How to Build Best-in-Class Sales Compensation Plans that Drive Results
A Technology Industry Viewpoint
As organizations enter the third quarter of their fiscal year, annual planning quickly becomes a high priority. Cross-functional efforts between sales operations, marketing, finance, sales and sales compensation center on the go-to-market (GTM) strategies to best position the firm for profitable growth. These practices include sizing and segmenting the market, determining coverage model changes, designing new territories and quotas and―one of the most crucial elements―creating an effective sales compensation program. How do leading technology companies coordinate sales compensation planning efforts across functions to align with company goals, recruit and retain top talent and reduce administrative burdens?
Before delving into the build phase, it’s important to assess the performance of existing compensation plans. A comprehensive assessment should be conducted to analyze metrics such as Sales Expense to Revenue (E/R), Compensation Cost of Sales, Pay-for-Performance (P4P), Sales Rep Productivity and Pay Level Benchmarking. The result of the assessment provides insight into how the plans have performed over the past year and year-to-date, and ultimately defines deficits with the incentive plans to be solved in the build phase.
Beyond just the existing plans, other, broader changes with the go-to-market strategy or revenue model will have implications for incentive plan designs. As technology companies prepare to make these changes, typically there are three to four key focus areas, often referred to as “big rocks,” that the organization must incorporate into their incentive plans to ensure alignment with the go-to-market priorities. Typical “big rocks” seen with Alexander Group’s tech clients include priorities or issues related to hunting vs. farming coverage, driving focus on recurring revenue, paying on multi-year deals, renewal responsibilities and crediting, and consumption model crediting and goal setting. Identifying these areas well in advance of the annual planning schedule affords the organization enough time to reach a consensus on the “big rock” issues, outlining the priorities for sales compensation alignment and ensuring executive buy-in.
After conducting a thorough analysis and gaining consensus around the key focus areas, organizations can begin the build process. The first step is to set clear goals for the upcoming fiscal year’s sales compensation program. These goals may include financial targets, transformational objectives and other initiatives crucial for organizational success. It is important to note that some objectives may require a multi-year change process with the necessary change management, such as transitioning account executives (AEs) to a new crediting model, adding new roles (i.e., product or vertical specialists) or redefining performance metrics.
To accomplish the stated goals, organizations need to establish a collaborative team comprising stakeholders from sales operations, finance, HR, sales compensation and other relevant departments. Their expertise and insights contribute to building incentive options that align with the desired outcomes. This cross-functional team weighs the impact of proposed plan changes on both the business and the employees, ensuring that the revised plans are fair, motivating and financially viable.
Cost modeling is an integral part of the build phase, allowing organizations to evaluate the financial implications of the proposed changes. By analyzing the cost-of-sales under different scenarios, as well as conducting rep-level cost modeling, organizations can demonstrate to the sales representatives that their earning potential remains attractive.
Approvals are the final stage of the build process. This requires gaining leadership buy-in on the proposed designs. Leadership will be looking to understand how the “big rocks” are being handled through the incentive plans, key plan changes, individual rep impacts and the overall cost envelope of the proposed plans. This is rarely a one-and-done meeting. Keeping leadership informed throughout the process and leaving additional time at the end of the build phase are essential to gain alignment and approval.
Once the new sales compensation program is created and approved, effective communication is vital to ensure a smooth transition. Various functional areas, such as sales operations, finance, HR and sales compensation, must be informed about the changes. Internal systems and administration tools should be updated accordingly to reflect the revised plans accurately.
Management presentations play a crucial role in communicating the changes and their impact on everyone involved. Transparent and comprehensive communication helps build trust and understanding among employees. In addition to management presentations, individual communication materials, such as plan documents and calculators, should be provided to ensure clarity regarding the revised compensation structure.
The sustainment of the sales compensation program involves a year-round calendar with clear activities, owners and milestones to ensure the timely administration and regular monitoring of the program. The period between annual planning cycles also provides the opportunity to bolster operations capabilities for future incentive plan improvements (i.e., resolve data gaps, improve tracking capabilities and invest in missing systems or tools). Creating a roadmap is advisable to address any issues or gaps identified in the process.
Some priorities identified in the Diagnose stage may require a multi-year implementation of the changes (i.e., pay changes or changes in the go-to-market model such as roles, coverage, crediting, etc.). Ensure these changes have a roadmap so stakeholders have a clear understanding of the implementation plan and the calendar.
Sales compensation planning requires clear goals and priorities, a cross-functional team and leadership alignment around key focus areas – “big rocks”. Develop clear communication plans and a robust administration process to successfully implement the changes. Lastly, start early!
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