- Align to the organization’s definition of success. Effective sales teams measure compensation program success on the ability to achieve strategic growth objectives.
- Consider top- and bottom-line growth. Carefully select plan measures so the sales team is incented to drive profitable growth.
- Manage the costs. Focusing on program governance can help you realize appropriate return on investment and minimize cost overruns.
Sales compensation budgets can become a target for corporate cost-cutting initiatives — particularly in a constrained business environment — if the related plans don’t drive the right behaviors and align with the overall organization strategy.
Learn: Sales Compensation: Strategy and Design Application
As you evaluate your sales compensation plans for the next fiscal year, consider how several focus areas may help you maximize return on investment by driving revenue and margin growth.
Target Outdated, Misaligned, Poorly Implemented Plans
Sales compensation plans do more than dictate the way you pay your sales team. They can be a strategic tool to motivate, reward and align your sales force with organizational goals. However, many sales comp plans are outdated, misaligned or poorly implemented, leading to suboptimal results. To mitigate such risks, pay attention to several critical aspects of your plans.
Alignment of Sales Drivers with Organizational Goals
Many comp plans reflect a legacy strategy. Your plans should reflect your current and future growth strategy, not your past performance. Consider whether your plans have the right measures, weights and payouts to incent your sales team to pursue the objectives that leadership measures. This strategy can act as a force multiplier, helping field sales teams pursue individual results that align with organizational goals. For optimal results, review the comp program with input from different functions and stakeholders annually.
Align Sales Measures with Key Financial Metrics
Your sales compensation plans should be built with measures that align with organizational success and that your sales team can influence. Sales incentive plans commonly incorporate a revenue and/or bookings target. However, be careful how you define and implement these measures, as they can have unintended consequences on operational efficiency and team behavior.
For instance, using a bookings measure without linking it to revenue recognition or delivery timelines may encourage the sales team to close deals that maximize their payout but limit or fail to influence overall revenue growth. Similarly, using a profitability measure that disallows sales team visibility and control over pricing and costs — but rather pushes a strong governance process and management discretion to determine acceptable deal-level margin — can create team frustration and confusion. In these cases, consider how a strategic product measure may incent sellers to improve margin through product mix.
Top-Down Alignment of Measures and Goals
To increase the likelihood that sales team success translates into organizational success, consider tying the rollup of sales team targets with the overall annual operating plan targets. While this may sound obvious, loosely structured (or nonexistent) sales comp governance programs can lead to discrepancies with how management creates and allocates quotas.
Aligning sales targets with operating plan targets necessitates some commonality in measures between your sales team and management layers. While management plans may have additional measures, especially at higher levels, they should include some measures that are consistent with those used for the sales team. This can create accountability and alignment for team achievement.
Cost Management of Sales Comp Programs
Sales comp programs can represent a significant portion of the organization’s selling, generation and administrative (SG&A) expenses. While a well-designed plan can generate substantial revenue growth and drive profitability, one that’s poorly managed can spawn cost overruns and inefficiencies. A strong, well-defined governance program with cross-functional input and regular review can help effectively manage costs.
Learn: Sales Compensation: Advanced Implementation and Program Management
While many mechanisms can improve comp program efficiency, focusing on a few areas can pay dividends.
Quota Setting and Allocation
Poor quota setting can be a significant driver of program cost overruns. If the target is set too low, you may end up paying your team too much money, as they exceed their goals and earn accelerators. This leads to compensation costs of sales surpassing budget. If the quota is too high, you may risk losing sales talent through demotivation, resulting in unintended turnover costs and a need to recruit new sellers.
Quota allocation, or how you distribute the overall quota among individual sellers, can also have a significant impact on costs and revenues. If the quota allocation isn’t fair, balanced and realistic, you may face situations where growth targets are missed but program costs exceed budget.
Pay Levels
Without a clear, consistent governance structure, sales comp can become misaligned with the market and your pay philosophy. If you don’t have a well-defined job architecture and career path guidelines, you may rely on managers’ subjective and discretionary decisions, which can inflate team pay levels over time. Regularly review market benchmarks on pay levels and monitor how you pay talent compared to the market.
Policies
Many organizations lack well-defined, up-to-date comp plan policies. One often-overlooked policy relates to windfall. Without a clearly defined windfall policy, you may face financial and legal risks for large and unexpected deals. Sometimes, the team may be entitled to huge payouts, even for deals where they had little or no influence. Without a true policy, you may have no choice but to pay them.
A Plan to Withstand (and Enable) All Market Conditions
By focusing on the sales comp elements explored in this article, you may optimize ROI potential, mitigate risks and improve program efficiency. And by doing so, you can help your organization evolve and progress — regardless of market conditions.
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