The Impact on Sales Compensation

In Sales, Performance & Pay: Sales Compensation for the Future we discussed the changes to the existing sales paradigm. In this follow-up article we’ll consider how these changes have affected sales compensation initiatives.

This shift in the sales paradigm has rendered many of the traditional “one-size-fits-all” sales compensation plans useless in the achievement of current and future sales and business goals. In fact, organizations that have plans in use today that are more than three years old (or have only been “tweaked” during that period) run a high risk of rewarding for behaviors that are in direct opposition to what will make them successful in today’s markets!

In defining sales compensation plans it may be important to distinguish between a “reward” and an “incentive”. A “reward” is a payment that is made after a performance period that reflects achievement of the goal – it does not necessarily affect behaviour. An “incentive” is a payment paradigm that is set at the beginning of the performance period that identifies for execution, both the required behaviour and the expected result and the payout that can be achieved for success.

A major consequence of the changes taking place in the sales environment has been the structural framework of the sales compensation plan. In the past, it was not uncommon for salespeople to work on pure commission plans. Conversely in many other markets, salespeople were solely on base salary (e.g.: highly regulated business – telecom, energy etc.). A mix of base salary plus commission or bonus or all three has replaced these extremes. These combination plans provide sufficient guaranteed income to cover obligations (e.g.: food, mortgage etc.) with the rest incentive based. The degree of personal selling and the influence that the salesperson has on the buy decision will determine the extent of the incentive amount. The greater the personal impact on sales, the higher the incentive amount.

There has been a distinct movement in sales compensation toward multiple plans to address each of the specific sales roles within the organization. Each unique role (e.g.: major accounts, channel manager, telemarketer etc.) requires a unique plan design with measures, targets and payouts that are appropriate for the accountabilities. Plans in the past tried to cover every potential sales scenario and apply a “reward” for achievement. In a stable market without a lot of change, this might be achievable. Today’s constantly changing environment makes it virtually impossible to cover all of the bases. As markets became more volatile, what has been achieved through this approach is to increase the level of complexity and create confusion among the sales force as to where they should spend their time and effort and what the organization valued. There has however been an effort in recent years to simplify the design of sales compensation plans, with fewer performance measures and greater focus. Rather than put an incentive on many deliverables, sales organizations have identified the one to two areas where salespeople make a difference and have placed their incentives on those deliverables. All of the other activities and expectations are covered by the base salary.

In sales situations where the revenue is recurring (e.g.: multi-year contracts) or where customers buy consumables, sales compensation has changed, as these accounts have evolved to being “managed” versus “sold” accounts. Under this scenario, if the selling rep retains the accounts, there may be a reduced payout for renewals or upgrades. Salespeople with a significant salary component are now servicing these accounts, with the “sales” effort being focused on new business development. Following the “boom” times of the late nineties, the mix of base and incentive has changed. In tougher markets, the base salary component has increased and the incentive amount has decreased, along with the higher upside potential. The only area, which has retained the high incentive approach, has been in new business development. These new business salespeople are paid a higher degree of incentive, often with significant upside potential and a focus on overachievement. Their base salaries also tend to be lower…high-risk…high reward.

Another area of change has been in the focus of the performance measures used for payout. Sales compensation plans have always paid on quantitative deliverables (e.g.: sales volume, revenue, units etc.). This has driven short-term tactical sales behavior. With the evolution of relationship selling and partnership development, such tactical behavior must change to a more strategic approach to sales activities that retains some focus on the short-term, but also places focus on the longer-term retention and development of the account.