Sales Transformation

How to Build a Sales Compensation Governance Program

Learn how a sales compensation governance program can enhance sales effectiveness, align with company strategies and drive sustainable growth.

October 02, 2023

Typically, organizations associate the term “compensation governance” with evaluating executive pay. But there’s no reason why governance principles shouldn’t apply to sales organizations too—and many leading sales organizations agree, especially as sales are becoming increasingly complex.

Why all the complexity? Because sales organizations are struggling to attract new customers. Customers are engaging sellers later in their buying journey. In our 2023 survey of 600 sales professionals, more than 80% told us that sales cycles have increased. “The longer customers wait to approach a seller, the fewer opportunities sellers have to distinguish themselves from the competition,” says Joe DiMisa, Senior Client Partner, Sales Effectiveness & Rewards Advisory Leader at Korn Ferry.

When customers do engage with sellers, they’re sometimes disappointed, leaving sales organizations to find new ways to engage with customers and reconfigure their sales processes to improve effectiveness. As a result, sales jobs have become more challenging—and sales leaders are strengthening their sales compensation programs to incentivize productivity and performance.

In these challenging times, governance can be the foundation for a robust, sustainable sales compensation program. A well-structured governance program helps sales leaders maintain the integrity of plan operations, overall design parameters and ultimately, the cost of sales. It can eliminate a patchwork of compensation policies and sales incentives based on guesswork and ensure that changes in compensation align with company strategies and values.

In short, a strong governance program strengthens compensation plans over the long run.

A strategic approach to sales pay works best

Each business unit in a sales organization may have its own ideas about how to set incentives and quotas and how to measure success. It may appear that sales managers are setting these numbers on a whim, which can lead to seller confusion and frustration.

When a sales compensation plan doesn’t yield the expected results, sales managers often change course, changing the metrics, adding more money to the plan or resetting goals. These knee-jerk reactions aren’t the right approach. Layers of different compensation plans, none of which share a consistent compensation philosophy, payout, cost or target, only make the problem worse.

Instead, sales organizations need to align with their company’s overall culture and policy. That means sales leaders should follow company guidelines for budgeting, goal setting and award determination and, above all else, align with the organization’s compensation philosophy.

The importance of a collaborative approach to sales compensation governance

According to DiMisa, “the strongest compensation governance programs are collaborative.” Instead of allowing a single team to dictate the terms of a compensation policy, organizations should gather a team from sales operations, human resources, finance and other interested internal organizations that should be involved in designing and aligning the governance program. This approach allows the entire organization to manage the pace of change by outlining common rules, practices, levels and communication requirements when customizing compensation plans for different areas of the business.

The organizational benefits of a compensation governance plan

For organizations new to the concept of governance, an initial challenge may involve convincing all stakeholders that governance can codify what’s essential rather than controlling individual business units. Establishing common aspirations about the purpose and advantages of governance is crucial to getting buy-in from all groups involved.

Some primary goals that programs with robust sales pay governance have identified include the following:

Developing, designing, monitoring and enforcing effective and consistent sales incentive plans that align with organizational objectives
Providing a uniform approach throughout each compensation plan design phase, from assessment to development and implementation
Ensuring that corporate cost parameters, target levels, legal requirements, regulatory compliance and risks are identified and managed effectively

Offering essential logistical support, rules, timing and accountabilities for the assessment, design and implementation of best-practice incentive compensation plans

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Three steps to create a sales compensation governance program

A sound sales compensation governance program ensures a unified approach to sales pay. The most effective governance programs start with three steps: setting up policies and practices governing sales incentive design, establishing governance principles, and using the program’s benefits to strengthen overall results, including enhancing performance, aligning compensation with business strategies and attracting and retaining talent.

Step 1: Address the eight key components of sales pay governance

Sales compensation governance plays a pivotal role in supporting an organization’s decisions related to strategy, market coverage and job roles. To ensure consistency and continuity, outline key policies and practices that address the eight components of sales incentive design:

Job roles: Clearly define the jobs covered under governance guidelines and match them with specific governance policies and standards.
Target pay levels: Outline benchmarking parameters and define corporate policies for target compensation levels. Identify the market pay levels, pay strategy and target levels for each role plus the data types that should be examined for each.
Mix and upside: Set parameters for salary and incentive mix based on job roles, sales cycles and sales process factors. Also establish upside potential rules for top performers.
Measures and weights: Define the key performance indicators and their relative weights, ensuring alignment between incentive compensation strategies and business objectives.
Mechanics and links: Specify payout formulas and mechanics that the organization should use to ensure clear communication of objectives and proper line-of-sight.
Quota setting and allocation: Establish guidelines for setting quotas for each performance measure. Outline the organization’s allocation process based on market potential and performance-based factors.
Implementation and administration: Set guidelines for standard communication material templates, plan documents and compensation plan policies. Clarify how business units should introduce these materials to the organization, including suggested timelines and checklists.
Evaluation and planning for the next cycle: Define the process for conducting 30-60-90-day audits. Explain what metric dashboards the organization should create to ensure that the plan meets corporate standards and business unit objectives.

Step 2: Create new governance standards

DiMisa advises that establishing sales pay governance requires a comprehensive approach that involves seeking input from all parties. He adds, “It’s essential to understand the strategic priorities and current challenges facing the organization, business units and the compensation program.”

As you establish your sales compensation governance program, follow three steps:

First, seek input from executives, sales management and other stakeholders. Ask them to identify current issues and share their perspectives on business objectives, sales strategies, legal risks, compliance issues, costing guidelines, management supervision, the roles of business units and human resources and compensation plan strategy.

Next, analyze your organization’s current costs. Study the various components that go into pay, including pay vs. performance relationships, distribution of performance and rewards for high performers. Evaluate the existing salary and incentive mix, upside potential, performance measures, weights, links, threshold and excellence levels and mechanics.

Finally, define the governance design principles. Define the eight design components noted above. Clarify issues such as business unit flexibility and alternatives. Identify key decision-makers and clarify role alignment between corporate human resources and business units in influencing governance guidelines and the pay design process.

Step 3: Enjoy the benefits

Organizations that invest time and effort in sales compensation governance realize significant returns in both the short and long term, such as:

Enhanced expense control, resulting in more predictable, lower compensation costs and compensation costs of sales
Improved alignment of jobs and their compensation with company growth objectives, eliminating the hampering effects of conflicting company objectives
Stronger performance and better cost predictability for business planning
Increased performance tracking and metrics that help monitor pay vs. performance correlations in business units
Improved ability to attract and retain top talent and reduce turnover through a well-structured pay program that offers appropriate pay levels and earning opportunities
Reduced legal and regulatory risks arising from plan noncompliance or unethical behaviors by plan participants

Sales compensation governance aligns and motivates the entire organization, enabling it to outperform the competition. To learn more about how Korn Ferry can help you align pay and performance to drive more sales, contact our sales effectiveness experts.