Guide
Jan 02, 2017
Getting sales compensation right is important for businesses to succeed. Learn how to avoid 6 common sales compensation mistakes and design plans that motivate.
Sales compensation planning is a crucial part of driving revenue and bottom-line growth. Without a well-designed incentive plan, companies often struggle with poor performance, and ultimately, the fear of not hitting their goals. Unfortunately, many businesses fall victim to sales compensation mistakes and fail to implement best practices during the planning cycle.
It's important to remember, sales compensation mistakes aren't necessarily going to result in an incentive plan that is a complete train wreck and fails horrifically. Rather, some of these planning strategies may be somewhat successful—but they are ultimately hindering your growth and performance in ways you might not realize.
6 Common Sales Compensation Mistakes to Avoid
Sales compensation mistakes aren't always an obvious problems in your incentive plan. However, they have can have a big impact on performance. Many companies get comfortable in their planning processes with a "this is how we've always done it" mindset and fail to realize new opportunities to improve sales compensation planning and performance.
To help you ensure you have a strong, strategic incentive plan, here are the 6 most common sales compensation mistakes you should avoid and how to eliminate them if you've made them in the past.
1. The Mistake: Recycling the Same Plan Over and Over
One of the most common and most detrimental sales compensation mistakes is the practice of reusing old plans year after year. The goal of sales incentive planning is to improve upon the previous year's performance, so if it didn’t work the first time, why would it work the next time?
This is also true for plans that were semi successful. You don't want to repeat performance, you want to improve performance. Recycling the same plan over and over again without making changes to improve it, keeps you from doing this.
The Solution: Use Data to Drive Strategic Planning
Even if you did have success with a previous plan, don’t be afraid to make broad changes when planning for the upcoming year. Evaluate your plans as a whole and identify the parts that worked well, those that could use improvement, and any elements that didn't work at all.
This is where data becomes extremely useful. Look at the parts that were successful see how you can build upon the success. Using historical performance data, you can identify incentive and sales commission structures that perform well and improve upon those. Take the strongest parts of your existing and previous compensation plans and use them to build an even better one.
2. The Problem: Failing to Benchmark Against Industry Data
Sales compensation is only as good as the data used to design your plan. If you base compensation on gut instinct or outdated data—it's a best guess—and ultimately, it will not be as effective at driving performance. This is sales compensation mistakes 101: Incentives based on what leadership's instinct tells them reps should be paid will not motivate your team or help you attract and retain top talent.
You might see positive results, but failing to eliminate this sales compensation mistake will not drive performance as strong as data-backed incentives.
The Solution: Benchmark to Creative Competitive Incentives
Benchmarking allows you to compare your incentive structures against peers in your industry. Using that data, you can better understand if you are paying above or below market averages. This knowledge helps you lead the charge to become a smarter sales organization and make strategic incentive planning decisions.
In fact, data-driven tools like Xactly Benchmarking make this even easier. With 14+ years of aggregate pay and performance data, organizations can compare every aspect of their sales compensation plan to industry peers, ensuring they have competitive, well-designed plans.
3. Driving the Wrong Sales Behaviors
Another huge sales compensation mistake is incentives are that aren't aligned with company goals. Compensation motivates your sales team and drives their behavior. When you create incentives that are misaligned and don't drive the right behaviors, you increase risk of losing revenue.
Consider this: you rollout an incentive plan and performance is high. Sales reps are hitting quota and morale is high. But there's trouble with this scenario. When you look at sales team performance, all is well, but your forecasting is off. You're not on track to meet any of your corporate goals because incentives drove the wrong behaviors. If you'd planned more strategically, you could have avoided this.
The Solution: Aligning Incentives with Goals
Your incentives need to drive the sales behaviors that will help achieve your goals. This starts with your compensation planning team. When you bring key players from each team to the planning table, you ensure that incentives are balanced and help reach all organizational objectives. That way, all of your incentives drive the right behaviors and ultimately work towards reaching goals.
4. Over-complicating Commission Plans
Creating an overly complex compensation plan is a sales compensation mistake that often flies under the radar. But when incentive structures are hard to understand, it impacts both rep performance and compensation admins' ability to execute on the plan. This usually means that commission calculation errors and time to complete payout will increase—both of which will not help you drive growth and reach goals.
Complex sales compensation plans also create another barrier for companies. Recent research in the 2018 Sales Compensation Administration Best Practices Survey reveals that the more complex your incentive plan is, the higher your rate of sales rep turnover.
The Solution: Create Simple, Effective Compensation Plans
Often the case with this sales compensation mistake, many planning teams believe that the more complex a plan is, the stronger it must be. However, the opposite is true. The simpler your incentives—when well-designed—the greater performance will be. Here's why:
Less complex compensation plans are straightforward. They layout exactly what is expected from sales reps and the benefits they receive from performing well. For compensation admins, simpler plans mean easier, efficient execution—they understand the functionality of the plan and can pay reps accurately and on time.
5. Creating "Cookie Cutter" Incentives
A big sales compensation mistake that too many companies fall victim to is building one-size-fits-all incentive plans. When you create incentives that are identical for each role, you're going to see poorer performance and lower employee morale.
The reason? Not all sales roles are created equal. Senior leadership, managers, and individual reps all have different responsibilities. Therefore, basing each employee's goals and variable pay on the same metrics, doesn't give each sales team member full control over their incentives.
The Solution: Tailor Incentives to Different Sales Roles
Consider the different responsibilities a sales manager has compared to their reporting reps. Managers spend less time selling and more time on administrative task, coaching, etc. Basing their variable pay on the same quota and incentive structure is unfair to managers because their responsibilities are different.
Rather, you can eliminate this sales compensation mistake by adjusting incentives for different sales roles. When you tailor incentives by role, each individual is geared up to help reach objectives in a way that their job responsibilities allow. Sales reps can continue closing deals with their incentives focused on higher quotas, and their managers can focus on keeping their team on track and properly trained—all of which works towards company goals.
(Get more tips and best practices on pay mix for different roles in our Complete Guide to Sales Team Compensation).
6. Using Manual Planning Processes
More than 75% of companies rely on spreadsheets and homegrown processes to manage incentive compensation planning. Here's the problem: 80% of spreadsheets contain errors—and any error hurts your performance and efficiency. On top of that manual processes don't allow you to model plans, make changes to plans on the fly, and adjust forecasting easily.
When you design compensation plans manually, you're creating a static plan. By the time you roll it out with the team, the data used to build it is already outdated and it takes too long to make changes. So you're stuck for the year ahead with a plan that won't perform as well.
The Solution: Automate Processes and Improve Your Compensation Plan Together
The average company spends up to 6 weeks manually processing and completing compensation payouts. When error-prone spreadsheets result in mis-paid reps, this time increases and productivity falls because reps spend more time shadow accounting. Automating plans eliminates this sales compensation mistake.
Ultimately, automating plans does four key things:
- Reduces planning time up to 20%
- Allows for 100% commission payout in less than 3 weeks
- Increases sales rep productivity 15%
- Eliminates more than 90% of compensation errors
Automation gives you up-to-date information, creative a proactive planning process. With the ability to continually analyze, you can course correct plans in real time. Because all of this data lives in a single source of truth that each team can access, you can easily adjust forecasting and remain on track to hit goals.
Eliminating Common Sales Compensation Mistakes
In order to design stronger incentive plans, you need to optimize your compensation processes and eliminate sales compensation mistakes. The keys to doing this effectively are using data to drive planning and parting ways with error-prone spreadsheets. By eliminating mistakes, you can develop a stronger sales compensation strategy, and drive growth and revenue more effectively.
Want to get more sales compensation planning best practices? Download the "Ultimate Guide to Sales Compensation Planning."
