Sales Compensation Blog

 When it comes time to design your sales compensation plans, don't go it alone.

Comp plans created solely by sales executives will emphasize incentives and motivation.  Plans designed by finance will be skewed toward ensuring affordability.

The best  sales compensation plans balance these and other corporate requirements. So when you are developing your comp plans, get input from multiple constituents to help you achieve the right balance.

One person needs to lead the sales compensation planning process.  The leader gathers information, opinions, and advice from other team members, and keeps the project on track and on schedule.  The team leader must also determine the approval process and make sure that "sign off" occurs at the appropriate stages of the project.

The sales compensation team should involve the following:

• The CEO: provides key guidance on the company's strategy
  
• Finance : delivers plan affordability guidelines and sales goals.
  
• HR : contributes job descriptions, base salary, TTC (total target compensation) and organizational structure.
  
• IT: delivers transactional data used by the compensation plan and information about the ability to implement the proposed changes to the plan.
  
• Marketing: presents upcoming campaign strategies that will influence quotas.
  
• Participants: advise on what worked and what didn't work in the current plans and, towards the end of the process, how they perceive the proposed changes to the plan working.
  
• Product Management: informs on road map for new releases and new products which can also influence quota.
  
• Sales Management: analyzes the attainment distribution of the current plans and explains why they may have fallen short or exceeded the goals.
  
• Sales Operations: provides their analysis of the current plans, as well as territory alignment.
  
• Legal: reviews plan to ensure that they are in compliance with current laws, regulations and internal policies.

Small companies will find one person on the team may fill multiple roles.

With your team in place, you'll ensure your sales compensation plan is within budget, is primed to motivate your sales team, aligns to strategic goals, and is well communicated across the organization.

I am a big fan of quarterly bonus payouts.  When they are targeted to the right behavior, everyone wins. The company reaches the revenue they need and the reps get paid for delivering.

There are two ways to structure quarterly bonuses.  Goals can be cumulative for the entire year or divided into quarters.  

Let's review each option with a simple example:  The quota for the year is $1,000,000. Each quarter is 25% of the annual goal.  There is a $5,000 bonus payable each quarter for achieving the goal.

	Q1	Q2	Q3	Q4
Option 1: Quarterly	$250,000	$250,000	$250,000	$250,000
Option 2: Year to Date	$250,000	$500,000	$750,000	$1,000,000

Let's compare them and discuss implications:

Quarterly - The goal is the same for each quarter - in this case $250k. What's the typical sales behavior with this option? Based on my experience consulting with many companies over a range of industries, the sales rep will attempt to hold orders until the next quarter if they are below the quarterly quota and have no hope in achieving it - putting the order in the bank for the next quarter. I have also seen that the rep will hold an order once the quota for the quarter is achieved - again putting it in the bank for the next quarter. The rep's goal is to do enough to get the quarterly bonus and set themselves up for the next quarter.

Year to Date - The rep must be on target for each of the quarters and that target is the year to date quota. There is no benefit to the rep to hold the sale, no game the rep can play. The rep must be on target for each quarter based on the year to date goal in order to receive the $5,000 bonus for that quarter.

"But, Teanna," I hear, "the rep is so far behind on a year to date basis, he'll never get any of the bonus." My usual response:  why do you want to give him a bonus for underperforming?

I also often hear "what happens if in Q2, the rep has already attained $750,000, enough to earn the Q3 bonus without doing any more sales? Would you pay it out?" I respond, "Yes, absolutely. Show me a rep that is on target to exceed their annual quota and earn accelerated rates, and I'll show you a motivated rep."

I have been talking to a few of our customers in the construction industry over the past two weeks. And I first have to say again, how much I like our customers. And not just because they pay us every month, but because they are just like us, they are small businesses trying to get their products and services out to the people that need them and they, like us, are willing to share war stories and learn from fellow small businesses about best practices. It's been interesting to find out about their sales compensation struggles before they found Makana:

• Overpayment of sales commission
• Inability to motivate their sales team
• Breaking into new markets during a down economy

One of the themes I found most inspiring was that many of them have eliminated spreadsheets from their commission planning and payment processes. They have also put more people on incentive compensation plans.

I talked to one home builder who is finishing projects faster and more efficiently by extending incentive compensation to more of the organization including project managers and foremen and others...Tying their compensation to project deliverables, customer satisfaction and even prompt payment of bills.

I am curious to find out what creative things other people have done with their comp plans and how has it worked out?