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Sales Compensation Best Practices: Plan Design
The critical steps that are key to drafting new plans.
Posted Mar 1, 2007
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Simply uttering the phrase "Let's talk about designing new sales compensation plans" to your colleagues in sales, finance, IT, human resources, or even among the executive team will garner a range of responses--some of them emotional -- that indicate a high level of caution, uncertainty, and even frustration with the plan design process. Sales compensation is the single most important factor influencing both the performance and morale of your sales team, so it is understandable that making changes to the "comp plan" causes some level of trepidation. But in business, change is constant. And the sales compensation plan is an organization's best tool for steering and course-correcting the sales team as market influences drive change in corporate goals. The key to managing change is to have a consistent and proven process for designing, modeling, deploying, and communicating new sales compensation plans. Sales compensation plan design is a science; there is no art to the process. Sales plans based on gut feel or what "worked at my last company" are guaranteed to result in missed revenue, commission budget overruns, and/or costly sales rep turnover. To create quality plans that optimize sales performance, morale, and effectiveness, follow a repeatable and structured approach to the design of new compensation plans. Best practice sales compensation plan design includes, at minimum, the following critical steps: Know the company goals -- What are the corporate goals for the year? Will the focus be on revenue, profit, new product introduction, new customer acquisition? The key objective in plan design is to ensure your plans align sales with corporate goals. Evaluate current plan effectiveness -- Identify issues with your current plans, and use that information in designing new plans. Are your territories balanced, does quota attainment plot along a standard bell curve, is there a positive correlation between performance and commission earnings, is sales turnover higher or lower than expected? Define your sales roles -- What roles are required to achieve corporate sales goals? What is the prominence of each role in the customer's buying process? Which roles need hunters and which need farmers? What is the appropriate ratio of fixed to variable (at-risk) pay for each role? Roles like territory rep, account manager, channel manager, and telesales rep are distinct and finite; each requires its own compensation plan.
Get market data -- Establish the pay range for each role and identify the target salary, commissions, bonuses and other incentives needed to be competitive in your market. Build the plans -- Sales compensation plans are really a combination of measures, mechanics, and policies: Measures - Set individual and/or team-based measures as appropriate for each role. These measures should align with corporate sales goals related to margin, profitability, new customer acquisition, new product introduction, et cetera. Keep in mind that plans work best when they are simple and easy to understand. A plan with more than three or four measures may be too complex to be effective, and may even indicate the need to define yet another sales role. Mechanics - How will the measures be used in calculating commissions? Will your plan rates be flat, ramped, or variable? Will you implement performance thresholds or multipliers? Will accelerators be applied as quota attainment increases? The mechanics define how the calculation logic will work. Policies - develop clear and absolute policies for crediting, adjustments, liabilities, windfalls, et cetera. There should be no surprises. Model plan scenarios -- Model your plans to evaluate the impact at both the macro (plan cost) level and the micro (individual earnings) level. You need to be sure your plans fit within budget parameters and adequately reward your top performers. Document and Communicate -- The plan document states the terms and conditions of the plan. Beyond that, demonstrate to your team the science that went into designing and testing the plans so your reps understand that the plans are realistic, fair, and attainable. Maintain electronic or hard-copy records of each rep's acceptance of her plan document. Automate the plan -- Automate your plans with an affordable on-demand sales compensation management solution. These solutions eliminate spreadsheets and the errors associated with them, provide real-time visibility into attainment and earnings information for your sales team, and provide finance with one centralized and secure solution for commission accounting. Measure and adjust -- Regularly analyze actual versus modeled results in terms of both cost and revenue to make sure your plans remain effective and affordable. Adjust midyear if needed, and communicate any changes to your team. Quality plan design, coupled with efficient automation and frequent communication, will help your company attract, retain, and motivate the best salespeople. It will also provide the best path to optimizing sales effectiveness and performance with a balanced ratio of revenue to cost. About the Author Bob Conlin is CMO for Centive. Please visit www.centive.com.
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