Looking to learn more about sales compensation strategies and how implementing comp plans can help your company? You’ve come to the right place!
FREQUENTLY ASKED QUESTIONS
Q: What is a sales compensation strategy?
A: A sales compensation strategy is the philosophical approach used to manage sales compensation for all sales roles within an organization, whether it’s inside, outside, channel sales, or major accounts. It is a philosophy and a strategy for how you want to pay your sales people.
Q: What makes a sales compensation plan strategic?
A: The sales comp plan is strategic if it supports the business goals and objectives and the sales strategies of the organization. It has to initiate and reinforce the right kind of behavior and ensure the people are paid for delivering the things that are important to the business.
Q: How does having a sales compensation strategy support the execution of sales strategies?
A: To give an example, if your strategy is growth, growth is a combination of new business plus retention. Whether that’s accounts or revenue, in order to achieve growth you have to keep the business that you have and you have to grow it. When you look at a sales compensation strategy, if your business strategy or your sales strategy is growth-focused then your plans need to have an element of both new businesses as well as in retention.
Q: Who is responsible for ensuring that there is a link between payment and performance?
A: When you’re looking at the results and we’re tracking people’s performance, there needs to be a very strong relationship between pay and performance. That’s where the sales manager is crucial. If people who are delivering more, are earning more, and people that are delivering less are earning less, then you have that linkage. If there are people that are delivering less but still earning a significant amount of incentive then your plan is out of alignment.
If people who are delivering more, are earning more, and people that are delivering less are earning less, then you have that linkage. If there are people that are delivering less but still earning a significant amount of incentive then your plan is out of alignment.
Q: What are the consequences of not connecting payment with performance?
A: If you don’t have that connection you’re more likely to lose your best people. The best salespeople can always get a job out in the marketplace. So if you don’t have that strong link between pay and performance, your sales execs may get disillusioned and they’ll look at other offers.
Q: How do you create a sales compensation plan for millennials?
A: Millennials like recognition, so part of your reward strategy needs to be recognition as well as incentive focused.You have a plan that is communicated clearly and concisely. You make targets that are achievable and within the line of sight of the sales people. Companies must also make sure that the rewards not only look at the financial side but also recognition.
Companies must also make sure that the rewards not only look at the financial side but also recognition.
Q: What are the big factors to consider before starting to build a sales compensation plan?
A: Interesting, very often people will say, “Can’t we just sit down in a room and hash this out in a couple of hours?” You can develop a sales comp plan in a couple of hours, but you can never tell whether or not it’s going to achieve its goals. Good sales compensation plans are based on researching what’s happened in the past, researching the market to see what’s required, and researching the best practices to see the kinds of things that are being done in a competitive marketplace.
Good sales compensation plans are based on researching what’s happened in the past, researching the market to see what’s required, and researching the best practices to see the kinds of things that are being done in a competitive marketplace.
Q: What are the steps in developing a sales compensation plan?
A: There are three elements:
The first is the upfront research that needs to be done to give you the data that you need in order to effectively model and calculate. Companies should get input from the leadership and sales leaders within the organization in terms of their direction and what they want to achieve.
The second element is the development phase where you take the organizational input and then you go through a design process in order to come up with the right plan for the role or roles.
Then finally the third element is the modeling, communication, and implementation.
Q: How can sales leaders connect performance reviews with sales compensation?
A: It’s a little bit different in sales than it is for other non-sales roles in the organization. A large part of what you’re looking for from sales people is what you measure in your comp plan.
It is, of course, critical for sales managers to also deliver ongoing coaching and mentoring. Otherwise you can have sales people all going off in various directions, eating up a lot of resources, and some will be successful and others won’t. The best plans are managed well by sales managers.
Q: What is pay for performance?
A: Pay for performance means that if I’ve identified the right performance measures and people are achieving against those expectations, and there’s a consistency in terms of their pay then it’s reinforcing.
It’s very important because sales people need to see that link in order to ensure that pay doesn’t become a demotivator. In organizations where the linkage between pay and performance isn’t there or it’s flawed that’s where you start to get turnover. Not only do you lose sales people but you may lose the accounts that they take with them.
Q: How often should you be paying out commissions?
A: The frequency of payout should be tied to two things:
One, the sales cycle, so if we have a long sales cycle and you’re trying to payout commissions too frequently then you’re going to have periods where people aren’t earning anything. Conversely, if the payout cycle is too broad then it’s not close enough to the transaction to be motivational.
Secondly, if you’re going to pay out more frequently you need a larger variable component. If your plan is one that only has a 20% incentive and you’re paying it out monthly, the payouts are going to be very small and they won’t be material enough to change behavior.
Q: How often and when should you re-evaluate commission?
A: That’s really dependent on the marketplace because when you have a marketplace that’s changing very quickly you may need to look at your commission rates and your target setting more frequently. Typically though, while your targets may change or your focus may change on certain products, and we are seeing a lot of featured products that are changed every month or quarter, typically you want to reevaluate your commission on an annual basis.
Q: What do I need to know in order to target my ideal accounts with long potential life cycle value?
A: As companies are moving more and more toward having fewer sales people on the street, those larger accounts become more critical, and as a result it’s really gets into customer segmentation. When you’re segmenting your customers into your A, B, and C type customers, then you need to have a strategy for your compensation program that says here’s what I need in terms of delivery from each of those groups.
Q: If you offer free products, such as basic levels of software, how do you structure a comp plan to get revenue?
A: Many companies can’t afford to pay sales people an awful lot for products and services that they’re not charging the customer for. Many experts would argue that if people are selling low margin or promotions that are giving the product away, they shouldn’t be earning a lot of incentive off that. If you’re selling at or above targeted margins or looking at certain volumes with a threshold before payout, that can cause people’s attitude to change in terms of how liberally they use promotions or giveaways.
Q: How can managers coach reps to meet the goals in their comp plans?
A: If the plans are structured properly, sales managers should be spending more and more of their time meeting with their sales people, talking about their account planning, looking at what they’re trying to deliver out of these plans, and understanding where the sales people are relative to expectations. If the sales comp plan sets very clear expectations then sales managers should be managing to those expectations or above. Non-performers, people that are performing below need to either be able to meet the expectations set out in the plan or they need to have a different discussion.
If the sales comp plan sets very clear expectations then sales managers should be able to manage to those expectations or above. Non-performers, people that are performing below need to either be able to meet the expectations set out in the plan or they need to have a different discussion.
Q: Can you recommend any compensation management software products and explain how can they help streamline processes?
A: Sales compensation management software really is about making sure that the calculations are done accurately and consistently so that you develop trust with your sales people. Xactly Corporation is one company that Dave Johnston believes has done a really good job in terms of being able to have software that fits the needs of the smaller to medium sized organization. It also has scalability.
Q: Beyond money, what other rewards and forms of recognition motivate employees?
A: The biggest motivator to most sales people is feedback from the supervisor.
Positive recognition, making sure that there’s alignment between what the sales person has as an expectation and when they deliver it that their manager or their director acknowledges the fact, and most sales people like to get that sort of adulation in front of their peers because it shows that they’ve achieved.
It depends on the type of selling that’s involved. Sometimes you don’t always have to use cash, cash is king for the most part, but we have seen some organizations that do a really good job in terms of smaller recognition programs or merchandise / gamification programs.
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