article | September 11, 2017
How to Design an Incentive Compensation Plan That Works
Compensation plans are often too complex, and other times they are too simplistic. As your company evolves its strategy and you evolve your sales strategy, the compensation program needs to keep up. Old compensation concepts are both a blessing and a curse. Stick to the way you have always done things and you are sure to miss your revenue targets but over-rotate to the new concepts, and you will push talented reps out the door. It is imperative to refresh the incentive compensation program at least once per year if you want to hit the revenue target. Assess your compensation approach by reviewing the Sales Compensation phase of the new How to Make Your Number in 2018 . Turn to page 395 of the Sales Strategy section.
Creating an effective sales compensation plan is tough. Your plan must achieve three things:
Satisfying all three, and managing the ongoing tension between them, is a tall order. You have to create a program that’s both sustainable and highly competitive. To do that, you’ll need to take specific steps in the correct order. And factor in a host of variables.
Today, we’ll cover the essentials.
The costs of a poorly designed comp plan are steep. It All Boils Down to These 7 Questions:
A poorly designed comp plan will wreak havoc. It will drain your profits, encourage bad behavior, and/or drive “A” players away. For the sake of your revenue goal, start with territory design and quota setting. Then tackle each of the items below.
1. How do we accurately benchmark compensation for each role?
Take a look at what your industry competitors are paying. Make sure responsibilities are clearly defined. Take care to avoid costly benchmark mismatches.
2. How do we determine what we want to pay relative to the benchmarks?
Align your budget with what you expect each role to produce.
3. What is the optimal compensation plan design for each role?
Aim for simplicity. Miring your team in complex incentives will create confusion and kill morale.
4. How do we calculate the cost implications of our compensation decisions?
If commissions are growing but sales revenue isn’t, look for these underlying issues.
5. How do we communicate compensation decisions to the team?
With complete transparency, down to the last detail. Our Sample Compensation Communications Plan can help.
6. Who should be part of the compensation plan committee to approve changes?
Your sales leader may call for comp plan changes midyear. The HR leader should help the CFO assess the current plan and proposed changes. A thorough analysis will help prevent knee-jerk reactions.
7. How do we measure the effectiveness of our compensation plans?
Measure payout against attainment (quota, MBOs, or company performance). If you can’t measure it objectively, don’t pay on it.
To understand timing for your compensation plan changes, read this recent article titled: Is now the right time to pull the compensation trigger?
Get This Right, and You’ll Unleash Revenue Growth
The costs of a poorly designed comp plan are steep. High turnover, weak sales, and eroding profits invariably result. A solid plan attracts “A” players, keeps them motivated, and maximizes profits. A thoughtful design process can bring huge revenue gains.
Have expectations gone up and left you wondering if you can make your number? Here is an that will help you understand if you have a chance at success. Take the Revenue Growth Diagnostic test and rate yourself against SBI’s sales and marketing strategy to find out if:
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