Is your sales compensation plan working? How do you know? Can you drive better performance by improving the plan? How can you adapt to more effectively support your strategic goals with the least amount of disruption to your business?
Often, the sales compensation program is the weakest link between an organization’s strategic goals and its sales results. Poorly designed and grossly overlooked, the compensation plan can dramatically move the organization in the wrong direction. This translates into missed critical objectives with a high recovery cost. Conversely, if designed and implemented well, the sales compensation plan can motivate exceptional sales professionals and drive exponential performance of the company’s goals and objectives.
So, what are some of the fundamental issues in sales effectiveness and compensation?
Many are in fact business alignment issues as the business unit or company at large matures through its natural evolutionary stages. Its target markets and go-to-market strategies must evolve, demanding the direct correlation and necessary changes in the organization’s sales strategy, territory or named account coverage, and appropriate compensation. Only by understanding these critical issues can you begin to plan appropriate adjustments.
The Top 10 Most Pressing Issues Surrounding Sales Compensation Plans:
- Is your strategy actionable? Does the sales organization and/or your distribution channel at large clearly understand how to execute the often grandiose strategy at the street level on a daily basis? As such, does the sales compensation plan communicate and prioritize a crystal clear message about your business goals and objectives?
- Levers to sales productivity – What will it take to increase the competency and capabilities of your sales organization? Are jobs too broad, encompassing dramatically different roles? How much time, effort and resources are salespeople spending on non-selling activities? Does the sales compensation plan push your top performers in too many conflicting directions?
- Consultative selling – Many prospects know what they want and not necessarily what they need. The difference is the consultative approach to uncovering and addressing their business issues. Have you clearly defined that elusive trusted advisor role in your business and equipped the sales team with the right tools?
- Channel conflicts – Are your channels and sales resources aligned with the sales process or do they create consistent conflicts? Does the sales compensation motivate dysfunctional behaviors?
- Cross- and up-selling – Are you fully aware of the increased mindshare and walletshare opportunities within your existing customer accounts? Does the sales compensation plan motivate the sales team to expand your portfolio of products or services in each and every account?
- Nurturing a sales culture – Have you created an environment of mediocrity and entitlement or one of drive and continued profitable growth? Does your sales compensation plan drive performance or deliver pay for status quo?
- Top performer pay gap – Do you significantly differentiate compensation for top performers compared to the average masses? Are you overpaying your low performers?
- Comp plan complexity – Is your sales compensation plan easily understood? Does the sales team clearly and succinctly understand how to maximize their pay or is the plan cluttered with too many measures and complex mechanics?
- Effective quotas – Is the sales team reaching its overall goals with at least 60-70% at or above quota? Are quotas set with market opportunities in mind or are they based on rearview mirror historical performance?
- Sales comp costs and credits – Do you have clear crediting rules for sales? Are you crediting too many for each sale, thus exponentially increasing your SG&A?
Consider these issues and you are sure to view revising your existing sales compensation plan as a seemingly daunting task. In our experience, everyone tends to have an opinion about sales compensation and miraculously, everyone is an expert. But the lack of a clear understanding of the evaluation process and a systematic approach to address the above issues is a sure recipe for disaster.
Only through a set of battle-tested processes that cross industry knowledge and proven best practices can you minimize the cost of missing critical sales objectives and potentially losing your top sales performers.
Top 10 “Musts” to Enhance Your Sales Compensation Plan
- Link roles, strategy and pay. Roles in the sales process, sales cycle, account type, product portfolio, sales strategy and management responsibilities will drive the appropriate relationship for the top 3-5 positions such as direct sales, channel management, sales support, service and management. Each job’s critical success factors should provide direction on target pay, pay mix, and performance metrics. Combine resources and partners to pursue a well thought-out sales strategy.
- Stop robbing Peter to pay Paul. Although unique to each industry, market and often job type, the top 10% of sales reps should be able to earn an upside of 1-3 times the incentive of an average peer. Pay low performers too much and you’ll misallocate critical funds to non-producers. As such, the pay mix (portion of base salary to incentive at a target performance) should match each job role. Pay particular attention that this pay mix isn’t too aggressive for complex sale cycles or too simple for accelerated acquisition cycles.
- Only the right metrics matter. Performance metrics represent a clear set of sales priorities for each job. They must include financial, strategic, as well as KPIs (key performance indicators) and must be directly aligned with the sales strategy and each critical role. World-class sales plans rarely use more than four primary metrics – weights, links, hurdles, and multipliers – all aligned with the organization’s priorities.
- Unequivocally connect pay to performance. The sales compensation plan must be understood as a tool to not only communicate business objectives, but to also reward their obtainment. A plan must pay for revenue, profit, growth, base retention, as well as other strategic priorities.
- Celebrate collaboration, discourage conflict. Increasingly more sophisticated clients, increased complexity in sales roles, and a multitude of sales channels all mandate collaboration and congruence versus bickering and constant channel conflicts. Team-based selling between direct and indirect channels is critical to executing and aligning your sales process with a customer’s buying process.
- Simplify your mechanics. Performance over a period of time mandates plan mechanics. Simply and elegantly designed plans create a clear site for sales professionals in understanding how they are paid and where they should focus their limited resources. It is critical to understand the percentage of pay for maintaining and protecting the existing customer base versus net-new clients and revenue sources.
- Leverage economic conditions. Begin by understanding your cost of sales. Components and drivers of sales and compensation costs include customer retention, customer penetration, new customer selling, cost by product type, customer segment, and often job type. The appropriate allocation of these costs must be congruent with the overall sales strategy and be competitive in your market.
- Set appropriate market-driven quotas. This is one of the fundamental challenges in many sales organizations. The age-old trap of setting quotas based on historical performance often ignores not only the true market opportunity, but also underestimates the overall performance and productivity of the organization. A market-based approach that takes into consideration territory size, sales potential and growth rates, can provide the organization with a more accurate performance advantage.
- Must have broad-based buy in. Involve or certainly represent the broad base of the organization in the design, development, evaluation, communication and implementation processes. Engage critical intra-company, as well as external sources of influence and opinion leaders early in the process to develop shared responsibility and accountability for plan development and results. Use a 30-60-90 day audit process to check understandings, behaviors and results from the plan through a well thought-out sales compensation dashboard.
- Evaluate and adjust. Evaluate the plan’s qualitative and quantitative measure by each of the critical components: target pay, pay mix, and performance metrics. This should be a repetitive and reiterative process. As such, it will future-proof any necessary modifications in the program for years to come.
Welcome your comments on the above top 10 and great (or ugly) examples you’ve seen over the years…