While early in the second half of the year, it’s already time to begin thinking about sales compensation plans for 2018 (believe it or not).
Before beginning on the 10 steps below, it’s critical that the team understands the C-level goals for the sales organization. Ask:
- What products and services are important for the upcoming year?
- Do we have the right type of sales talent?
- What are our 2018 financial goals?
Once the strategy is set, it’s time to dive in. Follow the 10 best-practices design steps below when designing or updating a sales incentive program to ensure your 2018 plans drive profitable growth for your organization.
- Determine First, consider the relevant labor market (and remember the market targeted for talent may be different than the market in which the business competes for customers). Target pay for each role will result in a target total compensation (TTC), which will be the starting value that will flow through the design of the incentive plan.
- Set "Pay mix" defines the proportion of salary and incentive at target performance, meaning performance to quota. The total of the salary and incentive at target should equal the TTC for the job. Pay mix will vary by job type and is driven by several factors that include sales process characteristics, types of sale and types of customers. For example, a role that is focused on new customer acquisition for mid-sized accounts will likely have more incentive pay as a percentage of TTC (perhaps 50% base salary and 50% target incentive) than a role focused on current customer management for major accounts (perhaps 70% base salary and 30% target incentive).
- Establish upside potential. "Upside potential" is the incentive pay available to top performers, typically the 90th percentile, and is often determined as a multiple of target incentive. Upside is a critical component to help the organization attract and retain the best talent in its market. Define high performance for the organization, and make sure you differentiate incentive pay -- significantly -- between top performers and average performers.
- Establish performance "Threshold" refers to the entry point of achievement where the plan begins to pay incentive. Threshold usually represents the minimum acceptable level of performance, below which a rep would not typically stay employed with the organization.
- Develop measures and priorities. "Performance measures" define the focus areas that are most important for each role. Each measure should represent the most significant pieces of the sales strategy that the role can control. A challenge for many organizations is determining which few of many possible measures should be included in the sales compensation plan and which should simply be core expectations of that job.
- Set levels and timing. For each measure, the organization must define the level at which that measure will be tracked for the plan. For example, the organization may define a revenue measure for a sales rep at an individual level or a region level. Each measure will also be measured and paid on a certain timeframe, for example monthly or quarterly.
- Design. "Mechanics" create the connection between performance and pay and can be divided into three types. A rate-based mechanic (or, commission) usually pays a certain percentage of revenue or gross profit, or a certain dollar amount per unit of sale. A quota-based mechanic typically pays a target incentive for reaching a specific quota or goal and may scale its payout above and below that performance level. A link creates a relationship and interdependency between two measures or mechanics.
- Align the team. A full sales compensation program will include a range of sales, sales support and management roles. To work together as a team, plan designs must interface as a complete system. The program should promote teamwork; seek out points of potential conflict and try to resolve.
- Set quotas. Quotas are the linchpin between the sales compensation plan and performance. Quotas should be market-based and created with a process that’s well-understood by reps. Over time, quota processes for an organization will usually move from historically based approaches to more market-based approaches as the market and organization become more developed.
- Institute the governance process. A good governance process is like the constitution of the sales compensation plan. Without a clear approach to governance, the organization will probably create the governing laws throughout the year as it goes, sometimes in a reactive mode.
Operating the program throughout the year will draw from all the strategic connections made, components designed and governance established. From a tactical standpoint, technology may also be leveraged to track performance, administer pay and provide a communications portal for the reps and management.
Continue to evaluate the program throughout the year, drawing upon the dashboard and tools to monitor relationships between pay and performance, attainment of goals and differentiation of high and low performers. Track areas where improvements can be made, and then – before you know it -- get ready to start the process over again.
Mark Donnolo has been a sales effectiveness expert for over 25 years and has worked with companies such as: IBM, AT&T, KPMG, Office Depot, and LexisNexus. He is also the author of "What Your CEO Needs to Know About Sales Compensation."