Designing Sales Comp.V3.Final.031709


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Step by Step Overview to Designing Successful Sales Incentive Plans

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Designing Sales Comp.V3.Final.031709

  1. 1. DESIGNING SALES COMPENSATION PLANS Your sales compensation plan has a direct impact on growing your business, keeping your customers satisfied and having a competitive advantage. This article will provide you with clear steps to designing an effective sales compensation plan for your sales force. Linking the Compensation Plan to Business Objectives I. Understanding the Business Strategy – It’s a good idea to start with a confirmation of the company’s current business plan. Collect and catalogue any written statements of financial, product or customer goals. Next, proceed with interviewing senior management in the business unit under review. These interviews will provide you with a good understanding of future expectations for corporate objectives. Next, review all the performance measures in the current plan. This will enable you to assess how well the current measures are contributing (or not contributing) to desired corporate objectives. Determine Criteria for Success – Once Business Strategy is identified, you’ll want to identify specific sales goals. In doing this, first, Identify which sales goals are most important within the context of your business goals. Usually, you will use some combination of new customer account growth, overall revenue growth, gross or net profit, and/or customer satisfaction. For example, in an attempt to reach new customers, you may find that barriers to entry in a new market segment may require the addition of distributors or other new channels to augment existing direct sales staff. Next, identify a quantitative measure of success. You might target a percentage of “new sales revenue” that must come from “new channel distribution” sources without compromising your sales staff’s production capacity. Finally, check to ensure your success criteria don’t conflict with other sales or business goals through interviews with sales leadership and key sales representatives. II. Establishing the Compensation Plan Design Team Cross Functional Approach - Key members from Sales, Marketing, Finance, Human Resources and Information Technology all contribute to designing an effective sales compensation plan. Be sure to include all known opinion leaders to ensure buy-in. Rules of Engagement – At the initial design meeting, the rules of engagement should be discussed and finalized. The rules of engagement are behavioral operating boundaries and serve to keep the team focused on the charter’s objective during periods of conflict or as project deadlines loom. For example, before a major phase of the design can be completed, rules of engagement should include a rule that will determine what decisions require executive sponsor approval and what authority rests solely with the design team. For more detail on cross functional team design and engagement rules, you can refer to: rnance_Article_0207.pdf Designing Sales Compensation Plans (S. Wien) Page - 1 -
  2. 2. III. Assessing Existing Plan (Assuming existing plan exists) Measuring Plan Objectives to Actual Outcomes - First, compare forward-looking statements of performance goals for individuals and the firm (e.g., Sales Forecasts for the upcoming period, Sales Incentive Scorecards from Sales Leadership, and Quota statements for leading sales reps) to actual sales performance. Next, compare actual sales compensation to actual sales volume to ensure there is a strong positive correlation. Achievement of Payout Objectives - is another way to see if the “payout levels” have been reached to the desired extent. To measure this, many companies compare the “distribution” of sales incentives to the “percentage of quota” achieved by the sales reps in question. Typically, two-thirds of your sales reps would be expected to achieve quota, with a fraction of that group exceeding quota. If 90% of your sales rep achieve quota, and 50% exceed quota, you may find that sales achievement expectations are too low. Reaction of the Sales Force - Although it is not recommended that you include the sales force in the design team, you should interview key sales reps for their opinions on such issues as, efficiency of interaction with internal sales operations team or product management staff, how the “actual” sales role compares to the design, and so on. Feedback from these interviews will give you very important data on how the real experience of your sales force compares to the sales program design, and if any modifications should be considered before moving on to the new design phase. IV. Designing the New Plan After Phases I to III are complete, you can begin designing the new plan. Essential components include: New Plan Objectives, Sales Job Definition and Plan Design Elements. New Plan Objectives – After reviewing your firm’s business strategy and new sales goals, write a short summary statement that explains the plan’s linkage to the company strategy as well as a summary of the plan’s objectives and guiding principles. A guiding principle may include the following statement: “exceeding the performance standards will set the basis for recognizing excellence in sales achievement”. Stretch goals are built into the performance expectations of the compensation plan. Therefore, sales reps can expect to be rewarded above the industry average for outstanding accomplishments. Define Sales Role(s) – Write a job description that incorporates each role’s basic purpose, essential sales functions, and job requirements for successful selling. The job description should identify how much (if any) activity is dedicated to: 1) Customer Identification, 2) Customer Persuasion To Buy and 3) Customer Service. Design of Plan Elements - Eligibility should be determined first, and restricted to sales employees who directly influence customer decisions to place sales orders with your firm. To ensure the right sales employees are in the plan, you should assign responsibility to evaluate proposals for new plan participants while periodically (annually) reviewing participation levels to an impartial group (e.g., HR). The next step is to determine the “absolute level” of pay per sales role or Total Target Compensation. Total Target Compensation is based on comparing minimum, target and above target pay levels for incentives as well as base salary with your peer companies using external market data on comparable sales positions in other organizations. Typically, you should match internal job descriptions with Designing Sales Compensation Plans (S. Wien) Page - 2 -
  3. 3. Design of Plan Elements (Cont’d) available market based descriptions in order to set desired pay levels according to 3 competing factors: 1) Budget (How much can the firm afford to allocate for TTC), 2) Internal Equity (relative value of each job to achievement of firm’s sales goals) and 3) Market Data (external competitiveness desired to attract and retain sales talent). The following prominent consulting firms provide sales compensation surveys for purchase or on a participation-only basis: Next, you should determine the desired Compensation Mix and Leverage. The “mix” is the split of Target Total Cash into 2 components: base salary and target incentive (commission or bonus). It is important that this step comes after sales job design because the level of “Customer Persuasion To Buy” in each sales role (See Define Sales Role above) is directly linked to its mix of incentive pay and base salary (total pay=100%). The “Leverage” equals the target upside earnings potential one can earn for sales results that dramatically exceed the target performance level. The most common leverage is 3x target incentive. The ratio of individual sales performance (which performance?) to a given leverage multiple depends on the difficulty of exceeding sales target. Mix and Leverage can be adjusted after initial performance outcomes are analyzed to ensure pay levels are in line with desired performance, cost of sales and external market benchmarks. Next, select and weight your Performance Measures. You should select 3 or fewer measures for your plan. Weight the measures depending on their respective importance to the current period’s overall business goals. Almost all sales incentive plans have some form of sales revenue measure, with a profit measure included only if the sales person has some control over pricing negotiation with the customer. Performance measures will be closely tied to the company’s objectives for what they want to accomplish in this sales year. Finally, construct the Sales Incentive Formula based on the target incentive value, target performance value and leverage multiple. A typical commission formula is constructed as follows: target incentive / target performance = commission rate. For example, if the target incentive is $50,000 and the target performance is $1,000,000, then the “commission rate” would be .05%. Each sale would generate a commission of .05% of the sales order value for the sales rep. The actual sales incentive formula should reflect the unique business financial metrics of your company’s product or service Other potential Plan Features include Maximums, Minimums/Thresholds, Accelerators and SPIF’s. Using a Maximum or Cap on incentive pay is used by companies to preclude excessive earnings for unexpected, large orders not obtained through the sales rep’s efforts. A related design principle, so-called Performance Thresholds - are used to avoid paying for the same sales in recurring years. Thresholds (minimums) are set at or above the sales forecast level that is considered recurring revenue. Thresholds also serve as performance messages from management as to the minimum level of achievement expected and can weed out underachievers. Accelerators are often used when cross selling or up selling are desired. Finally, a SPIF is a special performance incentive fund (in addition to the Designing Sales Compensation Plans (S. Wien) Page - 3 -
  4. 4. normal incentive) that is used for motivating sales reps to overcome a sales downturn or sell a new product. This article summarizes standard concepts as well as the necessary process steps you’ll need to design a sales incentive plan for your firm. Each firm, however, is different, and you may want to consult with a sales compensation consulting firm that can help you further align your design with corporate goals and organizational culture. **** Designing Sales Compensation Plans (S. Wien) Page - 4 -