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Tying the Sales Compensation Plan to Organizational Strategy
Interview with Dennis Spahr, Vice President, Sibson Consulting

SCS: What ought the sales practitioner and person responsible for variable pay be thinking to tie the compensation plan to organizational strategy?

DS: The first thing is to know what the organizational strategy is. Comp people should find out specifically what is the marketing strategy, the product and service offerings, the key customer segments to the organization, and the sales strategy. Is it about getting new business, growing existing business and/or keeping current business at all costs? Sometimes comp folks don’t know, and the management doesn’t feel the need to let them know.

Also, organizations sometimes implicitly change their strategy, especially right now. The change is sometimes subtle, but it can cause misalignment between the compensation plan and strategy. Maybe external competition is changing; maybe you’re focusing on products with higher profit margins. You need to stay in touch with your sales leaders, HR leaders and business leaders. Be a trusted partner by running a regular analysis on pay versus performance. Answer their questions: What does our performance distribution looking like? Are our top performers performing the way they used to in the past? You can provide incredible value to the sales leaders if you do that.

SCS: When it comes to changing strategies right now, are there any special concerns in this downturn? How can you avoid temptations to look at short-term issues and change the compensation plan too quickly?

DS: Sales compensation is oftentimes a circuit-breaker. When it goes off, you know something’s wrong. But usually it’s not sales comp, it’s something upstream. For example: Let’s say you lower your goals/quotas because people aren’t making sales numbers. That certainly seems like a good idea to help salespeople, but you’re automatically raising your cost of sales and breeding mediocrity. Another solution would be to break the quotas up or go to milestone measures.

SCS: What does executing against strategy entail and how can you take the lead on this?

DS: For some sales executives, it’s counterintuitive to look at more than just the results and numbers. Now is the time when more progressive companies are taking a look at what is keeping the top performers still performing? Sometimes, it’s the best territory — that’s not a good answer. The better answer is that you find out they stay in contact with the customer on a regular basis, they keep the profile up to date, they know when to bring in specialists to meet with customer.

That’s the performance management part. If you’re a true HR partner, you don’t just pay out the compensation and have no idea how the person is performing.

You first need to look at a clearly defined sales compensation philosophy, defined, understood and agreed upon. If you don’t have that, you get people having one-off plans. Are you a cost-of-sales philosophy where you pay X % on every dollar brought in? Or are you a cost-of-labor philosophy? Is your company paying at the 50th percentile or 90th percentile?

The second key is to truly understand what the sales roles are. It doesn’t have to be a nine-page job description. I’m looking for the job responsible for keeping existing business, growing business at existing accounts or getting new business. I can’t tell you how many times that gets clouded.

The third key is measures and weights — making sure that the incentive measures are aligned with company strategy and weights are appropriate for the role and the strategy. Sometimes you’ll hear that a company changes its comp plan every year, but really it’s tweeks to the weights and measures. This year, it’s less about revenue and more about profit. Technically, those are changes to the plan, but that’s a tweek if you ask me.

SCS: Do target pay levels vary by strategy? 
DS: Go back to the pay philosophy. An established company with name recognition and all of the support systems—everyone wants to work for them. They can get away with paying either at market median or even slightly below. Maybe the expectations of productivity aren’t as high. That is different from a start-up or unknown. I’ve never heard of you. I don’t know how long you’ve been around. You don’t have support. But if you sell a lot, you get paid more than you’ve ever dreamed of. You’re going to have to work harder than you’ve ever worked before and produce at higher levels. You can have two companies in the same industry that pay significantly differently because of their strategy or where they are in the business lifecycle.