Sales Compensation Blog

An effective sales compensation plan is critical in motivating the sales team. It provides focus and rewards for the right results.  To make sure that your plans help speed your team towards success, avoid these typical sales compensation plan roadblocks:

Plans that are too complicated: These plans cause reps to either waste valuable time trying to figure them out or, even worse, to ignore the plan altogether and do whatever they think is right.

Too many measures: A measure includes quotas, goals and any other expectation of attainment for the sales rep. If you have more than five measures, the plan loses critical focus. In my experience, you should have 3 or fewer measures to avoid distraction, frustration and confusion.

Unrealistic quotas: You want to have at least half of the reps making quota. Otherwise, the reps won't be able to see themselves as achievers and will quickly become unmotivated.

Financial rewards delivered too late to be associated with the event: It's human nature - when we are rewarded right away for a behavior, the motivation to repeat the behavior is strong. The more you wait to pay incentives to your sales rep, the more the reward loses its power to motivate.

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 have read thousands of sales compensation plan documents over the years. Some I can understand but others take even a comp expert a lot of time to figure out. This is the time of year when many new compensation plans are announced to the sales force. In this economy, lots of companies are changing their comp strategy and no company can afford the lost opportunities that can happen when a sales plan is not clear.

When reviewing your plan documentation answer these questions clearly and you'll go a long way in communicating your plan changes!

1. Can the rep see how much they can earn at target?

• The rep wants to quickly look at the plan document and figure out what he can earn when he achieves his goals.

2. Does your plan document clearly communicate the goals?

• Goals must be clear and precise. The rep needs to know where she should be focusing her attention.

3. Does your plan document clearly communicate the earnings?

• If you have designed your plan correctly, the reps greatest earning capability will be on the area you want them to focus. Let them know where that is.

4. Do the reps get excited about the upside possibilities?

• Let the reps see how much they can make at excellence, it goes a long way towards overachievement.

	By using Makana Motivator, you are quickly able to create plan documents that will help focus your sales reps on the right behavior. Goals and earning capabilities are clearly stated.
By using the mini modeling function of Makana Motivator, you will be able to interactively show the rep how much they will earn at various levels of attainment and compare it to what they made on the previous plan. As you review the plan with the rep and change your attainment assumptions, Motivator will calculate the appropriate payout based on the plan you created.

• 18% of companies surveyed will change incentive opportunities
• 12% will increase their emphasis on profits
• 38% will change performance expectations

And according to The Alexander Group's, "AGI Sales and Marketing Benchmark Reports, Guide to Sales Compensation Survey," 93% of companies surveyed will make changes to their comp plan

But, rebuilding or even worse, starting a comp plan from scratch can be scary, especially if you are looking at an empty Excel spreadsheet. But Makana has an easy self- service solution that is available online.

Join us on February 19th to learn how AutoSmart America, an auto dealer in downtown Detroit, used Makana to rewrite comp plans that motivated sales teams and increased revenues.

Companies often spend a lot of time and money trying to design the optimal, most effective sales compensation plan. They may hire consultants, review detailed earnings history or run various analytics to ensure their team plans are good for the business. In doing so, they sometimes overlook the fact that the comp plan must be motivating for the sales team as well. It must reward the team close to the point of influence and provide them the right incentives throughout the year. What is one of the easiest and quickest ways to know if you are properly motivating your sales team  ASK THEM! Ask your sales team directly. A true team of professionals will tell you whether or not their sales compensation plans are motivating. I found by surveying the entire team, and then discussing the results and suggestions with a subset or core team yielded much better plans, and hence much better performance. When you include sales team input into your plan design, the team actually takes more ownership of their earnings potential and there tends to be less conflict or confusion around payouts. By asking them, you are also showing that you value their input and recognize them as part of the equation. You can ask them in person or with an online or printed survey. Using an online survey tool, live survey monkey - (free at www.surveymonkey.com) allows you to make it anonymous if you feel that you will get more accurate results that way.

Here are 7 basic survey questions you can ask your team:

1. Do you know what your goals are? Do you clearly understand them?
2. Do you feel your goals are achievable?
3. Do you find yourself focusing more of your attention on any one goal? If so, which one?
4. Do you clearly understand how you get paid, and what you need to do to get into your accelerators?
5. Have you run into any conflicts or found yourself competing with someone on your team (direct or channel) over the same deal or account?
6. Do you clearly understand company goals?
7. Do you have suggestions on how to improve your current plan that are in alignment with company goals?

Sometimes the obvious path eludes us, but is often the best. Let us know if this has worked for you.

Larry D'Angelo
VP Business Operations
Makana Solutions

Recently, we held our monthly live Best Practice Webinar,

Common Pitfalls in Sales Compensation with sales comp expert Beth Carroll of the Cygnal Group.    It drew record registration and attendance highlighting how starved people are for assistance.

Beth and Makana Soltuons’ CEO Liz Cobb walked attendees through the most common pitfalls in sales comp and how to avoid or rectify them.  Their presentation drew the highest satisfaction ratings of any of the previous 6 webinars we have recorded.

We asked attendees in the post webinar survey which of the pitfalls they had experienced, and the results were equally amazing – see the below list.  96% of all respondents were experiencing at least one of the pitfalls and 65% of those were experiencing multiple pitfalls.

Sales Comp Pitfall and % of respondents that have that pitfall

• Plans with unattainable goals                     47%
• Plan that don't motivate                               41%
• Plans that overpay or are too costly         34%
• Credit wars among team members          34%
• Plans with too many measures                  29%

As Beth and Liz point out in the webinar – a lot of these can be avoided or rectified without too much effort.  You can watch the recording to learn more about these pitfalls and how to avoid them.  Let us know what you think.