Editor’s Note: Workspan Daily will be publishing a monthly sales compensation column from the Alexander Group for the benefit of our readers and to encourage further discourse on topics vital to compensation professionals. New to WorldatWork? Please feel free to join the discussion in our new online community, Engage, or send your thoughts to firstname.lastname@example.org.
Sales compensation is a living, changing and evolving sales management program. As business objectives change, go-to-market strategies shift and competitors alter their tactics, the sales department must also change and adapt. Often, these changes require changes to the pay program. Each year, more than 90% of all companies make such changes.
Test the health of your sales compensation plan against these 11 program health indicators.
1: Alignment. Does the sales department know what they should be doing? Left on autopilot, sales departments will pursue two objectives: grow revenue and improve sales productivity. “Of course,” you might add, “that is what they are supposed to do!” However, company market strategies are much more intentional and nuanced. The company wants certain types of customers, with certain types of margins buying certain types of products. Business unit management has specific product objectives. Absent regular alignment, the sales department could drift from the company’s desired revenue, customer and product goals.
Solution: Once a year, if not more often, bring key internal stakeholders to catalog, prioritize and confirm the key outcomes expected from the revenue team. Examine the pay program to ensure it reflects these objectives.
2: Job Clarity. Buyer populations are restless. They continue to change when and how they want to buy. For example, ready-to-purchase buyers often seek solutions, research vendors and make purchase conclusions before contacting a salesperson. What is the role of the salesperson in these instances? None? Let the customer self purchase via an e-commerce portal? Or should salespeople be assigned to inquiring customers to clarify, expand and upsell purchases? If the latter, should the salesperson be measured on close rate or cross-sell success in addition to sales volume? As buyers’ behaviors change, the role of the salesperson and the incentive plan should change, too.
Solution: While a company’s business units organize around product categories, sales departments organize around buyer populations. On a regular basis, examine these populations. Configure customer contact personnel to match buyer segments. Continually examine and refine the role of sellers. Ensure the incentive plan matches these evolving seller expectations.
3: Market Competitive. A sales force is purchased labor. Underpay and you will have continuous turnover. Overpay and you will inflate prices making the product less competitive. Most sales leaders abhor turnover and often want to pay above competitor pay levels. However, these practices have pricing and margin implications. Market competitive pay ensures sellers are well compensated without overpaying for their contributions.
Solution: Establish target total compensation levels by job using compensation surveys. Most industries have pay level surveys. Participate in them. Request special cuts of the data. Compare company practices for low-, middle- and high-performing personnel as compared to market rates. Manage to the company’s market-defined pay position. Accelerate pay levels for underpriced sales jobs and decelerate pay increases for overpriced sales jobs.
4: Cost Effective. Compensation cost of selling (CCOS) compares the cost of the compensation plan to revenue production. This calculation produces a percent of revenue paid in compensation. Senior management expects sales leaders to reduce the cost per order dollar, i.e., sales volume should increase at a greater rate than compensation costs. A second cost implication is ensuring the payouts align with production: a sales compensation plan should not pay out 110% of incentive budget when the company only achieves 95% of its sales goal. Finally, the mix and number of sellers affect selling costs. In some instances, it might be more cost effective to have a telephone sales representative handle a customer rather than an expensive outside seller. As markets mature, the number of expensive outside sellers might decline.
Solution: Examine the headcount, allocation of selling tasks and market rates to ensure the cost of selling is suitable. Assess the compensation plan to ensure payouts match performance.
5: Company Design Principles. Sales management needs design principles to follow when crafting sales compensation plans. What are principles? Principles provide guidelines for plan components when crafting an incentive plan: eligibility, target total compensation, pay mix, upside potential, number/type/weight of measures, performance/pay periods, quotas, crediting, formula types and exception practices. Each sales job will have its own sales incentive plan, but it should conform to a company sales compensation framework.
Solution: Corporate total rewards professionals should work with sales leaders, finance and business unit management to develop uniform sales compensation design principles, which apply to all businesses on a worldwide basis.
6: Engaging and Consequential. Consider this: You are a salesperson. What do you want from your sales compensation plan? Your reply confirms the purpose of the sales compensation plan: reward your sales outcomes. A sales compensation plan should capture the attention of sellers. The plan should be engaging and consequential. Engaging? Sales personnel should see the alignment between their sales responsibilities and their pay plans. Consequential? Exceptional results should earn exceptional rewards.
Solution: Each pay plan needs to be validated against the charter of the sales job. This should be done on an annual basis. Begin with the confirmation of job duties for the next fiscal year. Examine the pay plan to ensure alignment. Adjust as needed. Most annual changes adjust performance measures and their weights. Test the compensation plan for performance recognition: Better performers should earn more than lower performing sellers.
7: Accurate and Timely. You can hear the tapping fingers on a desk, as the seller asks, “Where is my commission statement?” Or the more frustrating, “No, this cannot be right; they are missing several closes I had this month.” Sales compensation administration must, without exception, provide timely and accurate incentive calculation results.
Solution: Make the commission reports a joy to read. Give accurate and timely performance period results. Produce trending charts. Allow earnings projections. Provide a means to audit results. Make crediting review requests easy. Invest in commercial applications: Retire spreadsheets, internal applications and misfiring ERP modules.
8: Analytical Assessment. Millions of dollars are flowing through the sales compensation program. Is the plan working? Are the dollars being well spent? It’s a complex system. It needs real-time reports and charts to monitor the effectiveness of the program. Can sales compensation managers answer these questions: What is quota performance distribution? How are costs compared to budget and sales results? What is the distribution of earnings? How many corrections are occurring: crediting, quotas and clawbacks? How well is the sales force achieving specific market and product objectives? Turnover rates: good, bad?
Solution: Assign sales operations and commission accounting to produce regular charts of sales performance and incentive plan payouts. Monthly charts provide good visibility to performance and pay progress. Quarterly audit reports ensure governance oversight. Annual assessment reports help evaluate the pay plan for effectiveness and improvements for the next fiscal year.
9: Defined Governance. Who is responsible for what? Sales compensation has numerous stakeholders and contributors. What is the role of sales management, sales operations, HR/compensation, finance, commission accounting and product management? Who has day-to-day responsibility for managing the pay program? Who ensures effective plan administration? Who is responsible for the annual redesign process?
Solution: Undertake a stand-alone effort to define governance protocols and assigned accountabilities. Establish an annual calendar confirming administrative, management and design milestones. Review with stakeholders to secure concurrence.
10: Transparent and Compliant. Transactions should be visible and auditable. Situational program changes and policy exceptions can erode plan effectiveness. Legitimate questions arise. At times, management needs to consider changes and exceptions. However, without a defined process with visible reporting practices, it could bring challenges to the program’s fairness.
Solution: Establish reporting requirements to preclude pay program dollar leakage and legal challenges. Require management to document changes and exceptions. Confirm approval protocols. Maintain a repository of decisions and adjustments.
11: Document and Communicate. Wrapping up the detailed PowerPoint sales compensation presentation at the national sales meeting, the VP of sales concludes, “…and that’s your new sales compensation for this fiscal year!” What? Wait a minute! Is that it? Is this the only sales compensation presentation for the new fiscal year? Here is a better message for the VP of sales to offer at the meeting, “In closing, now that you understand our business imperative for the fiscal year, you will be meeting with your sales leaders to learn how your sales compensation plan aligns with your sales objectives. You will be receiving your incentive plan document and individual sales objectives. You will find a plan calculator on the sales website portal to help you model your earnings potential. Have a great selling year!”
Solution: Have sales leadership present, inspire and confirm the goals for the new fiscal year. Avoid an HR/sales operations roll-out roadshow. Train sales management to communicate the new plan to their direct reports. Prepare full prose plan documents for each sales job. Give each seller their individual sales goals. Require signed acknowledgement of receipt. Provide ongoing communication of program progress and plan changes.
Confirm the Health of Sales Compensation Programs
Sales compensation is an effective and powerful sales management performance program. Use these 11 indicators to confirm the health of your sales compensation program.
Good health practices will ensure the success of your sales pay program. Otherwise, you might have to make a trip to the sales compensation emergency room.