Sales Compensation Best Practices: Modeling
NASCAR, the fastest growing spectator sport in the United States, is also one of the most carefully controlled of all sporting events. In order to ensure driver safety, NASCAR officials carefully model even the smallest design changes made to race cars to help them better predict -- or forecast -- the performance gains or losses for drivers and teams competing in the season-long race for the Nextel Cup.
Performance-oriented designers and architects -- whether focused on race cars, family cars, airplanes, or package delivery systems -- use models to test assumptions and forecast results. While far removed from the extreme speeds and high-risk world of NASCAR racing, performance-oriented sales and finance executives have a similar responsibility when it comes to designing and deploying the sales compensation plans that will drive sales performance within their sales teams.
Sales compensation plans are one of the most powerful tools organizations have to affect sales performance. Properly designed and deployed, sales compensation plans drive superior performance and result in achieving and exceeding sales and revenue targets -- without exceeding compensation budgets.
Unfortunately, most companies fail to adequately test and model sales compensation plan variables and attainment scenarios. This failure is largely due to the inability of their current spreadsheet-based sales compensation management systems to easily create and effectively run models. Restricted by their inability to model plans and attainment scenarios, executives are often reluctant to make the significant plan changes needed to better align their sales team with corporate sales, revenue, and profit goals.
Best practice sales-compensation management calls for sales and finance executives to work with sales operations to build and model compensation plans, analyze and forecast related commission earnings at both a macro (plan) and micro (individual) level, and then choose those sets of plans that best fit corporate parameters for sales performance, revenue, and associated commission costs.
This best practice exercise begins with the requirement to leverage a sales compensation management system that supports the ability to easily build multiple compensation plan models. Spreadsheet-based systems typically do not meet this requirement; the complex macros and linked worksheets needed to support multifaceted sales compensation plans are too difficult and time-consuming to build within a desktop application. To be effective with this exercise, multiple models need to be analyzed. Spreadsheet-based systems do not easily support this best practice.
Multiple models are needed because executives need to evaluate a myriad of changes and options--for example changes to quotas, commission rates, territories, and organizational structures. Attainment levels also need to be modeled--for example, a company may expect sales and the revenues associated with those sales to increase in some areas or with certain product lines, and decrease in other areas or with other product lines. So not only do executives need to model multiple plans, they also need to run multiple attainment scenarios through each of the modeled plans. By modeling both plans and data, executives are empowered to evaluate results and implement the plans that best fit their organization's business model.
During the modeling phase, results should be analyzed at both the macro level (i.e., what are the total compensation costs associated with this modeled plan?) and the micro level (i.e., how will this plan affect the earnings for particular sales team member?). Good sales plans should result in attainment that follows a standard bell curve, with the majority of reps grouped near 100 percent quota attainment. However, bell curves don't reveal details, and you need to make sure that new plans won't negatively impact your top performers or unfairly reward poor performers.
After the right sales compensation plans are implemented, sales and finance executives should actively monitor actual attainment and commission costs and compare them to their modeled plans. Modeled versus actual analysis helps ensure that companies are in position to quickly react should unforeseen influences affect results. In fact, best practice sales compensation management calls for executives to run new models periodically during the year to reflect market influences that may not have been initially factored in.
By modeling commission plans and forecasting related costs, sales and finance executives gain confidence that their sales plans will drive superior performance at a reasonable cost. In many ways, a sales team is like a highly tuned race car; it can achieve amazing performance results, but can quickly skid out of control if not carefully monitored and tweaked when results don't meet expectations.
The first best practice step in sales compensation management begins with modeling sales compensation plans to ensure they reward the rep and the company in equal measure. You can do almost everything else right when managing sales teams -- but if your plans don't work, results won't meet expectations.
About the Author
Bob Conlin is CMO at Centive. Please visit www.centive.com
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