Test Your Knowledge
Each company’s go-to-market strategy is unique to its products, buyers and growth ambitions. Often, the configuration of sales jobs is unique, too. This uniqueness answers a common question. Now answer this: Should sales compensation plan designs match competitor practices: true or false?
The answer: false. Sales compensation practices should reflect the company’s sales job design. If jobs are unique, then so are the pay plans. Yes, compensation pay levels should be competitive, but pay plan designs should be unique.
The following are some additional observations about sales compensation plans. Some are true, some are false. Ready to test your knowledge?
Rate the following statements as true or false.
- Sales compensation works. True or False
- Salespeople are only money motivated. True or False
- Sales incentives are the same as sales compensation. True or False
- Sales management owns the sales compensation plan. True or False
- Most sales leaders know everything about effective sales compensation design. True or False
- Plans should seldom change. True or False
- HR should design sales compensation formulas. True or False
- Sales title rationalization is a good place to start. True or False
- Sales compensation principles vary on a global basis. True or False
True or False—Our Analysis
Okay, let’s compare your responses to how we would rate these statements.
- Sales compensation works. True. When following best-practice design principles for eligibility, mix, leverage, performance measure types and weighting, goal-setting best practices, and explicit crediting rules, management can produce powerful incentive formulas that encourage and reward exceptional selling performance. Sales compensation must align with other sales management programs to work effectively.
- Salespeople are only money motivated. False. Yes, money—variable pay—plays a significant motivational role for salespeople. However, salespeople have the same ambitions and accountabilities as other employees. They want to succeed, learn, perform their jobs well, and receive recognition for a job well done. And, yes, they do want to be paid for sales success.
- Sales incentives are the same as sales compensation. False. A common mistake is to use the phrase “sales incentives” when referring to sales compensation. They are not the same. Sales incentives are offered to buyers (“…year-end sales incentives on new cars…”). Sales compensation is for sellers. However, it’s okay to use the following phrases: “incentive pay plan” and “incentives paid to sellers.” In each case, the context confirms the word “incentive” is about payments to sellers. And, one other vocabulary advisory note: Sales commissions and sales compensation are not equivalent terms either. “Sales commission” is a narrow term describing a type of sales compensation formula. There are other formula types, e.g., bonus formulas. Use the expression “sales compensation” to reference all variable cash programs for sales personnel, which include sales commission formula as one of many.
- Sales management owns the sales compensation plan. True. Sales compensation is a sales management supervisory tool. It is not an HR program. Making sales compensation work correctly is the responsibility of the sales leaders. Best practice utilizes a committee of stakeholders (sales leadership, sales operations, product management, HR and finance) to oversee effective design and administration.
- Most sales leaders know everything about effective sales compensation design. False. Unfortunately, many sales leaders have not had the benefit of applying the vast array of design choices that are available. HR professionals can help by providing stakeholder education on key concepts in sales compensation by sharing the array of potential techniques.
- Plans should seldom change. False. Most companies (more than 90%), make annual changes to their sales compensation plans. The most common change is altering the performance measures and their weights. However, as compared to sales representatives, the pay plans for producers (real estate agents, traders, manufacturer reps, financial advisors) seldom change.
- HR should design sales compensation formulas. False. An assigned and educated task force of sales leaders, sales operations, finance and product management led by an HR professional often produces the best incentive designs.
- Sales title rationalization is a good place to start. False. There may be merit to title consolidation, but this effort seldom solves sales compensation design challenges. A better process is to establish platform jobs. These jobs have the same job content, but may have dissimilar titles for various, compelling business reasons. The platform jobs (often a list containing far fewer jobs than the list of job titles) are the target population of jobs for incentive design efforts.
- Sales compensation principles vary on a global basis. False. The data does not support wide global variance in sales compensation best-practice principles. What varies is the deployment of sales jobs. As sales jobs differ, so do the sales compensation plans. Yes, in some cases, government regulations impact plan design. And, in some countries, works councils will affect sales compensation design—all of which is worthy of navigation to ensure effective sales compensation plans.
We are sure you got most if not all the answers right!
Sales compensation is a powerful management tool. When leadership provides well-designed pay plans—aligned with business objectives and motivational to sellers—the outcomes can produce accelerating revenue growth.