The leader of the sales department — the chief revenue officer (CRO) — places a high importance on the effectiveness of the sales compensation program. In many companies, this position owns the program. You can understand the CRO’s passion to ensure that the sales pay program drives the company’s strategic objectives, aligns to the market and motivates sellers to achieve their sales goals.
Sales leaders often dictate their compensation design recommendations. Some of these changes reflect best-class practices, but others do not. It is common practice for a sales manager to port previous plan designs from a prior job/company to a new company. Sometimes, these alien plans make sense, and other times, they do not. Even when using plan designs from the same industry, sales leaders must tailor their plans to reflect their own company’s strategy, jobs, reward philosophy and go-to-market (GTM) model.
“Hot topics,” such as driving new product sales, solution selling, new account selling, contract renewals and customer success, often become part of the annual design process discussion. Many of these noteworthy topics belong in the sales compensation program, while others do not. However, incorporating them into the existing sales compensation program requires prudence and thoughtful consideration. Each measure affects the other and alters how that role will focus its time. All suggested changes — including “hot topics” — require contextual and strategic deliberation.
Each year, many sales comp design teams find themselves focused on executing tactical design decisions as they rush to implement the new fiscal year incentive plan. The pro-posed list of changes might be long and disconnected, such as adopting new measures and changing pay mix, hurdles and accelerators. Due to time limitations, many design teams fall short of being strategic in their design process. The reasons for these efforts being less than strategic include: 1) being absent from the strategy discussions; 2) lacking comprehensive analysis on what is and is not working; 3) not having access to market benchmarks on plan design features; and 4) not having the right stakeholders involved in the decision-making process.
Is there a role for human resources/compensation to contribute to the effectiveness of the sales compensation program? Unfortunately, many HR/comp professionals find themselves on their back foot when it comes to contributing to effective designs. We recommend implementing these four steps to become a strategic partner to your CRO:
- Become an expert on all sales jobs.
- Apply corporate design principles.
- Invest in staying up to date with market practices.
- Set up your governance and manage your stakeholders.
Become an Expert on All Sales Jobs
The purpose of the sales organization is to persuade customers/partners to buy your products/services. The purpose of the sales compensation plan is to reward successful persuasion. HR professionals must invest time to gain a deep understanding of each job in the sales organization. What customers/partners does each role focus on? What offerings/services do they sell? What is the sales strategy — land new accounts, penetrate existing accounts or retain exist-ing accounts? What parts of the sales process do they own: access, persuade and/or fulfill?
To become an expert on the sales strategy, organization and roles, HR professionals can review internal documents, such as sales kick-off decks, sales presentations provided to the board, financial filings (if public) and sales compensation documentation. Interviews are a great method of collecting insights into sales roles. Figure 1 provides a list of topics to cover with various resources during your interviews. Make sure to customize the interview topics to the interviewee. For sales leaders, focus on the GTM strategy. For reps, focus on their jobs and compensation plan feedback. For finance, focus on financial goals and quota-setting practices. For sales operations, focus on sales productivity metrics and processes. If needed, spend time doing a ride-along with field sales reps or listen-in to telesales resources to understand the day in the life of a sales rep.
Apply Corporate Design Principles
Sales comp principles are a set of governing rules and best practices that help guide sales comp design decisions. These principles ensure consistent design practices. Best-in-class companies document principles, as well as guidelines, for each plan design component. Figure 2 outlines the plan design components (see row 3). An example of a specific guideline for “eligibility” is the following: “To be eligible for sales compensation plan design, all jobs must have customer contact, be responsible for persuading their customers/partners and have quantifiable sales goals.” Once documented, secure senior management approval. Use these guidelines to educate sales managers during the design process. Test recommendations against the company design principles to ensure suitability of suggested changes. Lastly, use the guidelines to assess your current plan design practices and build a road map for future plan design changes.
Invest in Staying Up to Date with Market Practices
Many companies are eager to understand what the market is doing. There are multiple benchmark data elements to capture. There is job-level data, such as plan type, pay levels and pay mix. There is measure-level data, such as measure types/weights, pay curves, calculation methodology, performance/payout period and crediting rules. In addition, there is program-level data, such as policies, cost metrics, administration practices and communications timing.
There are multiple methods to gather external benchmarks. Speak to recent recruits to capture their knowledge; however, use caution, as they may have dated or misconstrued information. Network with industry peers. Use third-party data — research your options, such as survey houses, research associations and consultants. Invest time, resources and budget to obtain good data. Interpret the results carefully — do not just copy what others are doing. As stated earlier, leverage best-in-class practices to design plans that align to your company’s phase of growth, strategy and philosophies.
Set Up Your Governance and Manage Your Stakeholders
To effectively manage the design process, adopt a comprehensive governance model. Define who is on the steering committee and has approval responsibility. Identify whom to interview for input. Outline the design team members and their responsibility to their functional areas. Charter design team members to roll up their sleeves to grasp all the inputs and develop the recommended plan design. Identify any strategic advisors who require review prior to final approval. Finally, identify key field leaders to help with program design rollout.
In addition, clearly document the end-to-end process to ensure all parties involved know what to do, how to do it and when. This effort typically includes process maps, roles, governance, calendar, escalation procedures and terms and definitions.
HR professionals who spend time getting to know the organization’s strategy and jobs, leverage guiding principles, understand the market practices and have the right governance structure in place are well equipped to strategically advise their CRO on how to ensure their sales compensation plan is set up for success.