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!