- More governance means more performance. As sales compensation plans become more complex, a solid foundation of governance guidelines helps drive performance to company objectives.
- Gather key stakeholder input ahead of implementation. A governance plan designed with input from all affected business units helps the organization manage the pace of change.
- Governance provides a sturdy foundation. A solid sales compensation governance program helps avoid “guess work” when setting plans for different units during changing times.
- Short-term and long-term benefits. Companies that invest in sales compensation governance realize a near-term payback in the first year and ongoing future returns.
The idea of compensation governance typically is associated with executive compensation. However, it’s worth contemplating if governance has a place in sales compensation too.
Leading sales organizations would respond with a resounding “Yes.”
Sales organizations and their strategies around segmenting and targeting customers are becoming more complex. In response, many of the largest and best run organizations are discovering that a solid foundation of governance guidelines, programs and tools empowers a consistent and common sales incentive compensation program that effectively drives performance to company objectives.
A sales compensation governance program that enables management to maintain the integrity of plan operations, the overall design parameters and, ultimately, the cost of sales helps to avoid any opportunity for “guess work” or change to company values. Since sales compensation design is part art and part science, applying more science through a strong governance program allows for better plan design in the long run.
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Too often, the sales compensation arena can resemble the “wild, wild West” with sales management from different business units shooting from the hip when it comes to setting the year’s sales incentives, measures and quotas.
Each unit wants its own plans with its own fingerprints. When times get a little rough, it is also common to see these same business units tempted to change horses mid-stream when a plan doesn’t seem to be generating results. Installing a new set of measures, adding more money to the plan and/or changing goals mid-stream is not the answer. Nor is having multiple plans with different philosophies, payouts, targets and cost parameters.
To align with total company philosophy and culture, stick to well-documented fundamental beliefs and philosophies about pay and adhering to administrative guidelines for budgeting, goal setting and award determination.
Sales operations, human resources, finance, marketing or any other internal organization that is tasked with design and/or the overall alignment among business units does not need to be the new sheriff in town that imposes law and order through stringent regulation.
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Rather, a good governance program that is created with the input from all interested parties and the individual business units helps an entire organization manage the pace of change by outlining common rules, practices, levels and communication requirements when customizing plans for different areas of the business.
On Your Mark: Outline the Organizational Benefits of Governance
If until now your organization has not had common governance practice, the first challenge may be to get all parties to agree that governance can be the means to codify what’s important rather than a method to control an individual business unit’s authority. Therefore, it’s critical to establish some common aspirations about the purpose and advantages of governance that all parties can appreciate and buy into.
The following are common objectives that well-run organizations with solid sales compensation governance programs have identified as the primary reasons for their sales incentive governance program:
- Develop, design, monitor and enforce the most effective and consistent sales incentive plans that meet organization objectives.
- Provide a uniform compensation approach around key design steps assessment, development and implementation.
- Ensure that corporate cost parameters, target levels, legal, regulatory and compliance risks are mitigated or controlled.
- Provide basic logistical support, rules, timing and accountabilities for the assessment, design and implementation of best practice incentive compensation plans.
Get Set: Identify the Components
Sales compensation governance provides a support for the organization’s decisions on strategy, market coverage and job roles. Therefore, it is important to outline key policies and practices that will ensure consistency and continuity in addressing the eight components of sales incentive design. These should include:
- Job roles. Define the types of jobs that are covered under the governance guidelines and match specific types of jobs with specific governance policies and standards.
- Target pay levels. Outline parameters for benchmarking and define corporate policies for target levels. This will include market pay levels, pay strategy and target compensation levels for each type of job as well as identify the types of data that must be used.
- Mix and upside. Detail parameters for establishing salary and incentive mix based on job roles, sales cycle and sales process factors. Set upside potential rules for top performers.
- Measures and weights. Define the key performance measures and relative weights that business units must use to link incentive compensation strategies to objectives.
- Mechanics and links. Define the types of payout formulas and mechanics that the organization should use to help ensure the company is clearly communicating objectives and providing proper line-of-sight.
- Quota setting and allocation. Define the process to set quotas for each performance measure and outline how the organization should allocate quotas to job roles, considering market-potential and performance-based factors.
- Implementation and administration. Establish guidelines for standard communications material templates, plan documents and plan policies. Outline how business units should introduce these materials to the organization, including suggested implementation timelines and check lists to follow.
- Evaluation and planning for the next cycle. Define the process to conduct “30, 60, 90” (day) audits. Detail the types of metric dashboards that should be put in place to ensure the plan is meeting corporate standards and business unit objectives
Go: Evaluate Current Guidelines and Create New Governance Standards
Establishing sales compensation governance needs to be an all-inclusive undertaking. The input of all parties must be sought and considered to ensure understanding of the strategic priorities and current challenges for the organization, business units and the compensation program. Key steps in establishing sales compensation governance should include the following:
- Seek input. Reach out to executives, sales management and other key stakeholders to identify current issues and understand perspectives on business objectives, sales strategies, legal risks, compliance risks, costing guidelines, management supervision, roles of business unit and HR and compensation plan strategy.
- Analyze current costs. Look at pay components such as pay vs. performance relationships, distribution of performance, and high-performer rewards across the organization. Evaluate the current salary/incentive mix/bonus, upside potential, performance measures, weights, links, threshold and excellence levels, and mechanics used to ensure the new guidelines take into consideration current practices.
- Define the governance design principles. Define the eight design components to be included in governance tool (see above). Clarify issues such as business unit flexibility and alternatives. Identify key decision makers and clarify role alignment between corporate HR and business units and how each influence the governance guidelines and design process.
Reap the Benefits
Organizations that invest the time and effort in sales compensation governance realize a near-term payback in the first year and ongoing returns in subsequent years. Typically, the greatest returns from a governance investment will be seen in the following areas:
- Better expense control resulting in more predictable and lower compensation costs and compensation cost of sales.
- Improved alignment of jobs and their compensation with company growth objectives to eliminate “directional drag” from opposing company objectives.
- Increased performance and cost predictability for business planning.
- Increased performance tracking and metrics that can help monitor business units pay vs. performance correlations.
- Improved ability to attract and retain the right talent (and stem turnover) through a properly positioned pay program that includes appropriate pay levels and upside earning opportunities.
- Reduction of legal and regulatory risk from plan non-compliance or unethical behaviors by plan incumbents.
In contrast, simply adjusting payouts or replicating plans used in the industry rarely produces a positive result and often can damage the organization’s performance by creating misalignments among strategy, job roles and compensation.
The choice seems clear: Sales compensation governance can be the means to direct and motivate the entire organization to work together and outperform the competition.
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