The 7 elements of a sales compensation plan - part 2

Summary: Having a detailed, documented sales compensation plan is cited as one of the biggest challenges of the sales and business leaders I work with. It requires careful consideration and planning, and needs to specifically address all the variables that go into determining compensation, as well as accounting for different types of performers and levels of achievement. In the last Scorecard , I shared the first 3 of the 7 key components that go into creating a robust sales comp plan — eligibility, total target earnings, and pay mix and leverage — and today I cover the remaining 4: performance measurement, quota distribution, performance range, and payment periods.

Incentives and commission caps: a recap

Before delving into the components, I’ll quickly reiterate my thoughts on incentives — an often-debated topic in sales. Some say incentives don’t work, and that motivation should come from within. Others argue incentives are just that — an incentive. I believe effective sales leadership comes down to both: Yes, good performers are natural salespeople even without incentives, but they also typically need that added boost to motivate them.

And while we’re on the subject of incentives, I don’t believe in commission caps: I think they actually hinder performance. Check back to the previous post for more on that, but for now, speaking of performance, it’s the first of the remaining 4 components I’m going to tackle today.

Building the plan – part 2

4/ Performance measurement – Defining the objects of measurement is one of the most important aspects of your compensation plan, and an area where you should spend significant time. You’ll need to be sure you can easily and accurately measure and report on everything you choose. Reporting criteria should include:

a)????Revenue – this could include # of items sold, total revenue by month/week/quarter, etc.

b)???Profitability – this might be margin, profit or amount of discount given

c)????Sales effectiveness – this could be product mix, account mix or territory metrics.

d)???Customer impact – measuring the loyalty of your customers is a key to success in most of the businesses I work with. Your salespeople play a critical role.

e)???Sales cycle – First off, each step in your sales cycle should be documented! I devoted this recent post to the sales process. Assuming you have a defined, documented process, you should absolutely measure the activity at each step.?

5/ Quota distribution – Setting a quota is a delicate process. If you set the quota too low, you run the risk of either overpaying or your people underachieving. If you set the quota too high, you may unintentionally be cheating them. A good quota distribution sees two-thirds of your team achieving quota, with one third failing to meet it.

6/ Performance range – The performance range could be how you actually manage or pay the variable. Let’s say you want to pay approximately a 25% total commission on margin. The lower threshold of your margin range — say, the first 50% attained — might pay a commission rate of 20%; from 50% to 75% would pay at 25%; and from 75% to 100% would pay at 35%.

7/ Payment periods – The last area that requires planning is the length of the period for which you are going to measure performance, and the frequency with which you pay out the variable. These two increments are normally identical, and require you to decide whether they will be:

• Discrete – each period is accounted for individually; performance and payout are not affected by either the preceding or subsequent period.
• Cumulative – the sales team receives proportionally smaller payouts at the beginning of the period; these payments are then factored into the total year-end payout. The reason for using this approach is that it does not reward a rep for getting close: ?95% quota attainment across a sales team can be a problem for a high fixed-cost business where the last 5% is highly profitable revenue.

A good quota distribution sees two-thirds of your team achieving quota, with one third failing to meet it.

One final consideration: how to tailor your plan to your star, core, and laggard performers. The concept of these three groups is discussed in the Harvard Business Review article titled “Motivating Salespeople: What really works” by professors Thomas Steenburgh and Michael Ahearne. Their research finds that:

• Stars need unlimited upside and call it a day once they have maxed out. For them, commissions should be uncapped and accelerated once they reach their quota
• Core performers hit their targets but rarely exceed them. Multi-tier targets with increasing payouts can help motivate this group.
• Laggards need intermittent goals, frequent touchpoints with management, and quarterly bonus payouts (ideally cumulative). It wouldn’t be a bad idea here to also have some bench strength of newer hires who can put upward pressure on this group.

I will finish here by stating the obvious: It is really important to have a documented sales compensation plan — one that is formal and official, and that clearly defines who gets paid when and for what.

Want a second set of eyes on your sales comp plan?

For a limited time I’d like to offer Scorecard subscribers a review of your sales compensation plan at a discounted hourly rate.

You can schedule it using this Calendly link:

https://calendly.com/launchba/introduction-discovery-meeting

I hope to be of help — see you again in 2 weeks!

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