Fourteen step formula for designing sales rep compensation:
- Determine eligibility
- The most common eligibility criteria require job incumbents to (1) have customer contact and (2) persuade the customer to act in a positive financial benefit to the company.
- Align sales jobs with customers
- Sales jobs function best when they have a single focus and uniform cadence
- Job design errors are the No. 1 culprit in sales compensation plan failure.
- Avoid having sales people selling too many products or too many dissimilar customers
- The # of sales comp plans should equal the # of sales jobs.
- Customer segments: New accounts; Existing accounts; Channel partners; Channel end users
- Customer specialization: size (strategic, major, & small); product; industry; geography
- Identify target total cash compensation
- Target total cash compensation includes both the base salary and the sales compensation components. It excludes benefits, contests and/or SPIFs, recognition events, and sales expense reimbursement.
- Example: Set low performance at the 25% percentile of industry benchmarks, on-target performance at the 60th percentile, and exceptional performance at the 90th
- Determine the pay mix of the plan
- The more the salesperson can influence a customer to act, the lower the base salary as a portion of target total cash compensation and the higher the at-risk component.
- Types of plans:
- Unit rate plans – pay either a fixed dollar amount per unit or a fixed percent of dollars sold; common for commodity sellers (Ex: traders, real estate agents, etc.)
- Incentive plans: At-risk compensation usually ranges from 10% to 100% of base salary depending on the job level. For hunter, the mix is usually 60/40; for farmers, 80/20; for hybrid, 70/30. For house account manager, 90/10.
- Gainsharing plans: Tied to overall corporate performance, paying between 3 and 8 percent of base salary. (Mixed history of success).
- Add-on plans: serve short-term purposes such as contests and special program incentive funds (SPIFs).
- A portion at-risk incentive compensation may be linked to key sales objectives (KSOs) – quantitative measures other than volume production (see #7)
- Provide a guarantee of 75 percent of target incentive for new hires when the base salary is less than 70 percent of the total target compensation and territory ramp-up time is minimal. Have this guarantee expire at some fixed date in the future consistent with typical ramp-up time.
- Establish the pay leverage of the plan (multiplier of target incentive for those who reach the 90th percentile among peer performance)
- Hunters: 3.75x (uncapped)
- Farmers & Hybrids: 3x (uncapped)
- Overlay specialists: 2.75x (uncapped)
- Sales support: 2x (capped)
- House account managers: 2x (capped with 50% KSO)
- Calculate range of pay opportunities
- Pay should generally be uncapped for sales reps and capped for sales support
- Though demotivation, caps can be used to prevent excessive earnings due to unexpected large orders or low quotas
- Identify and weigh performance measures (best practice: use no more than 3 output measure and avoid presales input measures.)
- Volume production (sales revenue; profit dollars; units; etc.)
- Sales effectiveness (product mix; account retention; order size; price management; etc.)
- Customer impact (satisfaction scores, etc)
- Resource utilization (productivity, channel partner success, employee retention, etc.)
- Set quotas and confirm quota difficulty distribution
- Design so that 2/3 of reps achieve or exceed quota
- Sales quotas should be difficult. That’s their purpose—to stretch performance. Sales compensation is not an appeasement program.
- Strive to achieve territory sizes with equal opportunity using account assignment. Include rules for quote adjustment based on assignment and reassignment.
- Include rules for quota relief for reassigned accounts and other circumstances (ex: facility closure); similarly, quotas should be increased when accounts are added. It is best to keep mid-year account changes to a minimum. Any account assignment changes should have several levels of approval.
- Set quota thresholds above assured recurring revenues
- Sales crediting specifies to whom and when individuals earn sales credit for compensation purposes. As a rule: “Credit sales personnel when you no longer want them involved in the sales process.” Mandate that no out-of-policy sales crediting can occur without senior sales management approval. Limit credit splits: Limit the use of credit splits and double crediting. Use only when necessary.
- The most popular quota allocation methods are: Top down/algorithm; Top down/negotiated allocation; Top down, bottom up; Account planning; “hands-free” quotas (no quota; usually employs ranking)
- Quotas should be adjusted for seasonality
- Eschew quotas and use event-based compensation for very long sales cycles (over a year)
- Define new accounts as those that have not purchased in the last 12 months
- Set performance expectations (see leverage – #5 above)
- Include a minimum performance level below which no incentive comp is paid
- The performance period is the length of time between performance measurement period. Longer sales cycles generally have longer performance periods. More certain business environments generally have longer performance periods.
- The payment period determines when the incentive payment occurs. Normally, the performance period and the payment period are the same, for example, measured and paid quarterly.
- Decide whether performance and/or payment periods or discrete or cumulative. Cumulative is generally better when the payment period is shorter than the performance period.
- Assign pay expectations with performance expectations:
- Each performance level is assigned a payout amount
- Calculate the incentive formula for each performance measure
- straight commission (rare)
- Progressive ramp: one or more increases in commission rate (most common; use when incremental sales grow more difficult and desirable). Performance between steps pays the rate of the lower step.
- Regressive ramp: Though viewed unfavorably by reps, use when quota setting is challenging or to control unexpected windfalls. Consider applying a regressive rate to mega-orders.
- Declining/trailing residuals: paying lower commission on recurring revenue in future periods
- Pool plan: For team selling or mega-deals; often divided equally. Rare and generally not effective for driving sales performance.
- Profit variance: use when reps have large discretion over pricing
- Use commission rates when territories have equal potential. Use bonus plans that pay out a percentage of the target incentive when territories have unequal potential.
- One may have different commission rates for different products (higher rates for higher margin products)
- Linkages, such as hurdles, reward balanced effort by requiring the salesperson to accomplish measure A before realizing the beneficial payout related to measure B.
- Individual commission plans should be avoided
- Hybrid plans are possible. For instance, bonus up to quota then commission above.
- Net-out (reduce) sales credit by any returns before calculating the incentive payment. some sales organizations also net-out past due receivables that extend beyond a fixed number of days outstanding such as 90 or 120 days.
- Publish incentive formula
- An effective communication effort is made up of eight components: (1) Communication schedule (2) Sales leadership message (3) Program launch material (4) Field management training (5) Salesforce communication (6) Plan documentation (7) Performance and payout reporting (8) Plan updates and advisory notes
- Field managers should present the new sales compensation program to sales personnel. Investment in field manager training provides an exponential return on the program effectiveness. Bring region and district managers together for a full-day training program. Devote the first half of the day to plan explanation. For the second half of the day, have the field managers practice their communication presentations.
- Sales supervisor coaching: In one-on-one sessions, the sales supervisor meets with each sales representative to discuss how the new sales compensation program will affect the salesperson’s income. Advice on how to sell effectively to optimize the sales incentive plan will provide the right direction to sales personnel.
- Measure performance and provide interpretations and adjustments as needed
- To provide the real-time reinforcement of the incentive plan, provide comprehensive and timely reports on sales performance and payouts. Sales personnel should be able to see all transactions, adjustments, credits, and payout amounts with relative ease.
- Examine the relationship between pay and performance using a variety of dispersion charts to review trends and pay and performance relationships. Prepare unique charts for each job. Be careful to eliminate data of personnel who only worked part of the year.
- Optimize performance through “day-to-day, hands-on committed sales supervision”
Other:
- At its heart, sales compensation is a communication device: It tells salespeople what’s important and what’s not important.
- A high cost of sales might be a result of overstaffing and not overpayment to individuals.
- Sales organizations and sales jobs can become obsolete as the point of persuasion moves.
- Final approval for sales compensation plan designs rests almost 50 percent of the time with the CEO, COO, or General Manager.
- All sales compensation plans must work in concert with one another so that the overall sales compensation program (including crediting practices, quota allocation, and account assignments policies) works in logical unison
- Sales operations provide day-to-day management of the sales compensation program.
- Sales compensation program management committee: The program management committee has an ongoing responsibility for providing oversight to the sales compensation program application and interpretation. Meeting once a quarter.
- Sales job families: (1) Income producers; (2) Direct sales jobs incl. global acct, major acct, renewal, winback, AE, etc. (3) Indirect sales jobs; (4) Overlay sales jobs; (5) Business development; (6) pre- and post-sales support
- Sales management should plan well in advance for a full redesign of the sales compensation program. Sales compensation redesign is an iterative process. For large sales organizations, this process could take up to 4 to 5.
- Sales management should strive to avoid mid-year changes to the compensation plan.
- Strategic account managers:
- Frequently, the strategic account manager has one, possibly two accounts.
- Strategic account managers should have a portion of their pay tied to continuing revenue, churn of existing business, and organic growth.
- The strategic account manager should prepare an annual sales plan for each key account. Sales leadership should conduct quarterly reviews of these sales plans for major accounts and make appropriate adjustments based on evolving buyer needs. This sales plan should also describe the full range of customer support and engagement activities with the account.
- A typical split of the incentive component would provide 50 percent for growth of existing revenue; 35 percent tied to sales initiatives; and the remaining 15 percent tied to account sales planning and action outcomes.
- If a new account needs to be “nurtured” by the new account seller, then the new account seller should retain account ownership until the account has reached a certain level of purchasing performance. Provide a “graduation bonus” rather than residuals when transferring accounts
- Overlay specialists do not have assigned accounts. However, they do have a quota, either a product quota or a vertical market quota. Most overlay specialists are field-based and sales management assigns them to either a sales district or a sales region. Sales leadership ultimately wants to retire the role of the overlay specialist as soon as all sales personnel can successfully sell the product or penetrate the target vertical market without the assistance of the overlay team.
- Specialize to improve performance. Task specialization is a natural bias when transactions and unit volumes increase.
- All sales compensation plans should have a published effective start date and a termination date. The effective period of the compensation program should match the company’s fiscal year.
- Analyze turnover rates to ensure that high-performing personnel are staying and low-performing personnel are departing.
- Disaggregated selling accountabilities: Perhaps the most difficult to manage sales entities feature disaggregated sales responsibilities. In such sales models, the selling steps are broken into process functions and assigned to various resources. For example, a market development teleforce might develop leads. The sellers would present alternative solutions. A pricing group might prepare bids. A service group might specify solution implementation. An executive team might be responsible for customer commitment. An implementation task force might provide on-site rollout support.