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Help Me, Help You! Sales Compensation Plans — 5 Steps

by
Chris Simone
Nov 13, 2012, 5:39 am ET

Those of you who recruit for sales hiring managers know how challenging it can be to get a candidate excited about an uncompetitive or uninspiring compensation plan. On the flip side, you have probably found some great sales candidates on the market as the result of inadequate compensation plans.

Sales managers often recognize this obstacle and turn to their trusted recruiters for help, especially this time of year when compensation plans are revised for the following year. In some cases good effort and intentions fail to produce the desired outcomes. Fortunately we can help achieve solid placements.

Here are “five steps to a more effective sales compensation plan”:

  1. Define desired outcomes and related behaviors: Purposeful sales compensation plans are created with one goal in mind: affect specific behavior. For instance, if your sales force has the ability to sell two solutions, and solution “A” has a much higher profit margin than solution “B,” then one desired outcome could be to increase sales of solution “A.” With this clarity of purpose, the commission schedule can be adjusted so as to increase emphasis and focus on solution “A” and, to the extent necessary, diminish time spent pursuing solution ”B” transactions.
  2. Use precursors and consequences effectively: Precursors are anything that comes before the required behavior with the strict intention of motivating or inspiring the behavior. Consequences are the result or what happens after the behavior. Consequences are often incorrectly applied in that they tend to disproportionately focus on the negative. However, consequences can also be visibly and measurably positive. Compensation is a consequence. There are three relevant aspects of consequences: 1) the degree to which they are balanced between positive and negative; 2) the immediacy of the consequence in terms of time — how long after the behavior before the consequence is realized; 3) the degree to which the sales force perceives the consequence will actually occur.
  3. Define necessary roles relative to the desired outcomes: In some cases, the desired outcomes require modification not only to the compensation plan, but also to the human capital structure. For example, one desired outcome could be to increase client retention or renewal rates. Rather than trying to incent sales hunters to account manage (which could, even if successful, have cross purpose with new business objectives), farmers/account managers might need to be introduced into the model. Then, a separate compensation plan designed around an entirely different set of behaviors/outcomes will be implemented.
  4. Determine quota and construct OTE per role: Quota is a very important structural element of the plan. Optimal sales compensation plans provide variable compensation equivalent to base salary at 100% attainment of quota with the total representing “At-Plan” or “On-Target-Earning.” If quota is measured monthly, then “OTE” is achieved if the sales representative achieves quota every month on average. Beyond quota, “accelerators” are provided to avoid complacency (which occurs at a different point with every sales representative). For example, if the commission rate on performance up to quota level is 5%, then consider 6% for 101% to 115% attainment and 8% for 116% and above, always uncapped. Above-quota performance is almost always measured and paid out in parallel within the established commission periods. In general, commission periods should be as short as possible. Keep it simple … your sales representatives need to understand the compensation plan the day it is rolled out, and they need to remember the key structure and mechanisms that drive income. If the plan is too granular or complex, then it will fail to affect behavior (which is the primary purpose of the plan).
  5. Manage change and enlist the sales force: The most effective sales managers promote and sustain high-output sales cultures of performance. Open communication is part of the success formula especially regarding goals, expectations, and compensation. The core business drivers that necessitated the change(s) should be discussed and the reasonable basis for the quota should be discussed. Buy-in can be achieved and is important; achieving buy-in means that any notions which might otherwise diminish belief have been effectively addressed. Open, team-oriented, communication also garners positive attitudes. Belief and positive attitude are as vital as a properly constructed plan.

Last but certainly not least is the ability to find and hire the perfect fit. Beyond numbers (e.g. quota history, W-2 history, transaction value, and sales cycle duration), sales hiring managers need to align sales person characteristics. For example, is the sales person strategic or tactical, comfortable selling at the C-Level or mid-level, comfortable selling to early adopters, selling inside or outside, etc?

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  1. Keith Halperin

    Really good! I think a great deal of this would be very applicable in constructing an effective Employee Referral Program, too.

    Cheers,
    Keith
    keithsrj@sbcglobal.net

  2. Carol Schultz

    This is right on point Chris!

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