How to Maximize Your ROI with Proper Sales Compensation Planning

Business.com / Finances / Last Modified: February 22, 2017

Your sales staff's depends on you! Discover the best method of maximizing ROI through structured sales compensation plans.

In order to maximize the return on your sales compensation investment, you’ll want to be sure that compensation is just one driver of sales force effectiveness.

In other words, the behaviors of your sales team, and your company’s business objectives should play equal roles to your success as does the compensation plan.

In order to be sure this is the case, your managers should place emphasis on goal setting, job design and role clarity, so each rep knows his or her role very clearly. It’s also important to focus on account planning, access to information and data, performance management, sales training and development.

What's ROI Got to Do With It? 

Return on investment (ROI) refers to the relationship between what is gained, and the resources used to achieve that gain. Typical examples include revenue generated or “R” (sales compensation expenditure) or “I,” contribution margin generated (sales compensation expenditure).

The first lesson in your company’s ROI is to define the desired “return” for your company. What is it you would like to get out of this business and what are you comfortable with? This must be defined in the context of your overall business strategy.

In order to begin an ROI analysis, you must obtain a definition from management by soliciting stakeholder input at the outset of the plan design process. Gain consensus and reveal divergent thinking. Then confirm that the agreed-upon definition is measurable through discussions with owners of order transactions and database administration, etc. Finally, build the measurement tool or tools (i.e., dashboard) to support the relevant and practical definition.

5 Potential Roadblocks to ROI

There are five issues that may arise to get in the way of maximizing your ROI: wrong performance measures, too many performance measures, poor calibration of the pay-performance curve, the reps don’t understand the plan or the goals aren’t attainable. 

But there are five things you can do in order to avoid these mishaps or “leaks.”

Related Article: Sales Compensation ROI: Not Just Your CFO's Calculation

First, say a representative exerts effort, the company pays him, but the results for both are less than desirable. To prevent such a leak, define critical objectives for the company for the plan period.

For each objective, decide what “success” is, i.e., the metric that could be used in a sales compensation plan. Verify that each metric can be tracked and measured, and then for each job, narrow down the list to mission critical measures which align with required corporate results.

Or what if a sales rep exerts effort on non-critical measures, the company pays out, and key financial results fall short? In this case, you need to ask three questions:

  1. Is this the only job that controls this variable?
  2. Is this the most important job that controls this variable?
  3. And is there another way to manage accountability for the measure in this job?

If more than three measures seem necessary, consider the job itself:

  1. Has it become too broad?
  2. Are there too many disparate responsibilities to focus adequately on any? 

Here’s another issue: Say the pay curve does not have a “steep enough slope;” It may not motivate sales reps to make the effort required to move quota achievement higher. To prevent the leak, be sure to design a plan so that payouts to “excellent” performers (those in the 90th percentile) are between two and three times the target.

Also, take a look at historical quota achievement patterns and determine the performance level that typically represents the 90th percentile of performance for a given sales job. You won’t find this answer by surveying your competitors; it is unique to your company.

Gaining Employee Understanding and Buy-In 

When reps do not understand the compensation plan, and they don’t understand how to make money under the plan, so they are not motivated by it. They “get a check, but have no idea how it was earned,” in other words. To prevent this leak, again, design a plan that can be simply explained in one paragraph.

Then train managers to understand and communicate the plan proactively and clearly. Communicate the plan in the context of strategy and job role, and create focused communication materials.

Separate the plan document from the legal and policy documents, as these can be very confusing. And keep in mind that communication is not a one-time event through one medium, but a multimedia process over time.

Unachievable goals can reduce motivation so that performance fails to reach real potential. To prevent the leak, develop a policy to limit quota over-assignment: both the level at which it occurs and the magnitude.

Then create a process to allocate goals based on sales potential and workload which will better spread the top-down forecast. The result will be that more sales reps will carry more realistic goals, and more people will get closer to achieving their individual goals.

Just be sure the plan has a reward for top performers, even in a year where overall performance is low.

Related Article: Get In the Game: The Playbook for Serious Sales Performance

Conclusion

In summary, use a commonly agreed on a measure of ROI that reflects your company’s important strategic objectives for the plan year. Make sure the plan is focused and uses only several mission-critical measures of success.

Design the plan so that sales reps and managers will earn significant dollars only by delivering desired results. Communicate the plan clearly, and in a context that ties it to the job role, the sales strategy, and the overarching business objectives.

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