Sales Compensation Plan Building
Posted by Teanna Spence on Fri, Mar 20, 2009 @ 07:23 AM
Building a sales compensation plan isn't easy. This week we found a woman on LinkedIn who needed help developing a plan for outside sales reps in the IT industry. She just needed a bit of advice about what to consider. We put together the following and figured it was worth sharing here.
There are a few things to consider when building a sales plan. Based on our experience, here are some of the questions and items our comp experts focus on with our clients:
1. What is your corporate strategy? (Increase volume of customers or revenue? Increase profits? Improve customer support or retention?)
2. Pay on the top 2-3 things that are important to you: Simplicity and clarity are key in driving behavior. Take a moment to consider what the most important measurable activities are that make a difference to your company. Clearly closing the deal is important, but often one or two other activities have a dramatic impact.
3. Determine mix of base to incentive based on the behavior you are trying to incent (see graph)
4. Build a plan with a ramped commission rate, the more they sell the more they make.
5. Eliminate de-motivators like caps on commissions, mis-calculation of commissions, or delayed payments
6. This sounds like a plug, but choose a system, don't do it in Excel. 90% of spreadsheets have errors according to a study done by Prof. Panko @ University of Hawaii. Building a plan in Excel doesn't allow you to easily model costs prepare or prevent you from making any over-payments or incurring other unintended consequences.
Things to keep in mind:
• Keep it simple, no matter what, keep the measures to 3 items and make them crystal clear- Use graphs where you can.
• Make sure you are compensating your people based on things they can control and are in complete alignment with your corporate strategy.
• Pay your reps as close to the behavior as possible- if they close a deal in March, you want to pay them no later than April.
• Do not create monthly goals; they promote "gaming" of the plan. Goals should at least be quarterly but annual is ideal.
• This might not be your area of responsibility, but you might want to add other people to incentive compensation plans- customer support, sales engineers, project managers. But if you add someone, make sure you are willing to tie at least 15% of their Target Total Compensation (TTC) to commission.
• A well built plan should include full definition of all terms and conditions, and all the appropriate legal language to protect your company in case of termination or dispute.