Good sales representatives are skilled at evaluating risks and opportunities in the market. The really good reps will then manage aspects of their existing business relationships and contacts to create a competitive advantage in winning opportunities.
While prospecting these opportunities, the key component for an informed and motivated sales rep is the ongoing analysis of historical performance that creates a comprehensive personal sales forecast. This knowledge of the sales pipeline, and ultimate sales probability, is then calculated against quota attainment and results in the rep’s payout. In other words, sales reps are motivated by clear line-of-sight between their performance and their pay.
But what happens when their forecast and quota attainment do not tightly align to the compensation payout? Distrust and skepticism can creep in if reps end up earning a lower payout than they feel they deserve or think the incentive falls short of their efforts. In even worse cases, overpaying lower performers can damage the motivation of top sellers (and average sellers) because of a lack of differentiation or recognition for true performance. Whether your sales compensation plan is underpaying a sales rep or enabling poor performance, the long-term results will be negative, turning your top performers into “bad reps.”
In order to keep reps motivated, engaged and ambitiously optimistic, a company should evaluate and assess certain components of the compensation programs every 12 to 24 months. As business strategy, job roles, products and customer needs change, so should the key elements of your sales compensation plans.
Understand How Jobs Specialize to Help Link Pay Opportunity
To design a simple sales compensation plan that is performance-based and differentiates top performers, a designer needs to first under-stand that different sales jobs have different priorities. The priorities of the sales job rep-resent the behaviors that are supported and driven through the sales incentive plan.
A typical sales job has five key priorities that need to be understood:
1. Target Customers
Segmentation defines the types of customers/accounts the job targets. Customers may be defined by size, type, strategic importance geography, etc. Different types of accounts require different skill sets and selling techniques.
Questions to ask about customer targeting include:
- What/who are the assigned customers/targets? Are the customers existing, new or a combination?
- How many accounts are current (active customers), target (want to sell to them) or dormant (haven’t purchased in a while)?
- How often do reps call on each category of customers?
- What is the rep’s focus, such as major accounts or geography?
2. Overall Sales and Revenue Strategy
Once you’ve identified the job’s targeted customers, you need to understand the job’s primary sales strategy: new business, retention of customers or growing existing customer base revenue.
Each of those sales strategies takes a different skill. Acquisition reps are hunting for new customers; they have to create awareness and stimulate interest. When the focus is retention, the rep’s role is to maintain the relationship and revenue. Growing the base involves building relationships but, in addition, the rep seeks out new sources within current customers’ organizations.
Sales strategies play a large role in how sales jobs should be compensated. Depending on the role, pay may differ significantly.
Questions to ask about sales strategy include:
- What type of selling does this role do?
- How does this selling support the overall organizational strategy?
- How does the company value the different types of revenue?
- How should the company compensate differently based on the different roles and strategy?
3. Individual Contributor or Sales Manager
Sales jobs can be specialized by organization and reporting structure (e.g., individual contributor versus manager). For example, an account manager oversees all sales activity into an account and is supported by a team of sales representatives. In other cases, sales representatives independently cover an account, most typically smaller, nonstrategic accounts.
Questions to ask about hierarchy include:
- Is the role an individual contributor, a team seller, an overlay resource or a sales manager?
- What other support roles should be considered for incentive pay?
- How are the resources allocated/assigned?
- How is the sales manager involved in the transaction/selling process?
4. The Selling Process
Sales process focuses on the steps a rep takes to complete the transaction. What is the rep actually doing? Does the rep identify, qualify, propose, close, fulfill? Each of the steps in the sales process has a value associated with it, and you need to understand what the value is in order to pay appropriately.
Questions to ask about the overall sales process include:
- What are the steps the seller uses to complete the transaction (sales process)?
- Does the typical transaction cross all of these steps?
- Is a certain transaction more valuable than another?
- Is the transaction a one-time exchange or an ongoing fl ow of business?
- What is the length of the sales cycle?
- When is the transaction considered closed or complete (i.e., at order, at billing, or at delivery/installation)?
5. What Products Are They Selling?
Sales jobs can be specialized according to product and/or product lines. Each product has an associated value, and you want to make sure the sales incentive is commensurate with a product’s value and profit. Additionally, if reps specialize in selling certain products, they develop in-depth technical knowledge and expertise in selling assigned products and/or product lines to many customers. That expertise may be worth a premium.
Questions related to products and services include:
- What is the range of products or services the seller represents?
- Do products/services differ by customer?
- How is each type of product or service measured in sales results (units, sales value, revenue, margin dollars, margin percentage)?
- Are individual quotas set for the products or services?
Starting with measures without understanding strategy is a poor decision because you can end up motivating the wrong sales behavior and paying for the wrong results.
Picking Your Sales Plan Measures to Ensure Easy Pay Alignment
Once you have clearly defined your job, the task of setting targets and paying the role becomes easier as you focus on what you are expecting the role to do and measure it against that objective.
When considering the measures to use in the sales compensation plan, you need to ensure your choices reflect the business strategy of sales roles (defined earlier). Starting with measures without understanding strategy is a poor decision because you can end up motivating the wrong sales behavior, paying for the wrong results and diminishing the salesforce’s motivation when the plan needs to be corrected midyear.
Four Categories of Performance Measures
The measures used in an incentive plan define the specific performance standards or criteria that determine success. Achievement against the measures becomes the basis for assessing sales results and awarding incentive payments. Generally, there are four types of measures: financial/production; strategic; input and activity; and subjective/judgment.
1. Financial/Production Measures
Typically, financial/production measures are the core measures in an incentive plan. They focus on sales dollars, margin or margin dollars, or units, and most often measure volume. Many plans give financial/production measures the most weight so that the largest share of target incentive is linked to them. These measures should be tied directly to the success of the organization’s financials.
A sales incentive plan for direct sellers should have at least one financial or production measure, and it should be the primary measure.
2. Strategic Measures
Strategic measures also are considered core measures, but usually are seen as secondary to the financial/production measures. Strategic measures deal specifically with an organization’s strategic priorities and may focus on specific customers or products, or measures that drive a specific strategic priority (e.g., a customer retention factor, unit factor, customer service or quality).
If a plan has a financial/production measure, it is common to also see a strategic measure that helps drive overall revenue or production. As with financial measures, strategic measures usually are given significant prominence or weight.
3. Input and Activity Measures
Activity measures focus on a sales professional’s activities, events or milestones, such as key customer events, key sales process steps, number of qualified leads, conversations and number of sales calls. Organizations may use these measures when they want to achieve major milestones, have a long sales cycle or in cases in which more typical criteria may be difficult to measure. Activity measures also are used with product launches or in new businesses when certain activities are critical to gain customer interest.
4. Subjective/Judgment Measures
Subjective/judgment measures typically relate to objectives that are less quantitative (numbers related) and more qualitative (observed), making them somewhat tough to measure. They may include professional objectives or discretionary behaviors that a sales representative must demonstrate.
Subjective measures are less prominent and have the least weight in the measurement hierarchy.
Rules for Performance Measure Selection
To be effective, performance measures must be controllable, measurable, aligned and limited to a maximum of three.
Incentive measures must be controllable, which means that sales representatives must:
- Have clear line-of-sight to the measures
- View them as attainable, even if they require stretch to achieve
- Understand the necessary actions as well as possess the capacity to take those actions
- Know exactly what they are being measured on and be able to influence the measure
- Understand how the measure links to their overall target or quota and their pay.
Essentially, the link between behavior and results must be clearly understood, attainable and tangible.
The organization must be able to consistently and effectively determine results against a measure. The organization also needs to be confident that the measures are driving the proper behaviors. This requires:
- Reporting results regularly (e.g., monthly, quarterly) to help identify directions and trends
- Providing a view into both what has occurred and what lies ahead
- Ensuring communication about the plan is clear.
Measures must align with the strategic business objectives of both the overall organization and the sales organization. Plan measures must tie directly to business strategy and drive overall corporate performance. Also, measures for the salesforce must align with the key objectives of the sales management team.
Limited to Three or Fewer
A compensation plan should have no more than three measures to ensure that the sales representative is able to direct the appropriate focus to each performance measure. Too many requirements can cause a dilution of effort. Remember: Less is more.
Upside Pay: Pay a Good Sales Rep to Perform
An important component for top reps is upside, the amount of additional incentive pay that can be earned for achieving outstanding levels of performance over the target incentive. Upside typically is expressed in ratio format. A 1:1 ratio means that at target performance a sales representative can earn the target incentive. A 2:1 upside means earnings can be two times the target incentive. Typical upside for a top rep can push into the 3:1 or 4:1 levels.
Do plan mechanics and corresponding link requirements encourage peak performance, or do they over-regulate or hinder achievement by adding too much burden?
Plan Mechanics: Ensure a Bad Rep Does Not Get Paid
A plan’s mechanics are where the rubber meets the road in compensation plan design. Payout formulae, payment terms, caps, thresholds and links form the underpinnings of plan design. They bring the compensation plan into focus and ensure pay elements and measures are brought together in a way that spurs the salesforce to accomplish critical objectives and earn rewards commensurate with their accomplishments.
A plan’s mechanics create the structure and details for how a compensation plan actually pays out given a representative’s level of achievement. Depending on the incentive plan structure, mechanics may include payout formulae and/or payout tables that correspond to results against quota or target.
A link refers to how each mechanic or design component operates in parallel with each other, or how they link based on the different levels of performance achievement. A link between components allows an organization to ensure that sales representatives have balanced performance across their various objectives. Typically when plans have links, a representative is required to achieve a certain level of performance across multiple components before earning higher pay (e.g., excellence pay). Earnings may be fl at over 100% of quota or target on Measure 1 (no accelerated pay) until Measure 2 also reaches 100% of target. Once results exceed 100% for Measure 2, the acceleration kicks in.
Mechanics and links can add complexity and, too often, confusion to a plan. The moment sales representatives learn about a new plan, they take out their calculators to see how the plan will affect their bottom line. They study the plan’s mechanics to determine how all components link. This helps them understand — in real terms — how the plan will affect them and which behaviors are necessary to achieve the greatest rewards. If representatives don’t quickly grasp how the plan works and what they can earn, it may mean the plan is overengineered — either there’s too much going on or the mechanics are too complex. When designing a plan, leave out those extra bells and whistles. Too often, these add-ons create unnecessary complexities that garble the message. You can’t control everything. Leave some of the management to the managers.
When considering certain plan mechanics, ask yourself: Do plan mechanics and corresponding link requirements encourage peak performance, or do they over-regulate or hinder achievement by adding too much burden?
Thresholds and Deceleration
A threshold is a minimum performance level that must be achieved so incentive earnings can start accruing. Typically, either no incentives are earned up to threshold or earnings are severely decelerated until the threshold is met (e.g., plan pays 10% below a threshold but 20% above the threshold). Commission plans typically have no threshold because they pay from dollar one.
Advantages: Thresholds are particularly useful when sales reps have a stream of business and a certain percentage of that business is predictable or recurring. The larger the percentage of predictable/recurring revenue, the higher the threshold can be. Thresholds usually are set at or below the 10th percentile of performers. In this way, they can create an artificial target for lower performers to strive toward.
Disadvantages: Without a threshold, representatives can earn from dollar one — a feature that can be highly motivational. Even low performance is better than no performance. Remember that no-threshold plans require financial modeling to ensure that the dollars paid out will be within acceptable ratios of dollars brought in. Companies that don’t use a threshold may have lower commission levels at lower levels of performance.
To be effective, performance measures must be controllable, measurable, aligned and limited to a maximum of three.
Measurement Periods and Payout Frequency
A plan’s measurement period specifies the time period during which performance is measured. Standard periods include monthly, quarterly and semiannually. These interim periods usually roll up into a longer, cumulative period, typically a year (cumulative year-to-date results). With a cumulative period, companies typically hold excellence pay-outs back until total cumulative results are tabulated.
Representatives receive pay for performance up to the target for each segment. Paying for cumulative results aligns pay with the attainment of annual goals — an approach favored by the finance department. Yet it has a motivational downside: Reps may give up if they fall behind quota early in the year.
Some plans employ a standalone feature (e.g., monthly discrete) in which each measurement period stands on its own and is not tied to another period. This can keep top sellers in the game but also can lead to overpayment if most monthly goals are achieved but the overall total doesn’t add up to the annual goal. A similar approach is to measure results quarterly and include a year-end measure for annual goal achievement. In a fifth-quarter approach, earnings are held back and paid when results for all quarters are in. If attainment is high in all four quarters, the incentives held in reserve are paid out.
Payout frequency denotes how often incentives are paid (e.g., biweekly, monthly, quarterly). Factors to consider include the payment size, administrative burden and feasibility. Can the plan be implemented and paid consistently with-out a large burden?
Evaluation is the critical final step in the optimal incentive design process. A thorough, consistent review can help avoid or prevent issues before a plan is rolled out or while it is in play. Overpayments, underpayments, high cost of sales, poor performance distributions and plan “gaming” are typical compensation problems. While these problems can never be totally avoided or prevented, a tight evaluation with the right analytics helps confirm what is happening with the plan and whether course corrections are needed.
A company should look at three views:
- Overall financial picture. How is the plan functioning and what are the costs (i.e., salesforce earnings and the company’s return on that investment)?
- Performance against overall objectives. Is the plan driv-ing the desired behaviors and functioning as designed?
- Differentiation of payouts based on performance. Are the top earners the top performers?
To keep your good reps good, it is critical to consider and address your plans in a logical and organized manner. Getting all the checks and balances in place at the start will ensure you have a plan that truly rewards and motivates your top sellers.
Joseph F. DiMisa is a senior client partner and a global salesforce effective-ness and rewards advisory leader at Korn Ferry.