While not all sales problems are associated with a poor compensation plan, many are. If your comp plan does not incentivize the correct behaviors, does not drive your sales reps to work longer hours, or ensure that YOU (as the business owner) will consistently make your quarterly forecast – then it may be time to implement a new compensation plan based on the following 5 criteria.
- Aligned Incentives: It is important that all sales compensation plans (at all levels) within your sales organization drive toward the same goal (from the Field Rep level to the District Management level and on to the Executive Management level). Thus, for a District Manager to achieve his or her goal, field representatives would need to collectively achieve their respective goal (the district goal/quota). Likewise, for a Regional Manager to hit his goal, the District Managers must achieve their collective goal (the regional goal/quota). In summary, everyone within the organization from the Field-Rep to the very top of the organization should all be marching in unison toward the same quota/goal.
- Term of the Compensation Plan: I have found that quarterly quotas/goals work best. The timeline is easily measurable, and it allows for timely tweaking of your quota on a 3-month or quarterly basis. However, it is important to note that a target/goal should never be adjusted during the “current” quarter. Adjustments should only be made after the finish of a given quarter, in preparation for the next quarter. Using a quarterly plan (as opposed to an annual plan) allows for nimbleness of the plan, along with the ability to adjust every 3 months in answer to changing market dynamics, potential performance issues, and “changing priorities” within the organization.
- Compensation Plan Structure: The compensation plan structure should have the following components:
- It must drive the quarterly behavior desired.
- It must be easily understood, allowing field reps to easily calculate their commissions mentally (daily).
- Daily metrics should be published to all sales personnel, with run-rated performance (by Rep, by District, by Region, and Nationally) visually available on a daily basis. This serves to ensure full and proper execution of the target.
- It should have well-defined quarterly goals/targets. These quarterly targets allow the organization to actively target and exceed the stated quarterly goals. This very important aspect of the compensation plan assigns individual accountability to everyone on the sales team.
- It should allocate enough bonus dollars (in the form of a quarterly bonus) for those sales professionals who cross the important 100% threshold of the stated quarterly quota. Of course, even more additional dollars should be available on a graduated basis for those sales professionals exceeding the quarterly target. These over-achievement bonuses can be paid out of the incremental sales revenue they create.
- Just as important, the compensation plan structure must provide enough incentive to the various sales reps to motivate them to work longer hours and exert additional effort to grab the “brass ring” (a.k.a. 100% achievement of the quarterly target).
- Finally, enough allocated compensation dollars should be reserved to create “spiffs.” A spiff is an announced bonus for “whatever” sales management feels is critically important during an “active” quarter (normally utilized on a more urgent basis). These spiffs will change quarterly based upon organizational needs.
- Quarterly Target/Quota: Any compensation plan is only as good as the targets and/or quota assigned. If the target is unreasonable, the compensation plan will fail regardless of how structurally sound it may be. As we all know, unachievable targets serve as de-motivators, something all sales organizations should strive to avoid. Finding the right target, and adjusting the targets (as needed) at the beginning of each new quarter throughout the year, allows for additional revenue growth of the organization. Without target adjustment, complacency can set in, and reps can become satisfied with their current compensation level (the plateau effect). Targets should be based upon sound metrics and forecasting (from the ground-up). This “ground-up” process is important, and gains needed team “buy-in.” But these targets must also be balanced by executive management’s needs and desires as well. This balancing act is part “art” and part “science.” In summary, I recommend organizations strongly consider moving away from straight “commission-percentage” compensation plans and instead move toward plans that pay a sales team based upon “percent to quota” achievement. Where (for example) a sales rep’s actual achievement of his/her quarterly quota is the primary factor for a sales rep’s commission payout.
- EXAMPLE: An 80% achievement of the quarterly quota would payout at 80% of “a $100,000 targeted quarterly commission” (equal to $80,000). And 99% would payout at 99% (or $99,000).
- 100% would pay out at $100,000 plus an overachievement bonus as a reward for achieving the critically important 100% target (perhaps an additional $10,000).
- Any achievement greater than 100% might have a 10% bonus attached to it (incentivizing sales folks to overachieve). Thus, achievement of 115% might payout at 115% plus the 10% overachievement bonus for a total of 125% ($125,000).
- Your plan does not need to be this lucrative – I am using an example of a $100,000 target for purposes of easy math only.
- Targeted Compensation Level: Prior to the construction of a compensation plan, it is important for the organization to agree upon “how much” the organization desires to pay each level of the sales organization (Sales Rep level, District Manager level, Regional Manager level, etc.). This is normally based upon, but not limited to, a percentage of forecast revenue. Once this amount is agreed upon, you can then allocate specific dollars to the compensation plan to ensure that sales reps who achieve a specific “performance to quota” in a given quarter will make that predetermined amount of money. For example, we might agree that targeted comp for an average rep who hits 95%-99% of quota should be $95,000/year. And a rep who can overachieve to the tune of 125% of quota should earn $125,000. And so on throughout the various levels of sales management. Regardless of the exact targets themselves, it is important to decide upon this “targeted compensation level” early in the compensation planning process.
Final Notes: To developing a strong compensation plan (for the various roles and levels of your sales team), one must first understand those behaviors that are critical to a sales rep’s success. Armed with this knowledge, you can then boil down these behaviors into appropriate and measurable metrics. Only after the critical success metrics are fully understood can you effectively build a customized compensation plan that will drive the revenue your organization requires. I find it beneficial to “measure twice and cut once” regarding this important process.