This is my second post on the topic of sales incentive compensation. I need to outline these basic elements of a commission plan to set the ground work for future discussions so please bear with me.
Like a three legged stool that can’t stand up on two legs, every comp plan needs five elements to be stable. These elements are territory, quota, plan components, terms and conditions and finally monetary reward or OTE. Each of the five is a necessary part of the puzzle and they are interdependent. For example, if a territory with limited opportunity is cut in half the quota might be similarly reduced. If a new component is introduced then a new quota must be created.
Most of these five elements need no explanation to experienced sales managers but the component element, performance against a specific goal, is most often misused. In an effort to tie some portion of a plan participant’s variable compensation to a multiplicity of corporate goals, plan effectiveness is sometimes diluted by too many components. Are there a “right” number of components for any one plan participant? I don’t think so but, purely from a mathematical standpoint, the lower the number of components the more focused and potentially effective the overall plan.
Clearly, senior sales managers can understand a plan with as many as three or sometimes four components but their attainment against those components is based on the performance of their team, not as much on their individual performance. If the front line sales resources can’t quickly calculate in their head their potential commission for a given transaction then the value of the comp plan to incentivize behaviors is diluted. Ask yourself, if a front line plan participant carries a component that accounts for 10% of their variable compensation, is that sufficient incentive to drive behavior or is that more of a distraction from the behaviors driven by the larger, theoretically more important, components?
I am interested to know your experience with multiple component plans. What is the largest number of components you’ve assigned to an individual on your team of front line sales resources? What is the lowest percentage of variable compensation you’ve ever tied to a specific component and what performance did it measure?
Cheers!
Bob Bacon
