations at least 60% of reps perform at or above quota. Objectives and quotas should be market based, representing the relative opportunity in each account assignment or territory, and be created with a process that’s well-understood by reps, optimally incorporating their input.
Don’t neglect the governance of the program. Establish and communicate the rules along with the rest of the plan. Otherwise, the organization will probably create the governing laws throughout the year as it goes, sometimes in a reactive mode.
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4. Operate for Results
Operating the program throughout the year will draw from all of 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. And finally, don’t forget to evaluate your plan throughout the year.
Take note of what’s working and what’s not as it happens. Draw upon the dashboard and tools to monitor relationships between pay and performance, attainment of goals, differentiation of high and low performers.
We recently worked with a technology hardware company to redesign their sales compensation program. For years they had double digit growth, but had fallen back to the single digits. So we shifted the payout curve. We raised the upside payments for the high performers, and instituted a threshold so sales reps way below quota weren’t rewarded for poor performance. Without changing quotas or the compensation cost of sales, the company went from 8% growth to 12% growth, returning to the double digits.
Sales compensation is a powerful motivator for the organization. Stick to a solid playbook, and celebrate the hard work of all.