“Let’s talk about designing new sales compensation plans.”

By simply uttering that phrase to your colleagues in sales, finance, IT, human resources or even among the executive team, you’re likely to see a range of responses – some of them emotional – that indicate a high level of caution, uncertainty and even frustration with the plan design process.

Sales compensation is the single most important factor influencing both the performance and morale of your sales team, so it is understandable that making changes to the “comp plan” causes some level of trepidation.

But in business, change is constant.  And the sales compensation plan is an organization’s best tool for steering and course-correcting the sales team as market influences drive change in corporate goals.  The key to managing change is to have a consistent and proven process for designing, modeling, deploying and communicating new sales compensation plans.

Sales compensation plan design is a science; there is no “art” to the process.  Sales plans based on gut feel or what “worked at my last company” are guaranteed to result in missed revenue, commission budget overruns, and/or costly sales rep turnover.  To create quality plans that optimize sales performance, morale and effectiveness, follow a repeatable and structured approach to the design of new compensation plans.

Best practice sales compensation plan design includes, at minimum, the following critical steps:

•    Know the company goals – What are the corporate goals for the year?  Will the focus be on revenue, profit, new product introduction, new customer acquisition?  The key objective in plan design is to ensure your plans align sales with corporate goals.

•    Evaluate current plan effectiveness – Identify issues with your current plans, and use that information in designing new plans. Are your territories balanced, does quota attainment plot along a standard bell curve, is there a positive correlation between performance and commission earnings, is sales turnover higher or lower than expected?

•   Define your sales roles – What roles are required to achieve corporate sales goals? What is the prominence of each role in the customer’s buying process?  Which roles need hunters and which need farmers? What is the appropriate ratio of fixed to variable (at-risk) pay for each role? Roles like territory rep, account manager, channel manager and telesales rep are distinct and finite; each requires its own compensation plan.

•    Get market data – establish the pay range for each role and identify the target salary, commissions, bonuses and other incentives needed to be competitive in your market.

•    Build the plans – sales compensation plans are really a combination of measures, mechanics and policies:

o    Mechanics – how will the measures be used in calculating commissions?  Will your plan rates be flat, ramped or variable?  Will you implement performance thresholds or multipliers?  Will accelerators be applied as quota attainment increases?  The mechanics define how the calculation logic will work

•    Model plan scenarios – model your plans to evaluate the impact at both the macro (plan cost) level and the micro (individual earnings) level.  You need to be sure your plans fit within budget parameters and adequately reward your top performers.

•    Document and Communicate – the plan document states the terms and conditions of the plan.  Beyond that, demonstrate to your team the science that went into designing and testing the plans so your reps understand that the plans are realistic, fair and attainable.  Maintain electronic or hard-copy records of each rep’s acceptance of their plan document.

•    Automate the plan – Automate your plans with an affordable on-demand sales compensation management solution.  These solutions eliminate spreadsheets and the errors associated with them, provide real-time visibility into attainment and earnings information for your sales team and provide finance with one centralized and secure solution for commission accounting.

•    Measure and adjust – regularly analyze actual versus modeled results in terms of both cost and revenue to make sure your plans remain effective and affordable.  Adjust mid-year if needed, and communicate any changes to your team.

Quality plan design, coupled with efficient automation and frequent communication, will help your company attract, retain and motivate the best sales people.  It will also provide the best path to optimizing sales effectiveness and performance with a balanced ratio of revenue and cost.

For more information on sales compensation plan design, I recommend the following books:

Comments (3)

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Great Overview!
written by Michael Juarez, March 31, 2011

I liked (and wanted to expand) how you brought up the importance of evaluating its macro vs micro level costs. Taking this a step further, it is important to weigh its organizational impact as well.

Trying to avoid costs or simply unaware of options, many SMB's are still exporting data to Excel to calculate commissions. This creates an additional level of detailed reporting which is often overlooked.

It is important to report each payment flow in a detailed matter and deliver this information in a report to each sales rep. Tools are available online for cheap, many times free, and can take care of this issue. I like to give a shout out to this commission tool because it brought me out of a world of pain.

All in all, modeling your sales plan is a great (essential?) idea. How it is often overlooked, amazes me. I enjoyed your article Robert, will

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great article
written by Annette Cohen, May 02, 2011

Great article, I've been looking for basic information on designing a commission plan. Thanks so much!

Annette C.
Sales Compensation

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written by Margarita R. , July 20, 2011

A very well-written and helpful article! Awarding sales compensation is a lot easier when you are able to keep accurate records for each member of the team and present it easily. I'd recommend keeping track of sales in this easy to use template: http://www.oneclickstatements....ments.html

Rita R.

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