When sales compensation plans need to be developed the air begins to grow cold, no matter what time of year it is. It’s the dreaded sales compensation plan monster. And that monster is ugly with bad breath. But, don’t despair there is a straight-forward seven step process to design a winning sales compensation plan.
Designing, revising or revamping sales compensation plans does not have to be a scary or daunting task. It can be a process that unites the key objectives of the company. It is a task that will also touch almost every department of the company. Try this process. It works! You can DIY or you might prefer to have some external consulting assistance.
1. Review the sales job description.
Most companies think they know what the job of sales is. In reality it is one of the most frequently changing roles in the company. In order to achieve success a sales team must adjust to multiple factors: internal, customer, competitive, economic, market, political and more. In this step, ask stakeholders in sales, marketing, channel partners, business partners, customers or others to independently define the role of a sales person in your company. The more stakeholders surveyed will yield a more complete description.
2. Identify the plan objectives.
Start with the end in mind. Poll finance marketing, sales and human resources for the measurable outcome they would like to see from sales people. Objectives will differ by group and will generally fall into several useful categories such as business objectives (step 3), compensation level (step 4), incentive objectives (step 5) and administration process (step 6).
3. Identify business objectives – controllable, measurable job elements
The outcome from this step is to establish the primary driver(s) or business objectives for the sales compensation plan, also referred to as targets, assignment, objectives or quotas. This is the most challenging step of the process. Step two provided key business objectives. Select one (and no more than three) key objective that will drive the compensation plan. Work collaboratively to unite the key departments around the company objectives. Test the selected objectives: 1) Are they controllable by sales? 2) Are they measurable by finance? 3) Are they challenging yet realistic?
4. Establish level of compensation
The outcome from this step is a compensation matrix with job position (or job responsibility) on one axis; the other axis contains salary, incentive and TTC (total targeted compensation at 100% of plan). Step two yielded critical information to determine compensation levels, such as: industry comp averages, salary-to-incentive mix, cost of sales and past compensation levels.
5. Determine incentive objectives and method of compensation
To over simplify things, there are three fundamental sales compensation plan types: straight salary, straight commission or a combination. Today 75% of companies use a combination plan. Straight salary plans typically earn less than straight commission or combination plans. There are four basic building blocks with options to choose from in each:
- Salary
- Incentives, such as commission, draw, bonus, profit sharing, award travel, gifts, and stock options
- Benefits, such as paid vacation, insurance, housing or moving expense, company car, tax or legal assistance, pension or 401k matching, etc.
- Expenses, covering things like travel, cell phone, internet, home office, supplies, laptop, airline clubs, etc.
6. Test and establish administrative process
Involve Finance early in the process. Even the best comp plan will crumble if it cannot be administrated. The acid-test is to take actual sales performance from the prior year and compute the compensation impact with the new plan. Test the plan with multiple data points – high performers, low performers and average. Ask sales management to look for ways to break the new plan or “game” it, that’s a great test.
7. Install plan and distribute regular dashboard measurements
Comp plans should be designed to motivate sales people, stimulate sales and recognize achievement. Create a dashboard that will be regularly updated that shows individual and group performance to the objectives. Performance, achievement and recognition should be highly visible. Sales people thrive on recognition for achievements, consideration as a valued employee and self-expression through individual contribution.
The prospects for sales success look bright when you have a well designed sales compensation plan to guide the way.