Sales Compensation Blog

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.

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.

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'm often asked if sales compensation planning occurs only once a year, in advance of a new year. Sales comp planning is really a ‘process' and not an event. You may do the bulk of your planning in a given period of time, circumstances frequently change that require a review of the compensation plan. Here are six (6) factors that may cause you to review or adjust your sales comp plans or structure:

1. You need to create new territories due to an increase in sales or as a result of new hires. Dividing territories usually calls for adjustments in quota allotment and hence adjustments in compensation.
2. You add a new sales role - i.e. a telesales, and you need to not only build a comp plan for the new sales role, but need to add the cost of this new plan to your Cost of Sales and revisit your cost model to ensure the plan is still in-line with financial budgets.
3. You introduce new products which weren't included in the original comp plans. You may need to provide a completely new incentive component, or promote a certain mix of old vs. new products.
4. None of Your sales team is achieving their goals. You may have set goals or quotas at a level that no one can attain. To keep your team motivated and driving forward, you may need to adjust quota levels for your team to achieve success. A best practice would be to structure team goals so that approximately 60% of your team is at or above plan.
5. Your plan is not motivating the right behavior. Your sales team is making money because they have figured out how to ‘work the comp plan' but their achievements are not aligned with company goals. You need to ensure that your entire team's incentive structure is aligned with the company achieving its goals.
6. Your Cost of Sale is too high. You may have designed a great comp plan in terms of motivating your team, but the Cost of Sale ends up making the plans not affordable to continue paying the current incentive rates.

Makana Motivator allows you to manage the dynamic nature of sales compensation changes. You can quickly and easily perform what-if scenarios with inputs such as quota levels, commission rates, staffing levels and territory assignments and graphically view how these changes will impact your sales comp efforts. The modeling capability allows you to verify that the plans you developed fit within an acceptable Cost of Sale budget. Once you have designed and modeled your idea comp plan, Makana Motivator automatically generates a comp plan document using your design inputs.

Larry D'Angelo