Three Ways to Better Focus Your Sales Comp Plan

One approach to improving the focus of your sales comp plan is to carefully manage the number of components your commission plan includes.  Since fewer commission plan components result in a more focused plan, how do you reduce them while maintaining alignment with the myriad of corporate goals you are tasked to achieve?  Here are three ways to better focus your sales comp plan.

 1) Focus on the role’s specific job responsibilities.

A key factor in the effectiveness of any commission plan component is control; does your resource have control over his success in achieving the target or is the target most influenced by the work of many?  This dynamic is the reason that large “team” quotas are usually frowned upon by executive management.  It allows poor performers to hide.  A high correlation of individual control along with a significant portion of their variable compensation tied to that component will drive behavior OR reveal resource weaknesses over the course of the plan year.

2) Eliminate highly correlated components.

Senior sales managers often carry a margin component as well as a sales target.  Unless the manager is a GM and responsible for ancillary functions like regional PS or Support, his margin target is comprised of revenue less cost of sales and can be represented as a percentage of sales.  In this case the relationship between revenue and margin is nearly linear and having both as components is suboptimal.  If the relationship between sales (bookings) and revenue is also linear (over the course of a year it usually is) then I would suggest that these two components drive essentially the same behavior and one could be eliminated without jeopardizing results.

3) Consider a minimum component weighting.

The prevailing wisdom is that money drives behavior (see this article for an alternative perspective) but not if the relative amount is insignificant.  Ask yourself, does a resource with an OTE of $200k change their behavior if $10k of their variable comp is tied to a special activity such as new account acquisition?  In my experience this plan participant will shrug off the smaller component and rationalize they will still make their OTE by over achieving on the higher leveraged components.  Component gating factors can mitigate this but also add plan complexity.  For special activities such as new account acquisition or customer referenceability you could consider a set payment outside of OTE, like a SPIFF.  In my opinion to be effective in driving behavior a plan component should be tied to a minimum of 30% of the plan participant’s variable comp.

Keep in mind that the best comp plan in the world is not a substitute for good management.  Don’t expect that your team will “manage themselves” if you issue the perfect comp plan.  As discussed above there is usually of myriad of corporate goals and corporate policies not addressable in a sales commission plan.  Your leadership, guidance, development and coaching are the most effective drivers of your team’s behavior, the results of which will endure long after the end of the plan year.

Please feel free to reply below with your own comp plan design improvements to help focus your selling resources in a way that contributes to their effectiveness!

Cheers!

Bob Bacon

About Bob Bacon

I work with global B2B high tech Sales leaders to help them enable and optimize the effectiveness of their organization Find out more about Bob here: http://bobbacon.net/blog/about/
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One Response to Three Ways to Better Focus Your Sales Comp Plan

  1. Marty Levy says:

    The universal understanding that the design of incentive compensation plans should have fewer components, does not necessarily result in less complicated plans getting rolled out. There are many elements that a VP of Sales wants to address (or is being mandated to address) in his plan, that the incentive compensation plan tends to add complexity as it is being created.

    You’ve done an excellent job in summarizing key considerations behind any good, effective incentive compensation plan. Yet, we still see plans being implemented that look like a stew of various primary and secondary considerations with a multitude of components for which, incentive compensation is paid.

    The key question seems to be, what elements are truly worthy of offering additional pay outs (incentives) to sales people to achieve or implement?

    Do you for example, pay out for such activities as teamwork – clearly an objective in many complex (global) sales processes? Is it a primary or secondary behavior and do you want to incentive sales people to exhibit more teamwork within the sales organization?

    This is likely a secondary behavior for which a separate incentive compensation element we might agree, would not be good. But we do want to foster this sales behavior. How can we use, or should we use the incentive compensation plan to drive that vital behavior by sales? By embedding the teamwork element within the primary incentive compensation elements in your plan – like sales quota attainment, you may be able to drive this positive behavior, while keeping the compensation plan simpler. By managing the way revenue credit and quotas are assigned, shared, and scored enables the inclusion of an important element of sales productivity without having to add a separate element to your incentive compensation plan. Revenue goal attainment (primary) is truly worthy of having an incentive plan component and pay out for.

    Incentive compensation plans are not easy to structure. However, in creating them it is important to identify those issues that are of primary importance and truly worthy of inclusion as a component in your incentive compensation plan. Applying the criteria you have defined to this primary/secondary consideration will allow for the design of incentive plans that drive productive sales behaviors. In the end, that is what we are striving for when we utilize incentive compensation.

    Keep it simple, but stay focused on the primary drivers of the business in your plan.

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