Sales compensation is the driver of company revenue and growth. If sales reps aren’t motivated to close, renew, and upsell deals, revenue doesn’t just appear. Poor performance often stems from poor sales planning. When compensation plans aren’t well designed, it can become a race between sales, sales operations, and finance to point the blame. Really, the focus should be on how you can improve sales performance with well-designed incentive plans.
I remember being a young consultant sitting in one of my first client meetings and listening to a conversation between the VP of sales and VP of Finance, each blaming each other for poor sales performance. The conversation went:
VP Sales: "You gave us horrible quotas, and you are messing with rep's pay."
VP Finance: "Your reps cannot close consistently. You are affecting our ability to report accurately to our investors."
VP Sales: "That is the reality of the sales cycle, and the quotas should reflect that."
VP Finance: "Reps want to earn incentives monthly so you need to have monthly quotas which are less accurate. Get the reps to accept less frequent pay periods."
This was when my manager leaned in and whispered, "this is like marriage counseling."
How very true.
The reality is that sales incentive plan (SIP) design should be a collaborative effort and need to take into account quota setting accuracy. Without it, companies will never be able to improve sales performance. I have seen too many plans that failed because of the blame game–the plan design team says the plans are great, and it is poor quota setting that is the issue.
They insist that the company start setting better quotas to meet the shiny plans they created, but that misses the point–setting better quotas is a long term process that does not happen overnight, whereas sales incentives are more dynamic and flexible in the short term. Therefore, to improve sales performance, the plan design should take into account quota setting abilities because that is the reality we live in.
But how? There are a number of ways that this can be done. Each option should be considered to find the best solution for your organization.
Selection of Mechanic to Improve Sales Performance
The choice between using a sales commission plan (paying a percent of a sale) versus a bonus plan (setting a quota and paying based on achievement of that quota) is the first and most important choice when designing a plan where quotas are inaccurate. Conventional wisdom says that a commission plan is the best choice with poor quotas, but that usually means that reps have fairly equal sales opportunity.
Reps in a high-opportunity areas have more earning potential than others in lower-opportunity territories, and unless you use different commission rates for each rep, your team morale will plummet. Hence, there is little reason to keep a commission plan because the rates you set per rep need to be set based on some sort of productivity expectation such as a quota plan.
With poor quotas, the answer to improving sales performance usually lies in setting the quota that the company needs to reach its goals, paying a low commission rate below that level and a high commission rate above that level. If the reps have unequal sales opportunity, try grouping common seller types and creating sets of common plans. As more groups need to be created, transition to a quota plan with high excellence points and low (if any) thresholds to reflect the uncertainty in quotas.
Low Performers Pay Mechanics
If goals are not accurate, setting a minimum level of performance where payouts begin (a threshold) may not be feasible. What if goals were too optimistic? You may need to make a mid-period adjustment or risk losing reps.
As a general rule, you should try to get at least 70 percent of your reps to hit quota. If you cannot confidently set a threshold above 50 percent of goal so that at least 70 percent of your reps are above that point – do not use a threshold. Why? If you cannot set a threshold higher than 50 percent, your goals are not that good and you risk high rep churn.
When a threshold can’t be met, the company also signals that it has no idea what reps are capable of selling, which is not a promising message. The plan should also aim to avoid achieving too much pay redistribution from low to high performers with such a low threshold. Instead, it may be advisable to “kink” the payouts and pay a low rate until 75 percent of goal is met, and then increase payouts up to goal.
High-Performance Pay Mechanics
On the other end of the spectrum, top performers should earn a multiple between 1.5 and 3 times their target incentive. The compensation planning team needs to be able to set performance levels where the top performers can expect to receive this multiple of target pay.
If goals are not accurate, there is no telling what this performance level is. It may be more realistic to set a higher rate above goal, but one where the 1.5 to 3 times higher rate is not earned until very high levels of performance (e.g., 200% of goal) have been met. Past this point, it is usually advisable to decelerate payouts to protect the company from bad goal setting.
Pay Frequency & Level of Metric Granularity
The narrower you try to set your quota (at a product, customer, timing level), the less accuracy you will have. Picture the risk of investing in a single stock versus an Index of many stocks. The single stock has much higher volatility and uncertainty compared to a portfolio of stocks. It will also have more volatility in the short term than the long term.
Try to group products/customers into measures to reduce plan payout uncertainty. The less frequently you measure performance the more accuracy you will gain. If reps would like monthly payouts but quotas are not accurate at that level, try paying monthly on a quarterly goal (with payouts capped at 100 percent until the end of the quarter). If quarterly goals are not accurate, try paying monthly on a semi-annual goal (again, with payouts capped at 100 percent until the end of the semi-annual period).
Inaccurate quotas do not need to be the death of a well-functioning, strategically aligned incentive plan. With some plan adjustments that create flexibility and reduce the amount of payout risk, sales plans can drive strategy despite poor quota setting ability.
Get more sales compensation planning tips from Xactly’s Strategic Services team and evaluate the strength of your incentive plan. Schedule a consultation today.