Fall brings with it certain happenings: leaves changing colors, kids dressing up for Halloween, cool evenings, the change back from Daylight Saving Time, and, in the business world, the beginning of the annual budgeting process, as well as the time to revisit sales compensation programs. It is the last of these annual events that presents a significant challenge to many businesses.
Sales compensation plans are important to the success of a company, yet many organizations fail to get it right the first time. So when fall rolls around and the sales numbers are as cool as the weather, companies begin to review their sales compensation program, intending to make changes. Changing the plan on an annual basis is time consuming, and has a detrimental effect on the sales forces’ perception of why the company keeps making these changes; credibility generally suffers as a result. Assuming that an organization has done its homework and recognizes that its program is not achieving the intended results, a plan redesign can be accomplished in time to permit a new plan to be developed, tested, and readied for roll-out well before its effective date, usually the beginning of the next fiscal or calendar year. In order to achieve the desired results, it is best not to be rushed, but rather to have sufficient time in which to review and redesign the plan without the extra pressure of an unrealistic, last minute deadline.
In order to accomplish this in a systematic and effective manner, we suggest that the following six (6) step approach be taken:
Step 1 - Clarify the Sales and Marketing Strategy: Although this seems very elementary, it is not unusual for a company to attempt to design a new sales compensation plan without having a consensus among Senior Management as to where their sales focus should be, which products or services to emphasize, and in some cases, what the role of the sales person should be. We recognize that some of these factors will change during the course of a year, and the plan should allow for the focus to be modified without radically altering the plan or having “to throw the baby out with the bath water”. Once the focus items have been identified, they need to be prioritized from most important to least important.
Step 2 - Determine the Desired Mix and Amount of Sales Compensation: There is a considerable amount of reliable comparative market data on companies and industry segment, how much variability should there be in pay, and what should the sales personnel be paid for (units, revenue, price or margin). Using this as a baseline, the company should decide on its intended Sales Compensation Philosophy. Specifically, it will define the mix between fixed pay (salary) and incentives, bonuses, and/or commissions. These typically range from 50/50 to 70/30, but each company will have to determine what is really best for its own sales force. This will serve as the “stake in the ground” for evaluating the current pay program and for any redesign.
Step 3 - Develop a Draft Sales Compensation Plan: The plan is actually the sum of the parts needed to achieve the identified sales and marketing strategy in the most effective manner. The parts should consider participants, setting and measuring of performance targets and thresholds, award determination and funding, and the rules for administering the program, including splits and sharing of awards, payout mechanics, and a host of other issues that prove the point, “the devil is in the details”.
Step 4 - Modeling the New Plan: Many companies fail to test the new plan design under historic and “what if” scenarios. Without this step, we really don’t know what the impact will be on the current sales personnel, or based on the anticipated performance levels. This is, in effect, a cost/benefit analysis to see how the best sales people will be treated under different scenarios. A point to remember is that the plan may have the effect of increasing turnover, most likely impacting the worst members of the sales force. If the salesperson is achieving his/her level of expectation, pay will be at the right level, and vice versa. If time and budgets permit, modeling can take the form of a full-blown pilot study; this is more complicated, but will provide evidence of results that can justify moving forward with the process organization-wide.
Step 5 - Implementation and Administration: Putting a new plan into operation takes a lot more work and thought than one may be willing to admit. Obviously, it needs to be thoroughly communicated to all concerned personnel. And that is three separate groups: the sales personnel themselves, their managers, and the staff who is charged with its administration. The form of communication will be different, since each group has to understand it in a slightly different way. The sales force has a special interest in the new plan, it’s called “WIIFM”- WHAT’S IN IT FOR ME.
Since installing a new plan is analogous to changing the engines on a plane flying at 30,000 feet, there are a number of transitional or phase-in issues that have to be addressed, to avoid turmoil and demotivation among the sales personnel. These could include running parallel systems, grandfathering some sales activities, and other related issues. Clearly, the administrative staff needs to understand the mechanics of the plan and have all of the necessary tools for handling the administrative issues they will encounter. Again, the devil is in the details.
Step 6 - Monitoring and Corrective Action: The proverbial “rubber meets the road” when the new plan is rolled out. Is the plan effective at focusing the sales force’s attention on the desired results? Does it provide the motivation necessary to achieve those objectives? If the results don’t match up with the expectations, the company needs to examine why not, and take remedial action. This is an on-going process that must be carried out on a timely and continuous basis. Rather than trashing the plan, it may need to be tweaked, in order to place more emphasis on the desired results, and the plan should have the inherent flexibility to accomplish this without major adjustment. Why do sales compensation plans fail? CRI recently conducted a survey to determine what issues companies were having with their sales compensation plans. Interestingly, the results of this study reinforced the findings of many previous studies. The problems fall into three main categories: plan design issues, administrative issues, and lack of focus. Specifically, the plans tend to be too complex by trying to accomplish too much in order to satisfy all parties, and end up by not serving anyone very well. Because they are overly complex, they are very difficult to administer on a timely basis, and the plan language is often too ambiguous. “If you can’t understand it, it’s probably not going to motivate you”. The lack of focus comes about when it is unclear what the company really wants the sales force to emphasize: price or margin, units or revenue, business development or maintenance of existing accounts, etc. Using the systematic steps outlined above should help to eliminate some or all of these issues, and assist in the design and implementation of sales compensation plans that will be more effective at meetings the company’s intended goals.
The sales compensation plan is a critical component of each company’s process to obtain the business that makes it operate. Avoid the tricks and go for the treats - care in plan design will reap rewards for both the organization and your sales staff. Remember, no sales = no revenue = no business.
Compensation Resources, Inc. provides compensation and human resource consulting to mid-size and Fortune 500 clients as well as public, private, family-owned and emerging companies. CRI specializes in Executive Compensation, Salary Administration, Performance Management, Sales Compensation, and expert witness services. Our reference library boasts over 4,800 surveys.