The strongest driver of the right sales behaviors is a tool you’re already using: the sales compensation plan. But if its foundation and structure are off base, you could be sending your sales team — and the bottom line — in the wrong direction. There are six essential components that drive compensation plan performance, and they’re worth looking at to ensure they’re doing the job you need them to do.
Do your roles align with your goals? Your sales roles may be inherited from a legacy organization chart or may have naturally evolved over time. But do they still align with your current C-level goals? When the executive team establishes those goals, they’re also establishing the overall direction for the sales strategy as well as the sales roles that support the strategy, the talent that’s in those roles and the financial performance expectations. C-level goals include five priority areas, with some modifications to fit the specific needs of the organization:
- Customer. What or who are the ideal prospects for your business? How do you retain and grow existing customers? Which segments are priorities?
- Product. What are the priority products and services? Which of them are core for cash flow? Which are strategic for your future? Are you sunsetting any legacy products or introducing new offers?
- Coverage. How should sales resources be aligned to specific customer segments and offers? What combination of direct and indirect sales do you need? Is your sales coverage model remaining constant or is it evolving?
- Talent. Which skills and knowledge do you need in your sales organization? What is your current talent inventory? What is your plan for talent?
- Financial. What are your priorities for revenue, profit and market share? What are the sales organization and channels expected to contribute? How will ROI be measured against your programs?
Sales roles should be created or changed to align with your C-level goals, and the sales compensation program should be tailored to the priorities each role can affect. So, plan components that include pay mix, upside potential, measures, mechanics and quotas should directly reflect the sales role and the C-level goals they affect.
Misalignment among C-level goals, role definition and compensation will result in team underperformance against sales compensation targets. But when goals, roles and compensation all are aligned, there’s a smooth flow of performance from the strategy to the front line.
Is your sales compensation plan truly rewarding excellence? Or is it sustaining underperformers year after year? The chief sales officer at one of our technology clients summed up the differentiation dilemma well when he said, “It’s far too easy to make a good living here, and far too hard to make a great living here. Our sales compensation plan fosters an environment of mediocrity and drives away the top performers.”
His company had many longtime salespeople who had a sense of entitlement surrounding incentive pay. They continued to receive rewards in the form of recurring revenue from prior years’ deals and had goals that didn’t represent true opportunity. The sales compensation plan didn’t differentiate enough between those who were bringing in new deals and new growth each year and those who were coasting on previous contracts. To make matters worse, the company couldn’t hire its way out of the situation with new superstars because it couldn’t recruit them with a plan that lacked the necessary upside earning potential.
Committing to the philosophy of the Reverse Robin Hood Principle, the organization’s sales compensation plan was retooled to tip the payout curve. In turn, the plan more robustly rewarded high performers while making the compensation package less attractive to those who routinely fell behind quota.
That meant that some of those lower performers would decide to leave — an outcome the executive team was prepared to accept. Those new vacancies allowed the organization to pay high performers significant rewards while keeping the compensation cost of sales (CCOS) in check.
The ROI was worth the effort with this wholesale change in sales compensation methodology. The results: a dramatic increase in performance and the company’s ability to recruit the top sales talent it needed. The company combined the Reverse Robin Hood Principle with two of its top C-level goals of strengthening high-performer talent and increasing growth.
Is your sales compensation plan giving your sales organization a clear message? View your plan with an eye toward simplicity and keeping participants engaged with clear priorities. One of the ironies of sales compensation is, with all the work we put into developing the program, the plan becomes more effective the more we simplify the final result.
One simplicity check is to trace the steps to quota achievement and ask whether they’re easy to understand and whether you’re paying only what’s critical to the role. The rest can be managed outside of the plan. The plan should only measure what’s within each role’s ability to influence, and pay as close to each achievement event as possible.
The salespeople for one of our clients, a leading telecommunications company, were tasked with selling bundled service packages. But, as we traced their steps to quota achievement, we noticed that they had to go through five to seven steps to calculate their payouts. An intricate point system coupled with multiple commission rate and quota-level conversions left reps disconnected from compensation cause and effect. Over time, sales reps became frustrated with the complicated path to commission and left the company.
The simple solution was to remove the point system for selling certain items and tie rewards directly to desired package bundle sales, effectively eliminating several steps and calculations. Simply stated, the new plan focused on revenue and rewarded clearly on product package sales. Reps understood what they needed to do, went for the most lucrative packages that were right for each customer, and then knew what they earned as a result.
As a basic rule, keep your compensation plan measures to no more than three, with each measure carrying no less than 20% weight of target incentive. Also, watch for nested measures in which one large measure — such as revenue — also contains conditions or sub-measures (e.g., term length, gates, hurdles). Each measure should require only one calculation.
How directly do your plan mechanics connect performance to pay? Are there plan mechanics options that fit the type of role and type of business that the role drives? Despite the complexity and range of mechanics you may have seen, all plan mechanics come down to two basic types: rate-based mechanics and goal-based mechanics.
A rate-based mechanic, often called a commission mechanic, connects pay to performance through a rate such as a percentage of revenue or dollars per unit sold. Rate-based mechanics are great for new business development roles, emerging organizations and markets for which reliable goals can’t be set. But they fall apart when the organization becomes more complex with sales teams, overlaying rules and varying types of markets with different levels of growth potential.
As the organization and its sales model become more developed and complex, companies typically move to goal-based mechanics. These allow more flexibility in shaping the financials of the plan and aligning sales teams on the same goal without driving up cost of sales like a commission plan would.
By starting with the type of roles you have, the strategies they pursue, and the stage of development of your sales model, you can determine the right types of mechanics for your plans.
Do your quotas support your sales compensation plan or hinder performance? A great sales compensation plan can be neutralized by bad quotas. Among all top sales compensation challenges, effective quota setting tops the list because quotas create the connection between the compensation plan and performance as well as represent the final link to incentive pay. A poorly set quota can put a solid rep in the underperformance category. An ineffective quota process can put the company in jeopardy of underperforming. Contrary to common belief, most quota-setting issues aren’t about the numbers; rather, they’re about a combination of process, people and numbers. Among the big issues are:
- Quota-setting processes that are nonexistent or misunderstood
- Methodologies that rely on history rather than future potential
- Lack of accurate market information.
With all the work we put into developing the program, the plan becomes more effective the more we simplify.
As a quick check, about 50% to 70% of your organization should be at or above quota, with a fairly smooth bell-shaped distribution shifted just above quota. Some reasons for this are:
- Predictability of the business plan (knowing we’ll hit our overall objectives)
- Motivation of the sales team (we’d rather have most of the organization see themselves as winners)
- Management of compensation costs (erratic performance can spike plan accelerators, leading to cost overruns).
One financial services company we work with needed to improve its quota-setting process on two fronts. First, it used a quota process based on historical data, which created a backward-looking view to try to predict the future. Reps who performed well received bigger quotas the following year, and those goals typically were unattainable. This led to reps gaming the system and trying to land just around quota and no higher to minimize their increase the following year. The second front the company needed to address was that sales capacity wasn’t considered in its quota setting. The quotas for each territory and for the organization in total exceeded the time and productivity of the organization.
The organization took a two-pronged approach to address these issues. First, the quota methodology was shifted to include indicators of market potential that were easily identifiable and understood within the organization. Then, drivers of sales capacity were reviewed, revealing that the organization was spending only about 10% of its time in front of customers and about 35% of its time on sales activities in total. Productivity-sapping activities, such as operations and service, were eliminated and shifted to increase available sales time. Then, market opportunity-based quotas were reconciled with sales capacity. The result was increased quota attainment with a closed-loop system that helped the company predictably plan and manage to quotas.
So quotas are an essential part of your overall sales compensation program and should be included in your assessment and design. You may consider:
- Creating forward-looking quotas based on market opportunity rather than history alone
- Communicating to the sales team about how their quotas are set, and incorporating bottom-up input, to give them greater ownership of their numbers
- Engaging a cross functional team, including sales and finance, to develop and follow a clear process.
Does your compensation technology engage your sales team or just enable the administrators? Once all the elements of the sales compensation plans are designed and aligned, they should be accessible and transparent to users with a system flexible enough to handle changes in strategic priorities. Effective automation can bring the sales compensation plan to life.
Consider the key audiences for automation and the requirements of each. Members of the sales organization are the primary user audience. These employees need to understand how their plans work, see their progress to goal on a real-time basis, and be able to run scenarios on what they could earn if they close critical deals in their pipelines.
Effective automation can bring the sales compensation plan to life.
Meanwhile, plan administrators and designers need to be able to manage the plan to ensure it operates as designed, as well as run analytics and test scenarios on plan design variations and adjustments in-year and for the upcoming year. Finally, executives require a simple view on the plan, its performance and the results it’s producing.
System views and reporting should have the appropriate level of detail and presentation of information for each level to allow them to do their jobs. For example, while executives may be curious about the details of the program, setting up their dashboards with just the information to make strategic decisions helps them focus and not dive deeply into the minutiae that’s better used by plan designers.
The Bottom Line
One of your biggest sales behavior drivers is sitting right in front of you. Sales compensation often is the largest expense in the sales organization, so make sure you’re getting a great return on your investment. Run your plans through a check-up on the six essentials outlined here and pinpoint where you can make the highest impact improvements. Taking a methodical approach to improving your plans, at a pace of change your organization can manage, will deliver big results for your business.