- Set priorities. A sales compensation plan should reward positive sales rep behaviors, such as selling more product, retaining current customers and acquiring new customers.
- Understand your philosophy. Once you determine the prominence of sales compensation, you can figure out how much of a rep’s day-to-day actions should be tied to compensation.
- Consider plan measurements and mechanical elements. Measures used in an incentive plan define the specific performance standards or criteria that determine success. Carefully use mechanical elements since they can create complications.
With fast-moving business realities, tightening budgets and time constraints, many compensation professionals don’t receive training as quickly as they want or need it. This can limit and/or negatively impact their ability to design a new sales compensation program. And, when such designs lack some of the strategic emphasis generally employed by a highly trained and experienced comp professional, the result can be as much risk as reward.
If the training conundrum can’t be immediately solved, focusing on six key points can help you navigate the sales incentive design process and implement an effective incentive program much like an “expert” would.
1) Know What You are Trying to Accomplish
A seasoned compensation expert knows that effective comp design is driven by an organization’s decisions on strategy, market coverage and job roles. As such, if you understand the basics of your organization’s business strategy and how it generates a profit, you can have the right vantage point for tying someone’s compensation to this strategy.
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A sales compensation plan is there to incent a sales representative for certain behaviors, such as selling more product, retaining current customers or acquiring new customers.
Once you know the priorities in your sales strategy, you can create a compensation philosophy statement. This acts as a guide for plan structure and helps lay the foundation for compensation design decisions.
Typical philosophy statements have multiple components, such as:
- A plan ownership/management statement
- A business objective link
- A pay level positioning and prominence policy
- A pay-for-performance guide, and
- Performance and management timing rules.
2) Know the Jobs
Different sales jobs have different goals and priorities that should be reflected in the incentive plan’s design. When sales roles are clearly defined with detailed job descriptions, skills and competencies, the incentive plan can better drive the desired objectives, behaviors and results. If a job is not well defined, it’s your responsibility as the comp plan designer to challenge the organization and ask for a better description. If you don’t understand the role, you won’t know its value.
3) Know Where Incentive Comp Fits into Your Philosophy
Thinking like a design expert requires knowledge around the different priorities in pay positioning and prominence. Compensation is only one element of the overall relationship between the sales rep and the company. There may be additive or more important talent management tools (e.g., benefits, career progression, work content) that can be as effective as — or more effective than — compensation. Once you determine the prominence of sales compensation, you can then figure out how much of a rep’s day-to-day actions should be tied to compensation.
Additionally, not all organizations can or need to pay at the market-rate midpoints. Many business-based factors can affect where target compensation levels should be positioned relative to external benchmarks. Applying this pay factor logic can help create target comp levels that more accurately reflect business needs and market conditions, rather than simply competitors’ pay levels.
4) Getting the Incentive Mix Right
A seasoned design expert is likely aware of the shift to a stronger pay-for-performance model (i.e., more dollars on variable incentive vs. fixed base salary). To get there, consider key points such as market share, buying patterns, selling vs. non-selling activities and control over the sale. When a rep has less influence and a less assertive role, the mix is typically weighted more toward base pay (e.g., 70% base, 30% incentive). Conversely, a sales rep’s job may be harder when a job requires a high level of skill and drive, a sale requires more effort, or the competition is very strong. In this environment, more performance-based pay may be necessary to motivate and engage high performance (e.g., 50% base, 50% incentive).
5) Know What to Measure
Incentive plan measures generally define the specific performance standards or criteria that determine success. Achievement against the measures becomes the basis for assessing sales results and awarding incentive payments. Expert plan designers typically consider four types of measures.
- Financial/production measures typically are weighted most heavily in an incentive plan. They focus on sales dollars, margin or margin dollars, or units, and are typically based on volume.
- Strategic measures are generally second to financial/production measures. They deal with anything that drives a specific strategic need, such as customer or product mix.
- Activity measures focus on a rep’s activities, events or milestones (e.g., customer events, qualified leads, conversations, sales calls). These measures are typically used when the organization is trying to achieve milestones or has a long sales cycle, or when other criteria are difficult to measure.
- Subjective/judgment measures are less quantitative and more qualitative, making them more difficult to employ. They may include professional objectives or discretionary behaviors that a rep’s manager will document or observe. Typically, seasoned design experts use these measures sparingly and hold less weight to them.
6) Mechanical Elements and Pay Periods of a Compensation Plan
Seasoned sales comp pros generally agree that payout formulas, payment terms, caps, thresholds and modifiers are where the rubber meets the road in plan design. These components can create the structure and formulas for how a plan pays out, given a rep’s balanced achievement level. Novice designers should use these mechanical elements with care, though, as they may create plan complications and cause reps to lose their line of sight from sale to payment. Common types of mechanical elements include:
- Thresholds and deceleration. A threshold is a performance level required for receiving incentive payouts. Companies often will either not pay anything below the minimum or will severely decelerate payouts until the performance threshold is met. In pay-for-performance plans, thresholds help to fund accelerated payments or to stay within fixed compensation budgets by shifting payouts from low producers to high producers.
- Multipliers and acceleration. These are increased payouts for overachievement and are used to create differentiation among average and top performers. Payments accelerate over 100% of performance and continue to pay out at multiples above target — typically three to four times the target incentive.
- Incentive payout caps. These are used to prevent overpayment or to ensure the company does not go over budget. An experienced design expert knows how to limit incentive caps on primary compensation measures.
- Measurement periods and pay frequency. Performance is typically measured in defined calendar periods (e.g., monthly, quarterly, semi-annually, annually). Many experienced design experts use cumulative pay periods, typically a year (cumulative year-to-date results), as companies often hold back excellence payouts until total cumulative results are tabulated. Reps do, however, get paid on their performance up to 100% for non-cumulative periods.
Make Comp Design One of Your Specialties
Increasingly, sales compensation design is becoming a highly specialized practice due to today’s sophisticated selling models. Education – both formal and informal – can help you to:
- Understand compensation principles
- Understand how strategy plays into design
- Apply a disciplined mindset
- Navigate plan design
- Create an effective compensation plan.
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