Don’t Throw the Baby Out With the Bathwater
Subtle Adjustments Can Help Save Your New Sales Compensation Plans

By Dennis Spahr and Jonathan Minor

You worked months collecting pay and performance data. You interviewed sales managers, the CFO, Marketing and IT. You oversaw multiple sales compensation project design team meetings. Your team spent endless hours modeling the new plans to ensure cost effectiveness. But the first quarter results weren’t what you expected. The second quarter results are “looking bad” and there are rumblings that the new sales incentive plans aren’t working. Does this mean you need to redesign the sales incentive plans? Before you throw the baby out with the bathwater, Sibson Consulting experts show you how to identify necessary adjustments to the new plans.   

Pay Levels: Are there new data that suggest you are over- or under-paying relative to market? Are there rumblings that people are leaving for more money? If yes, you should meet with the sales managers to understand the issue. In many cases, the “market” pay that is 30% higher than your pay is either a) an unproven rumor or b) a one-time opportunistic hire by one of your competitors. 

Pay Mix: Is the pay mix appropriate for the various sales roles, cycles and processes? Are reps on aggressive pay mixes (i.e., more heavily weighted on incentive) having cash flow issues? Frequently, unforeseen cash flow issues are a result of quota setting rather than issues with pay mix or pay levels.

Measures and Weights: A yellow pages company compensated its reps for overall revenue growth with an end-of-year bonus. Meeting strategic objectives required revenue growth and an increase in the actual customer base. A mid-year analysis revealed that the majority of incremental revenue growth resulted from an increase in sales to current customers, not an increase in sales to new customers. Rather than designing a new bonus from scratch, the company reduced the revenue growth bonus payout percentages and added a "customer base multiplier," thereby requiring the rep to both grow revenue and customer base to receive a commensurate bonus amount. This relatively subtle change better aligned compensation with the company's objectives while maintaining the original earnings potential of reps.

Mechanics & Links: An electronics distributor implemented a new sales incentive plan where commissions were paid monthly and adjusted up or down based on performance vs. target margin. After the first quarter, it became clear that the low end of the target margin range was unrealistically high. After a review of the past three years of data, the margin threshold was lowered. The reps were motivated by the more realistic target range and ultimately increased margin performance. 

Quota Setting: Sibson experience shows that “broken” sales compensation plans are often a result of improper quota setting and allocation. 

A mid-year review of a chemical company’s sales force showed parts of the East region with well above target pay and parts of the West region receiving incentives well below target pay. Further investigation showed that the East region had assumed 3% growth whereas the West region assumed 10% growth. The VP of Sales met with the two Regional Sales VPs and reallocated quotas accordingly. 

Implement & Administer: More often than not, sales compensation plans “fail” because of poor implementation and communication.    

A property & casualty insurer introduced a bonus for growth in policies in force (PIFs) that would provide agents with the opportunity to increase incentive pay by 20% on average for target growth. Rollout of the plans was rushed and the bonus was not adequately communicated. During a Q1 review of the sales compensation plans, the Director of Sales Compensation found that the agents did not understand (let alone embrace) the new bonus portion of the plan. The sales operations group revised pay examples and trained all sales managers to use the new examples in weekly meetings to show how agents could make more incentive.