The No.1 Best Sales Compensation Design Template, Ever!
Part 2 of this series, 5 Crucial Aspects of Successful Sales Compensation Modelling, discussed how sales roles and incentive plans change as companies grow from startup to enterprise organisations. This third and final article describes the practical steps to redesigning the sales compensation plan.
Change for the sake of change is both unnecessary and disruptive. Similarly, moving from one imperfect compensation plan to another equally imperfect plan is a waste of time. Sales leadership should perform an annual review to assess the efficacy of the existing incentive model and whether it remains competitive, aligned with the company strategy, and continues to drive the desired behaviours. If not, it's time to make a change.
“Complexity is your enemy. Any fool can make something complicated, its hard to make something simple.”
The 7-Step Enterprise Sales Compensation Design Process
1. Assemble a Strategic Review Team
The CRO or Head of Sales appoints an appropriate leader from the sales, marketing, finance, and HR departments. Participants must represent both their function and the interests of the company as a whole. The CRO should play an active role in driving the process, yet maintain an objective, unbiased view by not participating in the discussions. The goal of a collaborative team approach is twofold: to construct the best sales compensation plan, and ensure the key stakeholders understand how it was constructed. There is no such thing as a perfect plan, and it is critical that everyone is on the same page. For this reason, avoid short-cuts such as delegating the responsibility for compensation design to one specific department or function.
2. Establish a Timeframe and Agenda
The number of meetings and timeline will depend on the size, complexity, and number of unique roles in the sales force. Typically, it follows this format:
Meeting 1: Review assessment findings and confirm design objectives
Meeting 2: Discuss plan design alternatives for all eligible roles
Meeting 3: Discuss and finalise proposed design changes
Meeting 4: Review cost modelling results and discuss plan implementation
A good timeframe to assign this process is 8 to 10 weeks before the new fiscal year.
3. Construct the plan element-by-element (not role-by-role)
Each sales compensation plan comprises of decisions in ten areas, and the following proprietary framework is kindly donated by the Alexander Group:
Consider a sales organisation with five sales-based roles, such as Account Executive, Sales Engineer, Product Specialist, Account Manager, and Customer Success Manager. The Design Team should take each of the ten elements and discuss how each element applies to each role. For example, if Pay Mix (the split between base and variable pay) is the focus, the incentive for each role is agreed before moving to the next point. This ensures plan alignment at every stage.
4. Apply Best Practices
Eligibility: Limit eligibility to customer facing roles that influence and persuade the purchasing decision.
Pay Levels: Align total pay (base plus incentive) with markets in which you compete for sales talent.
Pay Mix: Match variable pay or pay “at risk” to the level of persuasion and influence in the role.
Leverage: Ensure enough upside earnings for top performers while simultaneously managing cost. The top 10 percent of performers should earn roughly 3x their target variable pay.
Measures: Don’t compensate more than three parameters. Only use team measures if the sale is a genuine team effort. Don’t use team measures to simply foster "teamwork".
“A small team of A+ players can run rings around a giant team of B and C players.”
Mechanics & Pay Curve: Commissions or a bonus plan? Commission plans are appropriate for Phases 1 and 2, while bonus plans are best for Phases 3 and 4 (see article 2). The Pay Curve should be simple. Use a threshold to account for repeat business. Accelerate pay after quota to motivate above plan performance to incentivise over-achievement.
Performance & Payout Periods: Align performance periods to the length of the sales cycle. Incentive payout periods should be monthly anytime the variable pay represents 30% or more of total pay.
Quotas & Targets: Quotas should be engineered so approximately 55% of the sales force achieve quota each year.
Crediting & Policies: Tie sales credit to the crediting event that the sales person influences most (i.e. booking, invoice, shipment, revenue received, implementation, etc.).
Special Incentives: Should not represent over 5% of target pay, or interfere with the core sales compensation plan.
5. Model the New Plans
Simulate how the new plans will pay out based on different performance scenarios. If necessary, adjust the plan parameters to ensure it is economically feasible.
6. Gain C-Level approval
The various options, together with recommendations, are passed up the chain for approval. The timing and implementation process is agreed.
7. Execute a Flawless Roll-Out
The roll-out is a multi-pronged process, cascading first to front line sales managers, and followed by a company-wide sales-force statement from the CRO. A lack of clarity at this stage is a recipe for disaster, meaning the undivided attention of the sales function makes it a crucial time to restate the company core values and growth strategy. Importantly, the clear incentive for over-performance should be emphasised to motivate the team for the year to come
“If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it, you almost don’t have to manage them.”
This kickoff should align with the start of the new fiscal year to capitalise on the momentum of the new process and company objectives. Sales team members receive plan documents that detail individual base salary, the company quota expectation, and on-target earnings. This is reviewed with direct managers, concerns addressed, and an acknowledgement form signed before beginning the new year with a fresh focus on over-achievement.
Remodelling the sales compensation plan is an opportunity to drive positive business change and motivate the sales force.
This concludes my sales compensation modelling series. Compensation design is a complex topic, and this 3-part series of articles was inspired by several discussions with my friend Paul Vinogradov of The Alexander Group, who kindly supplied some of the graphics. It represents our collective experience of managing and consulting for sales teams. Feel free to connect with me to discuss specific challenges, and for a deeper dive into compensation modelling read David Cichelli’s book, Compensating the Salesforce.