Avoiding Common Misunderstandings

Sales compensation plan designers see diverse thought in stakeholders.

Rightfully so. Leaders in finance, HR, marketing and even within the sales department will sometimes have competing views about the right approach. The error is trying to accommodate all these diverse views into a sales compensation plan. The right solution is to begin with an education session for stakeholders, which will help align their thinking around a core set of common principles. Plan a two-hour session to share the most contemporary thinking in sales compensation methods. Ensure your program addresses the following most common misunderstandings.

Misunderstanding No. 1:

We have too many plans. With dismay, select stakeholders will wonder why the sales department has so many different incentive plans for sellers. A recent quote from a company with 200 different incentive plans: “45% of our incentive plans have one incumbent.” (Well, that is a warranted frustration.)

Principle: Each sales job should have its own incentive plan. However, not every job title should have a unique plan. Group titles into like platform jobs and design one plan per platform job.

Misunderstanding No. 2:

We can’t change the plan. For a variety of reasons, some companies think they cannot change their sales incentive plans. More than 90% of all companies adjust their sales compensation plans on an annual basis.

Principle: Make needed annual changes to the sales compensation plan to ensure alignment with strategic goals.

Misunderstanding No. 3:

Sales compensation costs need to be fully variable. While incentive costs for producer pay plans (real estate, traders, brokers, et al) are fully variable, sales compensation costs for sales representatives are not. As a labor market target pay system, the costs are variable to the individual, but the overall cost to the company should remain consistent with labor market practices.

Principle: Set quotas so that 55% to 65% of the sellers reach and exceed quota. The collected target incentive dollars cross-fund the above-quota performers from the below-quota performers.

Misunderstanding No. 4:

To get sellers to do what you want, put it in the incentive plan. What are the right measures for an incentive plan? Instead of using the incentive plan, rely on sales managers, sales reports and personal accountability to help guide sellers’ activities, efforts and administrative compliance. Contests and spiffs are best suited for new selling efforts and special sales campaigns.

Principle: Limit the number of performance measures to three or fewer sales results: revenue, profit, product, account and/or profit.

Misunderstanding No. 5:

Top sellers should be able to earn more than the president of the company. How much upside should the best sellers earn? For income producers, the sky is, indeed, the limit. However, for sales representatives, outstanding earning levels should approximate the amount earned by top performers at other companies. The objective is to ensure your 90th percentile performers are earning equal to or better than the competitions’ 90th percentile performers.

Principle: Best performers should earn 3x the at-risk portion of their target incentive as confirmed by labor market pay levels for best performers.

Misunderstanding No. 6:

Sales compensation plans should have a threshold and a cap. A threshold is a minimum level of performance necessary before sellers earn an incentive. A cap is a top limit on incentive earnings. It’s best to reward sellers for new results. It’s common to have a threshold above recurring revenue from previous years. The pay program should only pay for “new” results. Meanwhile, a cap on incentive earnings should not be necessary if the payout rate correctly delivers 90th percentile pay for 90th percentile performance. However, a cap (or lower payout rate) for unexpected, unplanned mega orders might be necessary.

Principle: Pay for persuasion once. Use thresholds to avoid paying for previous year persuasion. Do not use caps except to protect from unplanned windfalls.

Education Session

Gather your stakeholders to participate in a shared learning process. Present key concepts. Present company philosophies and policies. Correct common misunderstandings. The result: Better-educated stakeholders will sanction and support better sales compensation designs.

Virtual sales compensation education sessions are available from the Alexander Group.

David Cichelli is a revenue growth advisor for the Alexander Group. Connect with him on LinkedIn.