Comp Plan Overhaul 101
Companies looking to energize the sales team while squeezing out a little more revenue are always tempted to monkey with the compensation plan. And boy do the salespeople love that! There are, however, some effective strategies for revamping a comp plan so that everyone’s happy. But first, say sales compensation experts Raoul Choos and Robert Surdel, you need to approach the process with an understanding of some of the fundamentals behind sales compensation. :
Writing recently in World At Work magazine, Choos and Surdel suggest six strategies for overhauling a sales comp plan to uncap its full potential. They are:
1. What Are You Compensating?
Sales compensation boils down to a simple philosophy – you either compensate for effort, results, or some combination of the two. So if two territories bring in $1 million and $10 million respectively, how do you pay the salespeople? If you’re rewarding results, the latter territory gets the lion’s share of the compensation. But what if the former territory is much tighter, and offers less opportunity? Then perhaps the salespeople should be paid roughly the same, because the effort was equal.
There is no right answer, but Choos and Surdel suggest that companies at least understand the philosophy behind whatever approach they take to sales compensation, and then apply it fairly and consistently.
2. What Are Your Priorities?
Your comp plan probably consists of some combination of salary and incentive pay, right? Whose doesn’t? And whenever a tweak is suggested, the only question companies ask is, “Can we afford it?” If the answer is “no,” then adjustments are made to the sales targets and that’s that.
But Choos and Surdel suggest another element to consider: business context. That means reviewing the company’s long- and-short-term strategic priorities, the product mix, and how you approach customer needs. These elements should point in the direction where rewards should be offered. This approach will also help HR folks design programs that maximize the company’s sales compensation ROI.
3. Everybody Grab a Seat
Typically, HR, sales, and finance work together to come up with a sales comp plan, which is then raced up to senior management for approval prior to the kick-off meeting. A better approach would be to include other interested parties, including legal, product marketing, and IT. This will avoid undue troubles down the line - like legal refusing to approve or IT saying it can’t implement the program – that tend to crop up with hastily thrown together plans.
4. Work Backward
The mix of a sales team’s incentive and base pay combines to produce a total cash figure. Companies will often tweak these figures independently in an effort to be more competitive or make the company more attractive to new employees.
Trying to match what other companies are offering is not an effective strategy for driving the right behaviors however, say Chool and Surdel. Instead, companies should begin by developing a specific cash target for the company, and develop an appropriate mix of base and incentive pay for a given type of sale. The numbers should reflect not only the behaviors the company is trying to motivate, but also the reality of the marketplace. And whenever an element in the validation process appears to be off, rethink the whole formula, not just that one element.
5. Times (and Roles) Have Changed
With the complexity of today’s markets, not to mention technological changes and the push toward globalization, the traditional “hunter” and “farmer” roles for salespeople need to be re-thought. As sales roles have changed, so should the compensation patterns. In an era when customer relationships are the key to profitability, companies that cling to anachronistic notions of how salespeople operate will not function at optimal levels.
6. Begin At the Beginning
Do you use competitive market data as a tool to help determine sales compensation? That may be appropriate, but it’s not where you should begin. Instead, start with the business case. What does the organization need from its employees to succeed? Your answer should be based on the company’s strategies and goals, the behaviors you need to motivate, influence from the market, and how competitive your organization is in attracting top talent.
Once these factors are considered, then it’s time to bring competitive intelligence into the mix to determine where your organization stands vis-à-vis other companies in the market. But remember – being different isn’t necessarily a bad thing, as long as the business case supports those differences.
http://www.sellingpower.com/html_newsletter/article.asp?NLid=4&Layout_ID=570&ARTid=2612&nDate=September+27%2C+2006