While not all sales problems are associated with a poor compensation plan, many are.
If your comp plan does not incentivize the correct behaviors, does not drive your sales reps to work longer hours, or ensure that YOU (as the business owner) will consistently make your quarterly forecast – then it may be time to implement a new compensation plan based on the following 5 criteria.
Aligned Incentives: It is important that all sales compensation plans (at all levels) within your sales organization drive toward the same goal (from the Field Rep level to the District Management level and on to the Executive Management level). Thus, for a District Manager to achieve his or her goal, field representatives would need to collectively achieve their respective goals (the district goal/quota). Likewise, for a Regional Manager to hit his goal, the District Managers must achieve their collective goal (the regional goal/quota). In summary, everyone within the organization from the Field-Rep to the very top of the organization should all be marching in unison toward the same quota/goal.
Term of the Compensation Plan: I have found that quarterly quotas/goals work best. The timeline is easily measurable, and it allows for timely tweaking of your quota on a 3-month or quarterly basis. However, it is important to note that a target/goal should never be adjusted during the “current” quarter. Adjustments should only be made after the finish of a given quarter, in preparation for the next quarter. Using a quarterly plan (as opposed to an annual plan) allows for nimbleness of the plan, along with the ability to adjust every 3 months in answer to changing market dynamics, potential performance issues, and “changing priorities” within the organization.
Compensation Plan Structure: The compensation plan structure should have the following components:
- It must drive the quarterly desired behavior.
- It must be easily understood, allowing field reps to easily calculate their commissions mentally (daily).
- Daily metrics should be published to all sales personnel, with run-rated performance (by Rep, by District, by Region, and Nationally) visually available on a daily basis. This serves to ensure full and proper execution of the target.
- It should have well-defined quarterly goals/targets. These quarterly targets allow the organization to actively target and exceed the stated quarterly goals. This very important aspect of the compensation plan assigns individual accountability to everyone on the sales team.
- It should allocate enough bonus dollars (in the form of a quarterly bonus) for those sales professionals who cross the important 100% threshold of the stated quarterly quota. Of course, even more additional dollars should be available on a graduated basis for those sales professionals exceeding the quarterly target. These over-achievement bonuses can be paid out of the incremental sales revenue they create.
- Just as important, the compensation plan structure must provide enough incentive to the various sales reps to motivate them to work longer hours and exert additional effort to grab the “brass ring” (a.k.a. 100% achievement of the quarterly target).
- Finally, enough allocated compensation dollars should be reserved to create “spiffs.” A spiff is an announced bonus for “whatever” sales management feels is critically important during an “active” quarter (normally utilized on a more urgent basis). These spiffs will change quarterly based upon organizational needs.
Quarterly Target/Quota: Any compensation plan is only as good as the targets and/or quota assigned. If the target is unreasonable, the compensation plan will fail regardless of how structurally sound it may be. As we all know, unachievable targets serve as de-motivators, something all sales organizations should strive to avoid. I have always stressed quotas must be aggressive, yet obtainable. Finding and adjusting the right targets (as needed) at the beginning of each new quarter throughout the year, allows for additional revenue growth of the organization. Without target adjustment, complacency can set in, and reps can become satisfied with their current compensation level (the plateau effect).
I recommend organizations strongly consider moving away from straight “commission-percentage” compensation plans and instead move toward plans that pay a sales team based upon “percent to quota” achievement. Where (for example) a sales rep’s actual achievement of his/her quarterly quota is the primary factor for a sales rep’s commission payout.
Targeted Compensation Mix: Over 3,000 small business owners polled, and aggregate data from 175 Sales Xceleration Advisors, tell us the most successful compensation mix is 50% base salary and 50% commissions. Most business owners tend to pay their salespeople a high base salary with low commissions. This causes complacency and doesn’t motivate sales teams to achieve the desired KPIs.
Final Notes: To develop a strong compensation plan (for the various roles and levels of your sales team), one must first understand those behaviors that are critical to a sales rep’s success. Armed with this knowledge, you can then boil down these behaviors into appropriate and measurable metrics. Only after the critical success metrics are fully understood, can you effectively build a customized compensation plan that will drive the revenue your organization requires. I find it beneficial to “measure twice and cut once” regarding this important process.
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If you’d like to discuss how you can maintain a successful sales organization, contact me at (248) 515-8799 or stappan@salesxceleration.com or book time on my calendar.
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