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5 key questions to guide sales compensation plan design

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With the talent crunch hitting teams and businesses across all industries, sales teams are not alone in the challenge to retain and engage top talent. Designing an effective sales compensation plan is a critical element of your employee engagement strategy that can be the difference between high talent retention and high talent attrition.

What is sales compensation?

Sales compensation is the payment a seller receives for their work. It usually includes a base salary, commission and additional monetary incentives to motivate a seller. Sales compensation is an important factor in motivating your sellers. This is why designing a sales compensation plan that aligns to your seller’s expectations and your company’s goals is critical.

If you want to keep your top sales talent, make sure you ask these five questions to help you design and implement an effective sales compensation plan.

Q1 What behaviors does your sales compensation plan need to encourage?

To design a strategic sales compensation plan, you need to first ask, what is the organization trying to accomplish? A sales compensation plan is there to incentivize a seller for certain behaviors, such as selling more product, retaining current customers, or acquiring new customers. These behaviors should align with your organizational goals.

Once you know the priorities in your sales strategy, you can create a compensation philosophy statement. This is an effective tool that guides the structure of your compensation plan and helps build the foundation upon which compensation design decisions are based. By surveying stakeholders and creating a compensation philosophy statement that tackles an overall corporate position prior to design, it helps you think like an expert and mitigates the emotional decision-making that can plague a design project.

Typical philosophy statements have multiple components that include a plan ownership/management statement, business objective link, pay level positioning and prominence policy, pay for performance guide and performance and management timing rules.

Q2 What are the objectives of the job role?

Understanding a specific job role’s objectives is one of the most critical elements in the design process and often one of the most overlooked. Different sales jobs have different goals and priorities that should be reflected in the design of the incentive plan.

When sales roles are clearly defined with detailed job descriptions, skills and competencies, the compensation plan can better drive the desired objectives, behaviors and results. If a job is not well defined, it’s your responsibility to create a thorough description. Without understanding a job role, you won’t know its value.

Q3 Does compensation align with your employee engagement strategy?

Compensation is only one element of the overall relationship between the seller and the company. There may be other more important elements such as employee benefits, career progression or work content that can be more effective employee engagement tools. Additionally, not all sales organizations want compensation to play the deciding role in influencing sellers’ behavior and, as a result, compensation may not need to be as prominent. Before creating a compensation plan, you should understand the role of sales compensation within the overall employee engagement strategy to determine how much of a sellers’ day-to-day actions should be tied to compensation.

Q4 What’s the right level of compensation?

There has been a shift towards a stronger pay-for-performance model, creating more aggressive sales compensation plans i.e. more dollars on variable incentive versus fixed base salary. It is important to understand how factors determine sales rep prominence and the ratio of fixed pay to variable pay. Market share, buying patterns, selling versus non-selling activities and control over the sale are key points to be considered. When a seller has less influence and a less assertive role, the mix is typically weighted more towards base pay, for example a 70/30 base/incentive. Conversely, when a job requires a high level of skill and drive, and a sale requires more effort, or competition is very strong, a seller’s job is harder. To help keep high performers motivated and engaged, more performance-based pay is necessary-aim for a mix of 50/50.

Not all organizations can or need to pay at the market rate salary midpoints. There are many business-based factors that can affect where target compensation levels should be positioned relative to external benchmarks. Applying this pay factor logic will help create target compensation levels that more accurately reflect the needs of the business and market conditions, rather than simply the pay levels of your competitors.

Q5 What are your performance standards?

When considering how to measure an effective sales compensation plan, you should define the specific performance standards or criteria that determine success. Achievement against these measures becomes the basis for assessing sales results and awarding incentive payments. There are typically four types of measures that experts consider:

  • Financial/production measures are often the core measures, weighted most heavily in an incentive plan. They focus on sales dollars, margin / margin dollars, or units, and are typically based on volume.
  • Strategic measures are also often core measures, but generally secondary to financial/production measures. These measures deal with anything that drives a specific strategic need, like customer or product mix.
  • Activity measures focus on a seller’s activities, events, or milestones, such as customer events, qualified leads, conversations, or sales calls. You can use these measures when the organization is trying to achieve milestones, has a long sales cycle, or when other criteria are difficult to measure.
  • Subjective/judgment measures are less quantitative and more qualitative, making them more difficult to measure. These may include professional objectives or discretionary behaviors that a rep’s manager will document or observe. Typically, these measures should be used sparingly and with less weight.

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Strategic elements and pay periods of a sales compensation plan

Payout formulas, payment terms, caps, thresholds and modifiers are where the rubber meets the road in sales compensation plan design. These components create the structure and formulas for how a plan pays out given a seller’s balanced level of achievement. Use with care, as these strategic elements can create complications in plans and cause sellers to lose their line of sight from sale to payment. Common types of strategic elements include:

  • Thresholds and deceleration: A threshold is a minimum performance level required for receiving compensation payouts. In pay-for-performance plans, thresholds help to fund accelerated payments or to stay within fixed compensation budgets by shifting payouts from low producers to high producers.
  • Multipliers and acceleration: These are increased payouts for overachievement, used to create differentiation among average and top performers. Payments accelerate over 100% of performance and continue to pay out at multiples above target, typically 3x to 4x target incentive.
  • Incentive payout caps: This is a limit on payouts. This is used to prevent overpayment or to ensure the company does not go over budget when paying out. An experienced design expert knows to limit incentive caps on primary compensation measures.
  • Measurement periods and pay frequency: Measurement periods are the time during which you measure someone on their performance, such as monthly, quarterly, bi-annually or annually. Many experienced design experts use cumulative pay periods, typically a year (cumulative YTD results), as companies often like to hold back excellence payouts until total cumulative results are tabulated. Sellers do, however, get paid on their performance up to 100% for those non-cumulative periods.

Get started on your sales compensation planning today

Increasingly, sales compensation planning is becoming a highly specialized practice due to today’s sophisticated selling models. Educating yourself and understanding how strategy plays into design, then understanding compensation principles and applying a disciplined mindset much like a seasoned professional design expert will help you navigate the plan design and create an effective compensation plan.

For more support on how to design your sales compensation plan to increase employee engagement and help grow sales, contact us today.