‘Tis the season for holidays, resolutions, and yes, tuning up your compensation planning process. While I love this time of year as much as the next person, it can take its toll. The good news is, the hustle and bustle brought on by December is temporary. And, try as we might, many of our resolutions always end up being rather temporary as well! On the other hand, the effect of your compensation planning can be long-lasting—but it’s up to you to determine whether or not that’s in fact good news or bad. Let’s start with what we know. The process of compensation planning is traditionally not very easy. The task involves many moving parts and requires input from a number of different people. But from experience – 870 companies’ worth – we also know that with careful consideration and strategic design, you can create your best plan yet—inspiring and empowering your teams to perform above and beyond the competition. You’ll notice this post offers more breadth than depth, but that’s because we’ve written a lot on the planning process, spread out across a number of different blogs. So, while each step here doesn’t have maximum detail, follow the links for the more fleshed out specifics. Ok, here we go.
Compensation planning made easy:
1. Assemble the team, but don’t overdo it (and really, don’t underdo it either). We’ve gone into great detail on assembling your comp design team, but the bottom line is you really must ensure you’re including the right people, and the right amount of people. The important thing is to think outside of your sales bubble. Meaning, there are very good reasons for marketing and other members to have a seat at the sales planning table. This is crucial, because there is nothing worse than getting deep into a quarter and having others breathing down your neck because they don't have a clear picture of the compensation plan, and didn't from the start. As sales compensation touches multiple disciplines – including finance, sales, HR, and the C-Suite – it’s important to invite important players to the party early in order to get everyone on board. Not only will it save you headaches later, it will also go a long way in terms of creating a plan that meets the larger objectives of the company. 2. Align your plans to each sales team role. I could write a whole blog post on how to compensate according to each different sales role. Actually I did! When you think about the time and consideration it takes to appropriately compensate just one single role, it’s easy to see how involved this piece of the process can be. But, the required effort is necessary to lay the ground-work for a successful selling season. Looking back, did your sales reps “get” their plans, or did they misinterpret what you wanted them to do? Did you spend way to much time explaining plan ins and outs and handling compensation disputes? If so, find out why and use this information to tweak plans for each role accordingly. Perhaps your plan was too complex and had too many measures altogether. Focus your compensation plan to get the most for your spend. Plans that try to do too much usually end up doing too little because reps get confused and their sales efforts become unfocused. For example, analyzing a decade of sales comp data in Xactly Insights has shown that the optimal number of plan elements is three. So keep the number of plan variables low and strictly aligned with corporate objectives in order to reduce overall compensation costs while still driving your desired behaviors. 3. Consider the relevant business goals. You will have specific business goals for your organization that are different from any other business. So, while the way you define your goals will be ever-changing, there are four main types to keep in mind:
- Motivation, because every business wants a motivated sales team.
- Focus, because not every sales dollar is equally valuable to the business.
- Intent, regarding the level of collaboration among the sellers.
- Value created at every payout tier and every role of their organization.
4. Set yourself up to drive the right behaviors. It’s surprising how such a fundamental “rule” is often overlooked. Your sales team has been put in place to improve the bottom line, and not just to simply sell because that’s their job. If you are paying for sales performance and create a plan that rewards people for selling product A, but product B is actually the product driving your organizational goals, then how is that going to shake out? Think about how plans performed before. Did your past compensation plan drive the top and/or bottom-line growth that management was looking for? Did your reps sell the right mix of products and close the longer-term deals necessary to drive sustainable growth? Before planning for the year or quarters ahead, you should analyze by customer, product, and territory to identify growth levers; where plans lagged and where they are excelled. Armed with this information, you can adjust resources and incentives to maximize the impact of your next plan. Then, to look ahead, modeling gives you foresight into a plan’s probable cost and sales performance impact, and enables you to avoid costly and disruptive plan adjustments down the road. On a macro level, you need to model the total costs associated with a proposed plan. On a micro level, you need to model how a plan will impact payouts for particular team members. Clearly, you want all your reps to attain their quota. But you do not want your plan to penalize your highest performers, as that would discourage their efforts. Nor do you want your low performers to be unduly rewarded, as that would be simply throwing money away. 5. Fully consider all of the relevant elements. It’s crucial you examine each and every comp plan element needed to construct programs for each distinct sales role:
- On-Target Earnings (OTE): What is the total amount of earnings a rep should receive for achieving their goals? If you aren’t sure where to start, look to market data sources or a sales compensation survey.
- Pay At-Risk or Add-On Bonus: Do you want to put your reps’ OTE “at-risk” of not being earned if they don’t reach their goals? This is a basic element of most comp plans, so the answer for many of you is probably “yes.”
- Plan Eligibility: Who should be on a variable pay plan, and who shouldn’t? It only makes sense for those to be on a pay at-risk plan if they have significant control over the selling process—meaning close contact with prospects and customers, along with the ability to directly influence their purchase decisions.
- Pay Mix: Of your established OTE, how much should be made up of base salary, and how much should be made up of target incentives? Here are more details on pay mix.
- Plan Mechanics: By which mechanisms will your reps be measured on and paid out on based on their performance? The most common mechanics include commission rate, percent to goal, rank, and MBO—all of which are detailed here.
- Upside (Leverage): How much upside should a rep be met with when overachieving? Some questions to help you along in this regard include: What is top performer status for each plan component? How much more should a top performing rep be rewarded versus those performing at target? Will there be a cap in place, or will you even decelerate payouts at some point?
- Performance Period: Over which time period will performance be measured? The best follow-up question to ask and answer for guidance here is what is the length of the sales cycle? Are we looking at an annual period? Quarterly?
- Payout Frequency: How often will reps be paid out for their performance? Monthly? Quarterly? When deciding, remember the benefits of paying as quickly as possible. These include maximum incentive effectiveness and cash flow to reps.
- Quotas: What targets do you demand of your sales team? What are the quotas for each component? How will quotas differ by role? Territory? Account type?
- Crediting: When a sale is made, who gets the credit? The more people involved in the sale, the more detailed your crediting policy will be. Remember to ask the question which rep truly made an impact on closing the deal? Are you spending too much on a single deal?
- Additional Rewards: How else do you want to incentivize your team? Perhaps it’s the classic “President’s Club” trip (and it’s a classic because it works, has for a long time, and drums up the right amount of competition). Other options include contests and SPIFs, which allow for quick pivots, to focus on selling something like new product, or less formal (and unexpected) spot bonuses.
6. Communicate your plans. The best compensation plans are useless if they aren’t communicated, and worse, if they fall on deaf ears. So, be sure to take this step as seriously as you would the planning stage. 7. Automate for a much better compensation planning process experience. Imagine if we didn’t embrace innovation, cared nothing about improving technologies, and just kept rolling each day into the next by doing the same things, with no regard for finding a better way? It would look a lot like the Stone Age. You likely wouldn’t buy a TV or car without looking at reviews, reports, and comparison studies. The same principle should apply to sales compensation. For the first time, empirical sales “big data” and advanced analytics are available to help you make more informed planning decisions. Companies using an automated system can pull and analyze their historical sales data and benchmark it against the best practices of similar companies to assess what worked and what didn’t. This kind of informed hindsight is the platform on which to build an effective compensation plan going forward. From trying to figure out your plan components to communicating your plans to the team, and for many stops in between, the entire process can be made much better through automation. Importantly, automation in this sense doesn’t mean setting up software and pressing a button and expecting all of your problems to be solved. Rather, it has to do with giving you access to valuable tools and abilities at your fingertips—insights into compensation data, visibility into rep performance, transparency behind the numbers, and much more. All of this is possible with automation. And, while you could argue that these things are possible without automation, the time and effort to dig it all out and then put it into play greatly exceeds what can be achieved through automation. To end, you should be giving just as much thought and consideration to your compensation planning process as you do to structuring your sales team. When it comes down to it, it is very easy to:
- Pay out more in commissions than anticipated: Multiple reps overachieve on their individual plans, accelerators kick in, and all of a sudden the overall plan is way more expensive than expected.
- Spend more than what is necessary to drive desired behaviors: Reps might be motivated to sell more of a new product with a 25 percent accelerator, so having a 40 percent accelerator in your plan would be an unnecessary over-payment.
- Get blindsided by costs even when the sales team underachieves: You are not out of the woods in terms of costs just because the sales team does not perform (and really, an under-performing sales team is a much larger fish to fry). You can still end up paying more than expected due to accelerators in the plans of individual reps.
All in all, the right plan results in the right incentives that drive the right behavior for your organization. There are many things in business that often turn out entirely different than originally planned, and sales compensation is high on the list. Happy planning!