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Creating an Effective Sales Compensation Program

Why Creating an Effective Sales Compensation Program is Tricky

What is the turnover rate of sales reps in your company? Benchmark data by SiriusDecisions states that 89% of reps leave because of insufficient compensation. It takes time, effort, and strategic thinking to design, implement, and administer an effective sales compensation program. But it's worth the effort when you've got higher profits and less turnaround (reducing your operating cost).

There are many layers and moving parts to sales compensation programs that affect nearly everyone from the sales reps and the comp administrators to the CEO. Layers include how much compensation for different product sets, base salary, On-Target Earnings (OTEs), Sales Performance Incentive Funds (SPIFs), and more. Therefore, designing a program that satisfies everyone, plus is easy to administer poses a challenge to any company. In addition, once you have a sales compensation plan in place, the complexity grows from year to year. 

Sales reps may be under-motivated and leave the company for a more appealing compensation plan. Conversely, over-motivated reps with high compensation plans may create a cash-flow or profitability problem if it's not adequately modeled and planned out. 

The older a company is, and the more product sets added, the more complex the sales compensation plan can become. If it's not looked at carefully each year for what to keep and what to remove, it can become a grueling exercise for the sales ops or compensation team to administer effectively. 

According to John Thackston, VP Business Development & Co-Founder, SOAR Performance Group, there are three reasons why creating an effective sales compensation program is a tricky undertaking for any company:

  1. Too many cooks in the kitchen
  2. It's a dynamic problem (continuously changing) 
  3. It's challenging to mix the head (financial) with the heart (motivation)

Too Many Cooks

Execs often want to be involved in designing the sales comp program. The CEO is thinking about the overall strategy and business objectives. The CFO is concentrating on cash flow and profitability. While it may seem like the executive team would agree on the right metrics for a sales comp program, that's not always the case in practice. Some execs aren't focused on the commercial side of the business; for others, creating an effective sales compensation program may not be a top priority. This situation creates a challenging conversation between the execs and the compensation planning team as they may have conflicting agendas. 

Of course, there are more "cooks" than just the execs. The VP of Sales wants to keep the sales team motivated. The sales team wants to have the best compensation they can get. Finally, the administrators of the program want something easy to administer that creates minimal disputes over commissions. 

With all of these competing priorities, it can be difficult to drive consensus around what should go into the sales comp program. And to make matters worse, priorities change each year - so what was important to the CEO or CFO last year may be different this year.  

The Dynamics

As we were reminded over the past year with COVID, things change. With COVID, many companies had to make quick strategy changes and adapt to stay in business. While it's not usually that extreme, the simple fact is that every year, things change. 

There are external changes and internal changes each year with companies. For example, the changing marketplace plus the competition changes along with their offers. Internal factors include corporate objectives, financial and operational changes, and product sets.

Because of these factors, it's crucial to look at the sales compensation plan early and, at least, annually. When creating a plan for the first time and then reviewing it each year, it's helpful to look long-term. For example, in the first year, the focus may be on growth, while the second year focuses on profitability.  

Finding the Right Mix

The "head" of an effective sales compensation program is about the numbers and its financial side. Consider how much the company can afford to pay in compensation, how much the operating costs are to sustain the sales, and more. 

The "heart" or the motivation factor is crucial to a balanced sales compensation plan. After all, if the compensation is too low, the company may lose sales team members. Therefore, the balance between profitability and motivation for the sales team is crucial. In addition, fair motivating factors help the sales team reach the company's financial goals and their quotas and goals. 

As essential as this process is, it's important not to rush through it either. Because there are many factors, and it ripples down from the CEO to the sales reps, it's essential to design and implement the compensation program correctly.  

Designing Stage

The team designing the sales compensation plan must have a clear understanding of:

  • Company strategic objectives
  • How the sales team will be motivated  
  • What actions (or behaviors) the sales team members will take to meet those strategic objectives

When the sales compensation team designs the compensation plan, it takes clear ongoing communication, strategic thinking, a look into the future, and reviewing the past. Taking a look at the company's objectives, finances, sales history, and projections affect the sales compensation model. 

Basing a compensation plan from one out of many sales team members doesn't create a realistic or fair compensation package. For example, if one salesperson consistently achieves high numbers but the remaining team members average about the same, it makes more sense to review the sales compensation program based on the many people over a single person. 

During the design stage, it's essential to look realistically at different scenarios. The more scenarios to consider, the more effective the compensation program can be for the company. Best-case situations are equally as crucial as worst-case scenarios. Identifying the possibilities and looking at the possible effect the compensation program will have on the company helps design the program that will be the most beneficial for the most people affected by the program. 

Implementing Stage

Besides the CEO and CFO being on board with the program, a smooth-running compensation program needs to be understood by everyone connected to it. This knowledge transfer ensures the VP of Sales knows how to motivate the sales team members and measure their performance. Likewise, the sales team members know what to expect and how to achieve the company goals and sales quotas. In addition, the sales comp administrators fully understand each nuance of the program to be accurate and fair with distributing any accelerators, SPIFs, or additional factors like quotas and OTEs. 

Administration Stage

Accurately administering the sales compensation program starts with implementation and continues throughout the year. The administration includes gathering all the data, being clear on the different performance measures and all of the competing objectives of the sales compensation program. 

The sales op/comps administrator's job includes tracking the sales team numbers and handling their sales commissions accurately. The more complex the sales compensation program, the more challenging this task is for the comps administrative team. Using automated sales calculations is a straightforward way to make it easier, consistent, and more accurate for the sales ops/comps administrative team to handle each day.

Next Steps

It's essential to ensure the sales compensation program is fair, realistic, and meets the company objectives. To get started creating an effective sales compensation program, Thackston recommends identifying these three components:

  1. Name with absolute clarity the company's strategic objectives and the behavior you want to motivate. This process creates the connection between the strategic goals and how you want to create incentives. 
  2. The problems the sales compensation program solves and what it doesn't solve. One factor that significantly impacts the sales compensation program is whether a company is scaling up or staying with the current business model. It means the difference between higher quotas or increasing overall sales productivity. 
  3. The cause and effect of the compensation program create and establish as many different scenarios as possible to model the sales compensation program in the company. If the sales team is motivated to sell more of one product set than another, it can affect cash flow and even inventory management. 

These factors: compensation variables like accelerators, SPIFs, sales targets and quotas, company strategies and goals, conflicting or hidden agendas continue to make creating a profitable and motivating sales compensation program more challenging every day. 

To create efficiency, reduce timewasters, and keep your sales reps motivated, a high-performance solution like Performio could be the missing piece to connect the sales compensation program in your company. Performio can help you automate sales calculations, improve the relationship with sales reps through more transparency, and provide the stats the executive suite is looking for with accurate reporting. Book a demo today.

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