Build an Effective Sales Compensation Governance Program for Your Organization By Joseph DiMisa, Sibson Consulting
Compensation governance typically is associated with executive compensation. Does governance have a place in sales compensation, too?
Leading sales organizations would respond with a resounding “Yes.” With their strategies of segmenting and targeting customers, sales organizations are becoming more complex. Many of the best-run organizations are discovering that a sales compensation governance program that enables management to maintain the integrity of plan operations, overall design parameters and, ultimately, the cost of sales, helps avoid any “guesswork” or change in company values.
Too often, sales compensation can resemble the “Wild West” with sales management from different business units shooting from the hip when setting the year’s incentives, measures and quotas. Each unit wants its own plans. When a plan isn’t generating results, these same business units are often tempted to change horses mid-stream. Installing a new set of measures, adding money to the plan and/or changing goals is not the answer, nor are different philosophies, payouts or targets.
A good governance program that is created with input from all interested parties (including sales operations, HR, finance, marketing and others) helps an entire organization manage the pace of change by outlining common rules, practices, levels and communication requirements when customizing plans for different areas of the business.
On Your Mark: Outline the Organizational Benefits of Governance
The first challenge will be to get all parties to agree that governance can codify what’s important rather than control an individual business unit’s authority. It’s critical to establish some common objectives about the purpose and advantages of governance that all parties can accept and appreciate:
Develop, design and monitor the most effective sales incentive plan that meets corporate objectives.
Provide a uniform compensation approach for key design steps — assessment, development and implementation.
Ensure that corporate costs, target levels, legal, regulatory and compliance risks are mitigated or controlled.
Provide basic logistical support and accountabilities for the assessment, design and implementation of best practice incentive compensation.
Get Set: Identify the Components
Sales compensation governance provides support for the organization’s decisions on strategy, market coverage and job roles. Therefore, it is important to outline key policies and practices that will ensure consistency and continuity in addressing the eight components of sales incentive design: job roles, target pay levels, mix and upside, measures and weights, mechanics and links, quota-setting and allocation, implementation and administration, and evaluation and planning for the next cycle.
Go: Evaluate Current Guidelines and Create New Governance Standards
Key steps in establishing sales compensation governance should include the following:
Seek Input. Reach out to executives, sales management and other key stakeholders to identify issues and understand perspectives on business objectives, sales strategies, legal risks, compliance risks, costs, supervision, roles of business unit and HR, and plan strategy.
Analyze Current Costs. Look at pay components such as pay vs. performance relationships and high-performer rewards across the organization. Evaluate the current salary/incentive mix/bonus, upside potential, performance measures, weights, links, threshold and excellence levels along with the mechanics used to ensure the new guidelines take current practices into consideration.
Define the Governance Design Principles. Clarify issues such as business unit flexibility and alternatives. Identify key decision-makers and clarify role alignment between corporate HR and business units and how each influence the governance guidelines and design process.
Reap the Benefits
Companies that invest time and effort in sales compensation governance realize a near-term payback in the first year and ongoing returns in subsequent years in the following areas:
Better expense control, resulting in more predictable and lower compensation costs and compensation cost of sales
Improved alignment of jobs and their compensation with company growth objectives to eliminate “directional drag” from opposing company objectives
Increased performance and predictability for business planning
Increased performance tracking and metrics
Improved ability to attract and retain talent through a properly positioned pay program that includes appropriate pay levels and upside earning opportunities
Reduction of legal and regulatory risk from plan non-compliance or unethical behavior
In contrast, simply adjusting payouts or replicating plans used in the industry rarely produces a positive result and often can damage the organization’s performance by creating misalignments between strategy, job roles and compensation.
The choice seems clear: Sales compensation governance can be the means to direct and motivate the entire organization to work together and out-perform the competition.
Joseph DiMisa is a senior vice president and leader of Sibson Consulting’s sales force effectiveness practice and author of The Fisherman’s Guide to Selling – Reel in the Sale – Hook, Line, and Sinker, published in 2007 by Adams Media. Joe can be reached at 770-403-8006 or firstname.lastname@example.org.