We’re nearly halfway through the year and your salespeople have received monthly reports and at least one payout. They’ve started forming conclusions about the kind of year they may have from a variable incentive pay perspective. They’ve also started judging the achievability of their quota. In an economy in which sales jobs are plentiful, your sales team’s perceptions of their full-year payouts could make them more willing to pick up that next headhunter call.
Meanwhile, at corporate headquarters, the executives you support have started identifying some initial trends in their performance against their business goals. They’ve begun formulating an opinion about the likelihood of achieving their full-year business goals — and if those goals aren’t likely to be achieved, your leaders may be looking for a short-term course correction. (Or, sometimes, when sales results are being significantly overachieved, Finance wants a course correction, usually in the form of quota increases.) For better or worse, executives often look to the sales compensation program first to address missed business results.
As a sales compensation leader, you’re sitting in the middle of both groups. If you wait until the end of the year to assess the sales compensation plan, it could affect the company’s sales performance, compensation cost of sales and salesperson motivation and retention for the rest of the year. Right now is the time for you to develop the definitive, comprehensive, fact-based assessment of how the sales compensation plan is performing. And any checkup should be centered around your two key constituencies: executives and salespeople.
Executives: Are They Achieving Their Desired Business Results?
The primary purpose of any sales compensation plan is to support the strategy by driving desired business results. If that part of the plan isn’t working, your No. 1 priority is to get it on track.
First and foremost, determine whether it’s the plans that are affecting the results or some other element. For example, assume you have a launch product that’s garnering half of the expected year-to-date revenue through midyear. Your first reaction may be to try to increase reps’ motivation by allocating more compensation to the launch product’s sales effort, but perhaps the market isn’t really taking to the product, the forecast was overly optimistic or your salespeople don’t know how to sell it. In this case, putting more money on the product in the sales compensation plan is simply “energizing incompetence,” leading to increasingly frustrated salespeople and a higher cost of sales rather than to better results. A few interviews with internal leaders and potential customers help answer this question.
Let’s assume that something can be done with the sales compensation program to address poor business results, starting with how much incentive you’re paying for each desired result. For example, if “minimizing price erosion” is a business result that you’re trying to achieve, how much incentive do you have on this result? What percentage of your incentive pay is actually paid on that result? Is that percentage consistent with the relative importance of the objective?
Another worthwhile check is to assess total earnings vs. earnings on the most important business results. How highly correlated are total earnings with key business results? Can salespeople earn what they want to earn without achieving some of these key business results? If so, does something need to change in the incentive plan so that this doesn’t happen?
If the correlation between total salesperson earnings and their business results achieved is low, it could be a sign that there are too many metrics in the plan (people can pick and choose how they earn), the key business results aren’t weighted heavily enough, or a dozen other reasons. Your job is to figure out why you’re not hitting your business results and then formulate a plan to rectify it.
Finally, sales leaders don’t just care about the business results being generated, they also care about the cost of sales required to get there. Based on your overall performance level as a sales organization (whether it’s 96%, 100% or 102%), are you paying out what you forecasted you would at the beginning of the year for this performance level? Make sure that you factor in any plan feature that doesn’t pay until year-end. For example, if your team is at 108% through midyear, but you reserve much of the upside payment until year-end, consider that in your cost estimates.
Salespeople: How Are They Feeling About the Plan, Quotas and Payouts?
Salespeople’s views of the plan should be analyzed both qualitatively and quantitatively. For the qualitative portion, you can conduct interviews or focus groups with a subset of the salesforce, or you can survey the field to get a snapshot of how they’re feeling about the plan. A survey should include questions about plan understanding, the fairness of the plan (internal and external), the upside earning opportunity, quota reachability and the plan’s ability to drive desired behaviors.
It’s helpful to track this over time to see how certain scores change. A score of 5.5 on a seven-point scale is an interesting data point, but when the score on the same question a year ago was a 4.5, it shows that you’ve meaningfully improved on that dimension.
In addition to survey information, best-in-class companies overlay their pay and performance data onto the scores. It helps to paint a brighter and clearer picture of how people are feeling. If the only people who feel that the plan is unfair are those who are furthest below their quota, then that’s a telling bit of information and may lead to different actions than if the people who find the plan to be unfair are only in the largest territories.
Some companies are wary of over-surveying the field and taking them away from their primary job of selling. This is especially true if you already conduct a year-end survey of how your salespeople feel about their incentive plan. To minimize this, you can survey a subset of the salesforce (assuming you have enough salespeople to get a representative sample).
Alternatively, you can rely on the second half of the salesperson assessment: quantitative results, for which you’ll want to check two categories:
Individual pay for performance. How well are your top performers paid vs. benchmarks? What about your bottom performers? How many of them earn nothing in incentive pay? How many are earning at least their target incentive?
You should evaluate these numbers against previously established target ranges to determine if a significant issue could be developing. For example, if you have too many salespeople earning no incentive pay, it could mean that your quotas are too high or too front-skewed toward the beginning of the year. Or perhaps your payout curve has too high of a threshold for them to earn an incentive.
Individual payout fairness. Are any factors affecting payouts other than a salesperson’s effort and ability? For example, if you see a negative correlation between payouts and quota size, the plan would be considered unfair and a correction may be needed. Take the qualitative feedback (if collected) during this phase and test every element that salespeople believe may affect their performance and payout.
Try to complete your audit as quickly as possible. It doesn’t do anyone any good to have a completed audit ready in October. Design the audit with the Pareto Principle in mind: Focus on the analyses and assessments that will provide the most results with the least amount of effort so that you can act on them quickly.
Once the audit is complete, piece together the facts into specific conclusions and recommendations. Saying, “60% of salespeople are below quota,” is true but useless. Saying, “We are likely to have two-thirds of our salespeople below quota by the end of the year, and historically that has led to above average turnover,” is a much more useful finding. Aggregate all data points into concise conclusions and, from those conclusions, form recommendations for how to adjust the plan (if at all) before the end of the year (or for the following year).
Take your recommendations to the company’s senior leaders. Most companies will avoid midyear changes to the sales compensation plan unless the results are dramatic. At a minimum, you’ll have accurately diagnosed the issues with the current plan and set yourself up well for 2019 changes. In extreme cases, you’ve headed off increased attrition and disastrous business results. In either case, you’ll likely find that the audit is a worthwhile exercise.