Sales Compensation

You Can’t Hide From It

If you are a sales performance professional, you can’t avoid sales compensation.

Prepare to provide ongoing guidance to revenue leadership. Invest in your self-development. You may need to provide mission-critical help to your current revenue team or to sales leaders at your next corporate job.

Do you contribute to sales performance improvement? You may be in sales operations, HR/compensation or finance. If so, sales compensation will find you. You can’t hide from it. Eventually, it will make it to your inbox/desk/message log. Sales performance professionals need to ensure sellers have aligned, exceptional sales compensation plans.

Sales Compensation—Two Sellers

Let’s start with the basics. First, we must divide the seller population into two categories: producers and sales representatives. What’s the difference? You know the producers: They are full commission sellers, whom we often encounter in our daily lives, including real estate agents, mortgage origination brokers, life/property insurance agents, car salespeople, and financial advisors. In the business-to-business (B2B) sales world, this group includes brokers, manufacturers’ agents and traders. When compared to the total population of sellers, producers represent a small portion of total sales headcount. Sales representatives are far more numerous.

Okay, who are the sales representatives and how do they differ from producers? Think of producers as being their own business. They create revenue with their known contacts and split the earnings with the “house” (their employer), either as a 1099 worker or a W-2 employee. Meanwhile, a sales representative represents a company’s products to a target population of buyers. Sales representatives provide the connection between the company and its customers. Often, B2B buyers have long-term repeating needs or are making major purchases. Or both. In these cases, the sales representative provides guidance and support to the buyer.

Pay for Producers Versus Sales Representatives

We know that sales leadership uses sales compensation to reward sellers for sales success. Producers are paid one way and sales representatives another way. Most sales performance professionals work with sales representatives. Frankly, producers need little managerial oversight. As expected, producers are usually paid a full commission with no base pay. The company and the producer split the revenue (or profit) earned. These commission rates are unique to each industry and seldom change. (Of interest, recent and new real estate market entrants are attempting to gain business by offering discounted commission rates. Successfully changing producer commission rates is a rare occurrence.)

Meanwhile, sales representatives have a completely different pay model as compared to producers. Sales management rewards sales representatives for successful persuasion. Leadership establishes a target total compensation amount for each selling job—key account manager, named account manager, territory sales personnel, and a variety of pre- and post-sales support talent. The target total compensation amount is divided into a base component (often sitting within a salary range affecting each incumbent’s base pay amount) and a target incentive amount. The payout of the target incentive amount can be zero to as high as 2x to 4x the target incentive amount for outstanding performance. (The norm leverage is 3x the target incentive for outstanding performers for the ~90th percentile performers.)

What About Sales Operations?

Sales operations professionals live day-to-day with the success (or failings) of the sales compensation plan. They have these continuing accountabilities.

  • Program Management. A well-designed sales compensation program should function with few issues. However, problematic sales reporting systems can cause uncertainty and confusion among sales personnel and managers. In such cases, they seek clarification of sales credits and payout calculations. Program management also includes complying with policies and abiding by the procedures outlined in the plan document. Communicating plan features to new (and existing) sales personnel plus managers is an ongoing responsibility. Exceptions need reviewed by senior leadership and require documentation of the situation and outcome.
  • Companion Program Alignment. Sales operations needs to align several programs with the sales compensation plan: quota allocation, sales crediting and account assignments. Sales compensation calculations depend on effective quota setting—fair assignment of goals; sales crediting—rules for attributing sales credits; and account assignments—the assignment of accounts and the change of account ownership during the year. All three programs impact the success of the pay program.
  • Reporting and Analytics. Sales operations creates and publishes regular reports on sales credits, quota achievements and payouts. Sales operations provides this information on a regular basis to managers and sellers. Analytics examines the performance distribution of sellers, quota attainment and cost of selling.
  • Annual Redesign. Most companies review their sales compensation plans on an annual basis. Sales operations helps these efforts by documenting current challenges, providing analytical reports and collecting field feedback.

What About HR?

Let’s examine three classic HR roles and their intersect with sales compensation.

  • HR/Total Rewards. These HR professionals can contribute to ensuring sales compensation plans are motivational, cost-effective and successful. We expect our HR/total rewards professionals to gather and maintain accurate market pay data. This function also needs to establish the annual design process steps and provide corporate sales compensation principles. In addition, HR/total rewards professionals need to educate sales compensation stakeholders and oversee ongoing and annual plan assessments. Finally, we would like to see corporate HR/total rewards lead major program reviews and improvements. “Lead” means to follow a multi-step process to review current plans, confirm objectives, work with a task force to design alternatives, cost the newly proposed changes, gain senior leadership approval, and create a roll-out plan for the sales force. Finally, HR is responsible for ensuring the sales compensation program is ethical and legally compliant.
  • HR Business Partner. HR Business Partners (HRBP) provide HR support to their client organizations. In this case, the sales department. Numerous sales compensation issues will emerge midyear. The HRBP needs to be able to answer typical questions about the pay plan, know who to contact for more detailed information and know how to escalate and resolve any major sales compensation issues.
  • HR/Talent Acquisition. Your talent team needs a full understanding of the sales compensation plan as they recruit new sales talent. It makes a prospective applicant queasy if the recruiter says, “Well, I don’t know how the sales compensation plan works. Your manager will explain it to you.”

What About Finance?

Finance contributes to successful sales compensation programs with the following accountabilities:

  • Costing and Modeling. When the revenue team crafts new plans, they need to be fully cost-vetted. These efforts help estimate cost implications of various performance levels.
  • Plan Administration. Often assigned to commission accounting, this mission-critical function collates all sales results, applies crediting rules and issues payout files to payroll. We suggest that companies with more than 100 payees use a commercial, dedicated sales compensation software application.

Your Action Steps

As a sales performance professional, consider these sales compensation action steps.

Step #1: Get Educated. Sales compensation is a learnable subject. Read books. (Let me humbly recommend my bestseller: Compensating the Sales Force, 3rd Edition.) What about e-learning? Contact to purchase e-learning classes in sales compensation.

Step #2: Establish Sales Compensation Charter. Let everyone know their role: sales leadership (plan owner), sales operations (day-to-day plan manager), finance (administration and costing), product management (product strategies), and HR (market pay data and process lead).

Step #3: Catalog Current Plans. Find out what you have. Create a spreadsheet listing all jobs and their sales compensation features.

Step #4: Produce Standard Assessment Analytics. Work with sales operations and finance to establish a set of plan assessment analytics produced quarterly. Use graphics to display payout alignment and dispersion.

Step #5: Publish Sales Compensation Principles. Craft and publish a guide to sales compensation principles to use at your company. Use a task force to develop the guardrails and objectives for sales compensation design, regardless of division or global location.

Step #6: Manage the Annual Review Process. Lay out a three-month process to review the current plan. Use a task force to design/update the plan for the next fiscal year.

Step #7: Communicate With Impact; Ensure Adoption. Script the roll-out communication program, which the field sales managers will present. Provide training to this group. Ensure adoption of practices. Address any new-year start-up hiccups.

Step #8: Monitor and Upgrade as Warranted. Hold regular quarterly reviews of the compensation plans. For any midyear changes in strategy or job functions, update the affected sales compensation plans. Finally, monitor for any unexpected issues. Provide a review and escalation process to address these midyear challenges.

Make Sales Compensation One of Your Professional Competencies

Sales compensation is a high-impact management program. If you prepare well, sales leadership will embrace your competency and insights.

Sales compensation is an important, highly visible program. Whether you pursue it full time, are assigned to a task force, or need to handle day-to-day inquiries, you are a valuable contributor when you help make the sales compensation program function to its fullest potential.

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


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