How to Design a Sales Compensation Plan Everyone Can Agree On
No doubt you’ve heard the expression “it’s like herding cats.” It’s frequently used to describe a situation where a task is made more difficult by an organizer having difficulty getting participants on the same page. When you’re trying to work with a group of people, it can be challenging to get them all moving in the same direction when other group members or department heads have completely different ideas about what is necessary and how to proceed.
If you’re not able to “herd all these cats” and get them working together, the result can be chaos, confusion and serious long-term problems for your event or your company.
When you’re designing a sales compensation program for your organization, you can often run into this “herding cats” problem. You may be getting a lot of conflicting messages from your colleagues and key stakeholders across the business. Perhaps finance is saying, “The program costs too much.” IT is saying that the data is no good. Occasionally the sales director will tell you, “The competition has a much better plan. Why are we doing this?” Worse, people in your organization are telling you that, “We better start with a blank sheet of paper. Maybe the plan is in driving the behaviors we want.”
Recently, David Marshall, the Managing Director and Co-founder of Performio and an expert in sales compensation planning, talked about how you can create a framework to deal with this “herding cats problem” and create a sales compensation plan that works for everyone in the organization.
How to Plan Your Sales Compensation Plan
Imagine you’re heading up an ICT company and you are beginning the process of planning sales compensation for the coming year. The company pays its account managers a percentage of OTE for a percentage of quota attainment. Meanwhile, sales executives are more focused on new business and earn 10% of their annual contract value but also receive various incentives for long-term contracts or different types of product categories. Then you have sales management and sales support engineers who earn commission overlays for new sales and crediting in new territories. You may also have different products which use special rates of compensation.
As companies mature and grow over time, this can create bloat in your sales compensation plan. So now you have 20 structurally different compensation plans for 100 salespeople. It becomes highly complex and complicated to manage.
Meanwhile, the company hears that customer churn is getting worse and they’re not winning enough new business. As well, the sales team needs to be motivated to sell a new digital offering which must also be accomplished in the new year. Another factor that needs to be considered is that selling is now a more collaborative venture. The idea of the lone salesperson going out and closing the deal is not as valid as it used to be.
So the question for you, as you begin the planning process for sales compensation plan, is where do you actually start? How do you get everybody on the same page with all these different concerns and schemes in your organization? As David noted, the mistake that many companies make is they don’t have a frame of reference for how to develop a plan. Too many jump right to the pain point and start with the wrong part of the plan.
So what does an effective review actually look like? What are its success factors?
Here are some of the goals to aim for in the initial phases of the planning process.
To create an effective plan, you need all the key stakeholders involved from the very beginning. It is the best way to effectively capture ideas, opinions, and constraints. Constraints may be the key factor because everyone wants everything but in business, there are always limitations on what you can do and how you can do it.
Knowing what is and what is not on the table for review is very important.
It’s imperative to have the same language for how you talk about sales compensation. Participants understand the guiding principles of program design and also the key business issues and constraints to be discussed.
Data and Analysis
All participants have access to the evidence. They prepare for each meeting. Use data to support the planning process rather than discussing everything based on intuition or hearsay.
An essential element. Preparation for each meeting is solid and meeting times are adhered to. Once a decision is made, actions are completed. If you’re going to have a successful design review project, you must have project discipline.
The idea of starting with “a blank sheet of paper” is very counterproductive to the planning review process. This is especially true with established organizations. Organizations have history and tradition that you can build on. A lot of learning has already taken place. A “blank sheet of paper” is a copout. It’s important to bring new ideas and open minds to every meeting but that does not mean starting from scratch.
Performio’s Ready-Set-Go Sales Compensation Framework
So now you have your goals but you must have a way to achieve each one. David and Performio have designed a framework to help you. They call it the “Ready, Set, Go” framework, that makes up the foundation of Performio ICM. It includes 15 steps to best practices. It is a clean, simple frame of reference that helps you guide the people in your organization through the sales compensation plan design process.
The idea behind the framework is to help you not get out of order. Sometimes a company will start with the set phase, then back to ready, then they shift to go before all the kinks have been worked out. The planning process works because you do things in order.
- Purpose: This framework starts with first principles. Put all your key stakeholders in one room and get them to agree on the purpose of the sales compensation plan for the new year. What are the goals that your company needs to achieve? What goals does the sale plan need to achieve?
- Principles: What are the design principles underlying the plan? Think about your non-negotiable items and how they apply to the company’s overall constraints. Be prepared for disagreement, but at the end of this phase, your key stakeholders need to agree on what is the principle. You can’t leave important compensation items implicit. They need to be explicit in your design process from the beginning and not added when you’re about to launch your plan.
- Total Pay: What is the right level to pay people according to the market, and how does that fit into your HR strategy?
- Pay Mix: What is the right fixed and variable compensation mix?
- Pay Curve: What does the pay curve look like? How aggressive do you want to be in terms of upside versus blown quota? What does the bell curve look like?
From a “herding cats” point of view, the key thing is getting everyone to agree on these five above items, especially the first two. This will make it much easier to move into the process of actually designing your plan. When you move into the next phase, it’s important to have a lot of these decisions in place already
- Measure: What are the performance measures that you can use at your company? In this phase, it’s important to decide what metrics are going to be used to make these measurements.
- Weighing: How will these measurements be weighed in terms of importance for the planning process?
- Mechanics: Here it is important to determine the mechanics of how performance is connected to rewards. You may already have a percentage of quota retainment model or you’re paying a percentage of commission. Perhaps you’re using a hybrid. Mechanics are the actual calculations that you use to determine compensation.
- Timing: How often do you want to pay your salespeople? Is it monthly, quarterly or semiannually?
- Targets and Quota: This is a very important element of your sales compensation plan review process. Even if you get many of the other above items correct, if your sales planning targets and quota method doesn’t work properly, it means problems for your company.
If you use the ten steps above to help get everyone on the same page and prevent them from heading off in all different directions, it will help you “herd the cats” in your company much more effectively. This will make your plan design process much more efficient and easier to achieve.
Finally, the final five-steps deal with the implementation of the sales compensation review plan.
- Gather: Companies ultimately implement a plan by bringing all their data together, creating a “single source of truth.”
- Interrelate: Managing these data relationships, and the changes that they may have instigated.
- Calculate: Running the actual calculations that support the plan that has been developed through the process.
- Communicate: Communicating the plan with your sales force, so that they understand the plan and know how it will be implemented.
- Evaluate: Very often sales compensation administrators try to generate reports on the fly. It should be clear, however, from day one what the agreed objectives of the plans are and that every decision that is made throughout the financial year needs to be measured and evaluated against the agreed objectives.
David shared what he’s observed is one of the biggest mistakes companies make when designing a sales compensation plan — people under pressure often jump straight to the mechanic area of the Set section. But if you don’t have your foundations, your purpose and your principles set in place, it’s impossible to determine accurately the mechanics that are needed to generate the correct sale compensation calculations.
Developing and Maintaining Sales Compensation Focus
Use the “Ready, Set, Go” framework to achieve those important goals and key success factors that we talked about above. It provides a guide for stakeholder engagement, particularly facilitating discussion in a productive and focused manner. It helps create a shared language and an agreed scope. Finally, document build helps you understand what your objectives are and over time how you are performing in achieving those objectives.
Most importantly, the framework helps you develop a sales compensation plan that can be used as a universal template for all individuals and departments in your company. Rather than 20 completely different schemes for 100 different salespeople, you have one plan that can be scaled according to each department’s needs. It also helps you bring people back to guiding principles when they want to head off in a new direction.
Remember, this is not the only time you’re going to do this plan review process. Depending on how your company operates, you could be doing it again in 12 months or 24 months. As the years pass, your organization matures and learns. This is why it’s important to build on this accumulated knowledge and learning and not to start with “a blank sheet.” This way, when you find yourself in a room in 12 months, beginning the process anew, you can review how the sales compensation plan has performed over the past year and build on that.
When is the right time to begin this planning process? Well, 30 days before the start of your financial year is too late. Think about beginning the process in the last quarter of your financial year and starting sooner rather than later. So if your new financial year starts in January, it’s time to start bringing the key stakeholders together in October to begin the Ready phase of the framework. You need to give people time to develop shared principles and language. By the time December rolls around, you’ve moved through Set and you’re on to Go.
Suppose, however, that you are tasked with designing a sales compensation plan for a number of companies all at once and not just one company. The framework does not change. The key from the beginning is to bring together the main stakeholders from each group and work through the steps of the framework.
Performio Can Help You Develop and Achieve Sales Compensation Successes
Performio has developed commission tracking software for salespeople everywhere. It can help companies assign correct targets and quotas and help reward the best salespeople with the correct amount. It eliminates the need for you to use spreadsheets, which invite mistakes that can cost a company hundreds of thousands of dollars in incorrect sales compensation every year. Even better, using our software can help motivate your salespeople to perform at their very best.
If you would like to learn more about what we can do for you and your company and help you develop a sales compensation plan that both pays your best people the correct amount and saves you money in the long run, you can request a demo today.