4 Steps to Effective Compensation Plans

Too many businesses are stuck in the past. They compensate sellers with a one-size-fits-all approach, using money as a tool to both motivate and instill fear.

Traditional commission plans are ineffective at achieving either of those ends. Dan Pink argued that point convincingly in his 2009 best seller, Drive: “carrots and sticks,” he says, “are so last century.” Here’s how we can do better.

1. Define goals first

The first step is to define your organizational goals (not just your sales goals) before deciding how you’re going to compensate people for achieving them. Sounds obvious, but most compensation plans for sellers are set in isolation of the company’s broader strategy.

Heed the lessons of two different clients. First, there’s the manufacturing firm that decided all sales reps would be compensated based on hitting a single target, no exceptions. That made sense when territories were all U.S. based. But when they expand internationally, the goals no longer made sense because they were unattainable in those new markets. Compensation became a morale killer. Good people moved on.

Here’s a second example: A chemical company set a unit sales goal that was twice what the unit production team was prepared to meet. It ought to have been obvious that you can’t sell what you can’t ship, but they persisted quarter after quarter while top people fled the company in frustration.

2. Variety defines the future 

Greater variety is already the norm in today’s marketplace. Bigger territories come with more customers who have diverse needs, and top sellers are meeting those needs with hybrid skills and a more team-focused approach. Your compensation strategy must reflect these facts. The more rigid you are, the more likely you are to fail. If you have a territory with little growth potential, it should have a compensation plan tied to client retention, but that won’t work in a greenfield territory. There, you should have a plan that rewards market-share growth. The rule of thumb is to be flexible based on the desired results for each territory or product line.

3. Results are everything

Eliminate pay for activity and instead focus on pay for results across all departments. Not just sales.

Pay no longer reflects the hours put into a job, but instead on how well your team achieves results. This favors entrepreneurial workers who strive not only to earn a good income but enjoy an adaptable schedule. They thrive on this compensation model because it aligns compensation with what they value: Working at a higher speed to enjoy greater freedom in life. With a results-based work environment, commission plans can be phased out. You pay a higher salary but it comes with the expectation that people deliver results or be moved out. Accelerators are added for those overachieving targets.

4. Make transparency the norm

I'm shocked by how many sellers tell me they have no idea how their compensation is calculated. All they know is that they get a bonus each quarter. But they are stuck with a system that keeps them in the dark on how--and how well--they're going to be rewarded for results.

That's no way to run a business! Your sales team deserves better than a guessing game. Clear goals and greater flexibility are going to be the norm in the future, so it makes sense you should also show your personnel how they will be rewarded.

Post goals and bonuses based on KPIs that are communicated and tracked monthly. Performance Management Software, such as Xactly, is becoming popular because staff can see real-time updates on their progress on commissions and bonuses.

In summary, compensation must align with all your business goals. Not just your sales goals. Compensation has to be flexible enough to make sense in a variety of circumstances and challenges. It also needs to be tied to results, not activity. On top of that, be ready for total transparency with how bonuses are earned. Each of these steps is crucial in rethinking how you look at pay and will serve your business well in the future as it continues to grow and thrive.