Sales Compensation Focus
Share

5 Steps for Designing a New Sales Compensation Plan

By Elliot Scott, Canidium  |  January 2014

In the world of sales, change is inevitable, and sales compensation professionals must be prepared to tailor their sales strategies to meet new demands. New products are developed and old ones become commoditized or obsolete. New sales channels become necessary to reach new markets or control costs. Corporate strategy shifts between growth and profitability. If your salesforce is behind the curve and your sales compensation plans are not driving in the right direction, your salespeople will spend too much time doing the wrong things, and results will quickly deteriorate.

As a result, designing and implementing new sales compensation plans is an important part of sales performance management (SPM). Sales operations and compensation professionals must know the market, evaluate their resources and current plans, refine systems, and educate managers and sellers if they want to successfully implement new plans. To ensure a successful sales compensation plan implementation, follow the 5 steps outlined below.

Step 1: Understand the Current State

The most important phase of any new plan design is the first one. Without defining priorities and gathering a fact base, you will be driving without a map and find it harder to arrive at the best destination.

  • Clarify the financial and strategic priorities of the organization. Everyone wants more sales, but what kind of sales? Where is the emphasis? More service? Larger contracts? New products or bundles? Sales to new or strategically important markets?
  • Identify the gaps and dysfunctions in coverage. Which objectives are being met and which are not? What are salespeople doing too much of and what are they doing too little of? Which channels are underused? Also, understand the coverage changes that are under way or coming down the pike so you can meet the challenge of designing plans that align with them.
  • Evaluate the effectiveness of your incentive plans. Even if your compensation plan priorities and performance metrics will be changing, it is critical to understand what your current plans do well … and not so well. Take the opportunity to build on strengths and address weaknesses. Are pay levels market-competitive? Are plans well linked to outcomes the sellers can control? Do plans create meaningful payout dispersion among top performers, average performers and low performers? Are there windfalls, one-off arrangements and disputes that are inflating cost and gumming up the works? Does the salesforce clearly understand how the plans work and what they need to do to maximize earnings? Are they motivated … or checked out?
  • Evaluate the strengths and limitations of your administrative systems and processes. Do they require significant manual intervention? Are they prone to error? Do they provide clear and timely performance reporting? Are there certain things you would like to do that are simply impossible with the current system?

Step 2: Understand Your Options for Change

There are many change levers in a sales compensation plan and many alternatives within them. Understand the options and how they may or may not help address your issues and meet your objectives:

Change Lever Description Helps Align Plan with Objectives or Job Content Enhances Motivational Impact of Plan or Retention Lowers Cost or Reduces Administrative Workload
Eligibility Which roles should be on a sales plan vs. another plan

Pay levels

Total cash compensation at target for each role

   

Pay mix

The split between fixed and variable pay

 

Performance measure definitions and weights

Precisely how to measure performance and the importance of each measure in the plan

   

Incentive form

Commission mechanic*, goal-based mechanic** or a hybrid of the two

   

Payout curve calibration

Thresholds, ramps, decelerators, caps, modifiers, etc.

   

Crediting rules

Factors for determining the amount and timing of credit for each sale

Goal setting

Process for allocating and adjusting performance standards

 

Administrative systems

Systems for capturing and processing data, calculating and communicating payment, and managing change

 

Communication

Presentations, plan documents, incentive calculators and other materials to reinforce plan specifics and rationale

* A commission mechanic pays incentive as a % of revenue or as $ per unit.
**A goal-based mechanic pays a % of target incentive for % attainment of goals (e.g., sales quotas or strategic objectives).

Step 3: Make Decisions Carefully

In designing a new sales compensation plan there is more that can go wrong than meets the eye. A failed implementation can impact results for more than a year. Follow these rules of thumb to minimize unintended consequences:

  • Assemble a design team with participation from sales, marketing, human resources, sales operations, finance and IT.
  • Follow a structured process of information gathering, data analysis, iterative design and communication.
  • Carefully test the plan under a variety of performance scenarios to understand expected results in terms of overall cost and individual impacts.

If implementing a new sales performance management system, do not underestimate the time required for careful evaluation of alternative systems, developing precise requirements, significant data integration and thorough user acceptance testing.

Step 4: Regard the Rollout as a Project in Itself

Most companies fail to fully grasp the change-management challenge and are left with new plans that are not understood by the salesforce, either in terms of how they work or why they were changed. And by default, changes to compensation will be assumed to be negative until proven otherwise. Plan administrators, human resources and — most importantly — sales managers must be trained in the mechanics and rationale of the plans.

An effective rollout plan must include:

  • A clear and positive explanation of why and how the plans were changed, with precise messaging
  • Demonstrated commitment to the new plan, from the vice president of sales down to the first-line sales managers
  • Communication presentations with a Q-and-A, ideally delivered in a face-to-face setting
  • Clear, professional and legally compliant plan documents that contain all plan details and supporting policies and terms and conditions
  • An ongoing program of reinforcement and communication, supported by regular reporting.

Step 5: Remember Governance

Sales compensation follows a set of cycles. There is the cycle of performance data gathering and validation, followed by calculating, reviewing, adjusting, communicating and delivering incentive pay. There may be an exception review cycle. There is the accrual cycle. There is the goal-setting cycle. And there should be a quarterly — or at a minimum semiannual — formal cycle of reviewing and analyzing plan results and considering what changes to make to stay aligned with the organization's strategy and needs.

If each of these cycles is not defined, scheduled and assigned to appropriate owners and participants, important considerations will fall through the cracks, resulting in errors, misalignment, conflict, rework and potential plan failure. So take some time to map out a complete governance cycle. The plans will operate smoothly and changes will be made in a timely manner, with a strong positive effect on top- and bottom-line performance.

About the Author

Elliot Scott is a sales compensation and sales effectiveness consultant at Canidium, based in New York.


Read the January edition of Sales Compensation Focus.

Contents © 2014 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

Have Questions?

Phone

+1 877 951 9191

USA and Canada

+1 480 951 9191

Other Countries

Online

Email Us