Q1 is over. You barely missed the number. You rolled out a new comp plan in Q4. It is a riskier plan for sales people, but pays big for performance. Due to this, some sales people received huge Q1 commission checks.
The CEO and CFO are reviewing the sales P&L. The CEO asks “are we overpaying sales people?” He is concerned reps are getting huge paychecks while overall results are below average. He is asking you if the comp plan is designed incorrectly. How do you answer this question?
Discussing compensation with the CEO is never easy. Over 90% of CEOs were previously operators, accountants or engineers. They are skeptical of sales compensation. You need to arm yourself with objective information. Proof from a similar industry and role type will help you.
If you can’t answer the CEO’s question, he will rely on finance. Finance will crunch the numbers and find ways to make the CEO happy. This could lead to a mid-year compensation plan change. A mid-year change will cause major disruption within the sales force. This disruption will lead to poor results and another underperforming quarter. You could also lose talent which will have a long-term impact.
Did you write some big commission checks in Q1, but miss the #? The Comp Plan Test will enable you to answer the CEO’s question regarding comp. Compare your plan to best practice to determine if you overpaid in Q1. Page 1 of the tool answers the top 4 comp questions outlined below. Page 2 provides a back of the napkin 18 point compensation test. Eyeball it to determine if you have a problem.
Determine if you overpaid in Q1 by reviewing some of the most common questions. I have listed 4 below.
1. Should Compensation Plans be Capped?
There are many thoughts on sales compensation. Some believe sales compensation should never be capped. Others think certain sales roles are only worth a specific comp level. What is the right answer?
2. Is our Base Pay Close to the Benchmark?
Base pay for sales people is a frequently debated topic. Do you want reps that aren’t performing to survive on their base alone? You need a big enough base to attract great talent.
3. What Should the Base vs. Variable Pay Mix be?
Each role should be assessed to determine the optimal mix. Determining the balance between risk and performance isn’t easy. Section #3 in the Comp Plan Test explores this in more depth.
4. Are Sales Compensation Plans Driving the Right Behaviors?
First you need to determine what the right behaviors are. Many sales leaders make the mistake of thinking comp will solve everything. Compensation alone doesn’t necessarily change behavior. Without proper performance conditions, your team may want to perform, but lack capability.
Comp is always a touchy subject. Any comp change should be driven by the market dynamics and not gut feel. Arm yourself with the knowledge you need to have the conversation with the CEO.