Incentive Compensation Plan Design
Incentive plan design is the construction of the sales rep compensation strategy, and is based on the individual’s role within the sales cycle, types of sales engagements they are involved with, seniority, and more. As explained below, incentive plan design must be aligned to sales roles, based on company culture and philosophy, and constructed to drive the right sales behavior.
The goal of the incentive compensation plan is to provide the framework for how sales reps will be paid for their performance, specifically, the variable compensation they will receive for hitting their goals. Incentive compensation plans are put in place to motivate reps to perform, and are also used to recruit and retain top talent.
Designing an Incentive Compensation Plan
When creating an incentive compensation plan, there are a few guidelines to consider, with one being you need to involve the right number of people. You’ll need executive support for your compensation management reform across your entire organization, but having too many people means too many agendas. Conversely, if too few people are involved, you won’t have enough information to pull your plans together.
It’s a delicate balancing act. Leadership buy-in is essential when designing an incentive plan, and the stakes are high.
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Who to include on your design team? When all these people are in the room, you’ll be on the right path to create an incentive compensation program that succeeds.
Sales: A senior representative from sales (VP, Director, etc.) is the person best connected to both company goals and staff capabilities. He or she will keep other executives’ expectations reasonable, while pushing for aggressive results.
Marketing: Sales and marketing should work hand in hand. A senior representative from marketing can share information on upcoming product releases or announcements that may affect the flow of sales.
Operations: A new incentive compensation plan can often affect processes, so make sure you get operations in the room. They can tell you what processes would need to change to accommodate what you want to do. For instance, they’ll be able to say, “If we compensate on X incentive, we’ll need to change our data flow in Y way.”
Compensation Management Analysts: Having a compensation analyst on your design team can help you understand how new incentive compensation rules will affect payouts. Are the rules reasonable given the current sales compensation structure and capabilities?
Other Team Members: If possible, have a sales team representative “gut check” the feasibility of the sales performance program. They’ll help you make sure you’ve structured your incentive compensation plan to accommodate the role your salespeople play in the sales cycle. It can also be valuable, if necessary, to invite a third party to the team meeting; someone like a, incentive compensation consultant, whose unbiased opinion can help settle debates and neutralize office politics. A sales compensation management consultant can bring industry knowledge to the table, and may have suggestions you wouldn’t have thought of.
Pulling the Compensation Plan Together
With the right number and balance of team members, you’re more likely to have success with your sales plan in a difficult market. Collaborating with the right brainpower can help you create a, incentive compensation plan that just about everyone can agree on.
Concepts in Incentive Compensation Plan Design
Now that you understand who should be involved in the incentive compensation program design process, let’s examine concepts and components of an incentive compensation plan, as well as a few overarching principles that should guide compensation plan construction.
At Xactly, we like to think about them as the “ABCs” that form a foundation for well-designed compensation incentive plans:
Aligned to sales roles: At the heart of incentive compensation plan design is the concept that different sales roles will require different compensation plans. Different incentive plans should be tailored to what you are asking each role to perform in the sales process. One-size fits all approaches simply do not work.
Based on company culture and philosophy: Your company has a distinct culture and the sales team is no different. Before you get into designing plan details, you should consider a couple of key questions concerning the culture you want to build in your sales organization:
- How do you want your pay to be compared to market?
- What is the difference in pay you want to have between high and low performers?
The answers to the two above questions will help you think through how rewarding and how punishing you want your incentive plans to be.
Constructed to drive the right sales behaviors: A well-built compensation program must have its plan framework aligned with company goals. What are your corporate goals for the year? What are your revenue targets? What are the requirements for new product or service introductions? Ensuring that your incentive plans are focused keeps them simple, allows both sales reps and managers to know what they are aiming for, and ultimately drives the right sales behaviors.
After you have thought through the ABCs, it is important to take a holistic and structured approach to designing your compensation plans. Below is an approach for the elements of a compensation plan that you will want to construct for each distinct sales role:
Pay At-Risk or Add-on Bonus
A fundamental concept of most incentive compensation plans is the idea of “pay at risk.” This means that in order for a sales rep to achieve their On-Target Earnings, they will need to perform at an agreed upon level (a quota or goal) to receive that target pay. In exchange for the pay at-risk, you should provide upside that rewards reps for surpassing their goals.
A distinct approach from pay at-risk compensation plans is to utilize an add-on bonus. Simply put, add-on bonus plans do not put pay at risk. Rather, they provide an additional bonus amount on top of salary that can be earned for either individual or team performance. This type of program is typically seen more in sales support or non-sales roles. For our purposes in this document, we will assume that your incentive compensation plans will utilize a pay at-risk approach.
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