Compensation design should be grounded in best practice. Remember, no two industries or companies are the same; the compensation plan should reflect market, business and role differences.
It is approaching the end of September. Your sales organization has just missed plan for a third straight month. And based on current performance, your organization will narrowly miss its year-end revenue targets. You hope it’s only a narrow miss. You fear it could be worse.
“Beep”. It’s the sound of an Outlook calendar reminder. The CEO has scheduled a 30 minute meeting with you to review Q3 performance. You’ve been dreading this meeting since the Q3 results came in. Your boss will want answers. You do not know where to begin.
You are not alone.
Download The Sales Compensation Design & Quota-Setting Checklist to evaluate your Sales Compensation Design & Quota-Setting processes and identify if you are missing revenue and/or cost objectives.
The Missed Revenue Opportunity
The pressure to grow faster than the market is immense; it causes high levels of stress and many sleepless nights. These levels of growth are often difficult to achieve—and without the right people or processes, the challenge is far greater. Sometimes impossible.
According to Gartner, “Enterprises will miss the equivalent of at least 10 percent of total annual sales in “lost opportunity” revenue that could have been captured with improved processes for defining, assigning and managing territories, quotas, and incentives and compensation plans.”
In addition to stifling growth, poor compensation design often results in:
- Misalignment between business objectives and sales strategy
- Above-market rep and manager turnover, which increases cost and disruption
- Undesirable relationships between financial results and incentive payouts
- Complicated plans that are difficult to understand and administer
However, when done correctly, compensation design can be a powerful tool to fuel revenue and profit growth by:
- Aligning business objectives to sales strategy
- Driving revenue and profit growth through existing customers and prospects
- Reflecting business segment, job role and geographical differences
- Attracting and retaining top sales talent
- Directing desired behavior and providing sales force control over earnings
To ensure your organization is maximizing revenue and profit growth, follow these design steps for FY2019.
Step 1: Is Your Sales Compensation & Quota-Setting a Problem?
The compensation plan needs to evolve with the corporate objectives and sales strategy; this will help drive the specific behaviors of the sales organization. Whether or not change is required depends on the effectiveness of the current plans.
If you consistently exceed your revenue objectives each quarter, few changes (if any) are required. It is an indication your compensation plans align to business objectives and adequately motivate the salesforce. However, if you are missing revenue and/or cost objectives or turnover is high, change is necessary.
Consider how you would answer the statements below:
- The sales compensation plans align to the business objectives, strategy and roles
- Our compensation plans enable us to attract, retain, and reward top sales talent
- There is a strong relationship between business results and incentive payout
- The plans are simple and easy to understand (i.e. less than 3 measures per role)
- At least 50% of your sales reps achieved quota last year and at least 90% of individuals participated in the incentive plan (i.e. received > $0 in incentive)
Answering “no” to any of the above statements indicates a misalignment to market practice. Review your compensation plans and design processes to determine gap to market. Closer alignment to best practice will help drive incremental revenue growth and higher employee morale. Download the sales compensation design checklist tool to understand if change is needed.
Step 2: Are Your Plans Aligned to Best Practice?
You’ve identified that some change is needed. The next step is to dig deeper into the compensation plans and determine what is broken. Use a combination of qualitative (i.e. executive interviews, rep survey) and quantitative analysis to gather insights.
Assess the compensation plans across the following key decision points:
- Strategic Alignment: Is there alignment between the business objectives, sales strategy and roles? Do they drive the right behavior?
- Eligibility: Are the right roles eligible for incentive compensation (versus other forms of incentive pay?)
- Target Pay Levels: Are target pay levels competitive with market practice? Do your plans attract and retain top sales talent? Is turnover high?
- Target Pay Mix: Is the mix of base salary to variable incentive aligned with the selling role? Is the mix too conservative or aggressive?
- Upside Opportunity: Does incentive payout align with broader organization performance? Does the company adequately incentivize top performers?
- Measures & Weights: Do you have the right mechanics (i.e. commission or quota) to drive growth? Are measures weighted appropriately to drive desired behavior?
- Quota & Crediting: How is performance distributed across the sales population? Are the rules for who receive credit on sales and individual goals aligned?
- Payout Timing: Does the payout and measurement period provide sales reps with sufficient cash flow throughout the year?
- Administration: Are the plans simple and easy to understand? Is the organization able to effectively measure results and administer pay?
Compensation design should be grounded in best practice. Remember, no two industries or companies are the same; the compensation plan should reflect market, business and role differences (refer to Appendix A). This will enable your organization to attract the very best sales talent. In turn, this will position you and your company for greater success.
Effective compensation plans and processes can yield 10% more in incremental sales. This may be the difference between narrowly missing your revenue targets and getting that ever-elusive promotion.
Refer to the following articles for additional insight:
- Are You Ready For The Annual Sales Planning Process?
- Is Your Sales Compensation Plan Aligned To Your Corporate Objectives?
Download The Sales Compensation Design & Quota-Setting Checklist to evaluate your Sales Compensation Design & Quota-Setting processes and identify if you are missing revenue and/or cost objectives.
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