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Modern Elegance

Composing a Fine-Tuned Sales Comp Plan

How hard can it be to pay commissions to people involved in the selling process? It’s a simple equation, right? Well, it used to be, then it evolved.

Today, compensation managers have the remarkable flexibility to inspire behaviors on a more granular level than ever before. They also have analytical tools — combined with comp management software and the rich data it contains — that enable them to see exactly how changes to a plan affect sales. They can continuously fine-tune their incentives for ever-better performance.

But just because comp professionals can, doesn’t necessarily mean they do. Some companies, especially those still using spreadsheets, oversimplify plans to make them easier to manage. Others are on the opposite side of the spectrum and make plans too complex. While more metrics can mean more granularity in terms of analyzing metrics of behavior, too many goals often distract sales reps and put them in a situation in which they will chase the goals easiest to attain. Not only can this cause misalignment with a company’s overall objective, research has shown it can cause a higher rate of rep turnover, lower quota attainment and more commission payout errors.

The question for comp plan designers: How do you drive maximum performance from your sales team through the use of data in managing compensation while also making the comp plan manageable and easily understood by the salesforce?

Define ‘Effective’

Step one — a step that shockingly few companies take, by the way — is to define what “effective” means in the context of your business goals. We all like to see big numbers at the end of the quarter, but most companies have goals that are a little more nuanced than that. For a comp plan to be successful, it needs to drive behaviors that move all the important needles for a business.

But defining effective is not terribly easy. It requires some introspection, input from various stakeholders associated with sales and an ability to look past the obvious answer that effective merely corresponds to higher sales numbers. Different incentives work better for different objectives — meaning that what’s considered effective by one constituency may not be seen that way by another within the same company.

Objectives driven by sales tend to center around basic numbers, such as total sales. But if your business sells a broad array of products or services, your objective may be to ensure that sales is selling the full line of offerings instead of just the core products. Or, on the flip side, maybe you are trying to incentivize selling the solutions your company sees as its future (as we have seen rampantly as companies move from on-premises systems to the cloud). If your incentives reward salespeople for selling everything equally, the tendency may be to sell the things that are easier to sell, perhaps to the exclusion of higher margin items or products and services that are better at creating long-term value for the company and lasting engagement with customers.

Depending on your organization’s needs, it could be desirable to alter your incentives to influence changes in a number of variables. These variables include the kinds of customers your sales team goes after, the timing of sales (to spread sales out to avoid the panicked rush at the end of a quarter, perhaps) and the product mix they’re selling.

It’s not merely the commission structure you need to consider as part of this. Bonuses and sales performance incentive funds (SPIFs) also need to be examined regularly to ensure they’re driving the behaviors that are priorities for your organization. These mechanisms are designed to change behaviors quickly — for example, to help salespeople understand the upsell potential of a new service so they start regularly adding it to their sales conversations. Once the effect has been achieved, the bonus ends and something else can be targeted. However, on many occasions, bonuses and SPIFs are left static beyond their initial influence. They become easy money that rewards behavior that has become routine. That’s not their purpose. Make sure that your bonuses and SPIFs drive change that helps you achieve your organization’s objectives.

Issues of what, when and to whom your sales team sells are all objectives that sales ought to be thinking about. But there are other objectives the company might prioritize, and finance may be able to help identify them. For example, a push toward better margins might require incentives that reward salespeople for selling certain, better-margin products. Recent changes to the Revenue Recognition Standard ASC 606 and IFRS 15 can change when and how revenue appears on the corporate books. So it may be in a company’s interest to incentivize deals that lead to recognition of revenues at different points over the duration of a deal.

To state it succinctly: You must align your business goals with the compensation mechanisms you use.

One-Size Incentives Do Not Fit All 

Once your objectives are understood, you can start applying the right incentives to reach those objectives. Here, again, it’s not as simple as laying out a one-size-fits-all plan, for a good reason: The various people involved in the sales process have different roles, and thus their motivations are different. The common advice is to align goals and compensation across the organization. But that doesn’t mean that you make the goals the same for every role. That’s almost a guarantee of disappointing results and dissatisfaction among some members of your team. Instead, you need to align goals based on objectives with the roles of your team members in mind.

Different incentives work better for different roles. For example, the incentives you set for sales reps will be different from those you set for sales managers. Reps earn commissions based on their own results. Managers, even if they maintain some selling responsibilities, are ultimately compensated on the outcomes achieved by their teams. Thus, a rep might be measured based on the value of closed deals while the manager might be measured on things that lead reps to close more business — training, work with sales operations, customer meetings, etc. These things on their own don’t result in closed deals, but they better equip sales reps to close more deals, thus producing more revenue.

The rep-sales manager divide is clear. But there are others in the process who exert influence on the selling process whose incentives must vary based on their roles and objectives. For example, many sales engineers, who confer with customers and engineers to assess equipment needs and determine system requirements, earn a commission based on closed deals. However, a sales engineer may make additional important contributions — helping customer success with a customer problem, for instance, or developing a demo tailored to requests from an analyst at a market research firm. If the compensation doesn’t recognize these additional tasks, the result may be that the sales engineer doesn’t devote much time or energy to them. That won’t affect the compensation, but it could hurt future sales through poor word of mouth from dissatisfied customers or lost opportunities caused by a substandard analyst evaluation. Those negative impacts won’t be on the sales engineer alone. They hurt the performance of the entire organization. Incentivize the sales engineer to commit time and energy to those activities and the result is likely to deliver organization-wide benefits.

Similar factors should be considered when developing incentive compensation for account development reps (ADRs), sales development reps (SDRs) and inside sales reps (ISRs). Understanding and rewarding them for their most valuable contributions is vital because it will incentive them to spend more time on those tasks. For example, many SDRs are evaluated and compensated for marketing-qualified leads. That can help boost the lead totals but may work against sales by overloading reps with fewer ready-to-buy leads. Depending on what sales wants, perhaps SDRs should be compensated for marketing qualified leads that turn into sales-qualified leads — or for meetings scheduled for salespeople. And don’t forget to adjust incentives when objectives change, even temporarily. One company that sponsored a major conference used their SDRs to call potential attendees — not potential leads — for several weeks to increase attendance. Since their compensation plan wasn’t altered to reflect this, the act of promoting the conference prevented them from earning their incentives, which led to a demoralized SDR team.

What Does Success Look Like? 

Understanding what the organization needs from different roles is vital. That understanding needs to be informed by the context of the business itself. Different incentives work better for different businesses — and not just because of unique aspects of different vertical markets.

For example, the stage and age of the business can influence the metrics you use to define success and the sales behaviors you want to encourage. A young company needs customers, so incentives may lean toward numbers of new customers. As the company matures and retention becomes crucial to profitability, adding incentives around customer satisfaction with the sales process may become important, as will upselling into existing accounts.

The age of the product line may also affect compensation plans. An established product line that sells well may be compensated at one level, while new additions to that line — additions that extend capabilities for customers while deepening engagement — may be rewarded at a higher level.

Is the company an innovator or a chaser? Innovators need to spend more time educating the customer base, meaning that sales may face a longer buying cycle and may need to work closely with sales operations to provide insight into what sales tools work and which ones don’t. If a sales rep isn’t rewarded for devoting time to that critical collaborative stage, he/or she may skip it in favor of running down early adopter leads and leaving an organization-wide blind spot that damages sales in the next few quarters. Chasers, selling to audiences that are more aware of their needs, may be more dependent on traditional volume-related metrics.

Your incentives will be different based on whether you’re measuring success based on sales volume or market share. For example, if you’re trying to build market share, sales may be compensated more for customers who switch from a competitor. If you’re trying to boost sales volume, you might reward salespeople more for landing customers from new vertical segments.

That’s a lot of variables: how you define success; the age and stage of your business; the state of your product line; the specific roles of your sales team members; and the behaviors that lead to success. But if you’ve defined your objectives, you should then be able to articulate key performance indicators (KPIs) that indicate how well members of your sales team are achieving those objectives. Working backward, you can then identify opportunities to improve sales behaviors based on those KPIs. And to drive those behaviors, you can tailor incentives.

Keep it Simple, Play Fair

The underlying process of thinking about definitions, objectives and incentives sounds very complex, and for good reason. It reflects your business and the unique thinking of your leadership. The process will be distinct for every organization. But once you’ve thought it through and can identify the behaviors needed to motivate your team to achieve those objectives, the next step is to design a compensation plan that favors elegance over complexity.

Your team needs to understand their incentives in order to act to attain them. A complex set of incentives will result in salespeople pursuing only the easiest-to-achieve incentives and ignoring the rest, defeating the point of the exercise. Similarly, overly complex plans invite overpayments when many people are involved in the sale in overlapping ways. Without visibility into these scenarios, it’s easy to create conditions in which commission payments erase any profit on a particular deal.

Simplicity also goes a very long way toward creating a positive selling environment for top MOD performers. A few easily understood metrics (analysis across more than 1,400 companies has found the optimum number to be three to five metrics) makes it easy for reps to focus on the types of deals that the business wants to close — and which will make the reps the most money. A complex plan makes it impossible for these performers to focus on the right behaviors. Simplicity delivers better sales results and reduces the amount of confusion and conflict. Simplicity also helps prevent inefficiencies and revenue roadblocks from being built into comp plans.

Once the plan’s in place, you need to make sure that your team is ready to execute it most effectively. Without that, it can be difficult for team members to succeed, no matter how carefully the plan’s been thought out.

For example, developing and managing sales territories is vital for maximizing sales and helping every sales team member have the best opportunity to achieve their incentives. Territory management is much more than simply carving up geographies and assigning sales reps to them. It also factors in the potential of each region, the value of available deals and other factors. If you have too few opportunities in a region, the rep is likely to become dissatisfied, end up with idle time and deliver below-potential results. Too many opportunities in a territory mean that the assigned rep won’t be able to contact every likely customer or won’t need to contact them in order to make his or her number, leaving money on the table every quarter. When managed properly, each territory should contain precisely the right number of leads that can be worked effectively by each rep.

Cultivate Long-Term Success

Sales organizations also need to develop sales talent — not just so sales reps can be better in their current roles, but so they can evolve within the business. Having clearly defined career paths, with the resources needed to cultivate reps, is tremendously helpful in reducing sales staff churn, an expensive drain on the bottom line. It’s also the best way to guarantee that when a sales manager is promoted that he or she is prepared for success. Many companies simply promote top-performing sales reps into sales management roles. But the skills needed for sales managers are wildly different from the skills needed to be great salespeople. The selling background informs the management skills, but few managers have a chance to learn those skills before being thrust into a management role. By considering career paths as a key component of an effective sales organization, businesses can build a pipeline of effective sales managers who can be promoted from within the company.

Finally, organizations need to use all the tools at their disposal to understand the total cost of sales. That means delving into the compensation management system to understand the amount of compensation paid, the costs of sales and marketing and the other expenses the company incurs from the time a lead is generated to the moment a deal is closed. This will help identify areas of the sales process that are absorbing an inordinate amount of dollars, such as multiple commission payments associated with the same deal. Usually, these areas reveal weaknesses in the process. Addressing them can bolster sales effectiveness while reducing selling costs.

Modern sales have a lot of moving parts, but defining effective incentives based on business objectives provides you with a road map for arranging those parts so they work together. With some fine-tuning, constant attention to what’s working and what isn’t, and the right set of tools, you can turn those moving parts into a powerful sales machine.

Erik Charles Bio Image

Erik Charles is the vice president of strategic marketing with Xactly Corp. Follow him on Twitter or connect with him on LinkedIn.