The idea of compensation governance typically is associated with executive compensation. Does governance have a place in sales compensation too?
Given that the sales compensation arena can resemble the “wild, wild West,” leading sales organizations would respond with a resounding “Yes.” As sales organizations and their strategies around segmenting and targeting of customers become more complex, many of the largest and best run organizations are discovering that a consistent and common sales incentive compensation program rests on a foundation of governance. A sales compensation governance program provides the guidelines and tools that enable management to maintain the integrity of plan operations, the overall design parameters, and ultimately the cost of sales. This framework helps to avoid any opportunity for “guess work” or deviance from company values. Since sales compensation design is part art and part science, a strong governance program bolsters the science aspect which allows for better plan design in the long run, and helps ensure that sales comp plans will effectively drive performance to meet company objectives.
Too often, sales compensation can seem like the lawless wild West, with sales management from different business units shooting from the hip when it comes to setting the year’s sales incentives, measures and quotas. Each unit wants their own plans with their own “fingerprints”. When times get tough, these same business units may be tempted to change horses mid-stream when a plan doesn’t seem to be generating results. However, installing a new set of measures, adding more money to the plan, and/or changing goals mid-stream is not the answer. Nor is having multiple plans with different philosophies, payouts, targets or cost parameters. The best approach is to stick to your guns and adhere to well documented fundamental beliefs and philosophies about pay and to administrative guidelines for budgeting, goal-setting, and award determination that align with the company philosophy and culture.
Sales operations, human resources, finance, marketing, or any other internal group that is tasked with design or alignment among business units does not need to be the new sheriff in town that imposes law and order through stringent regulation. Rather, a good governance program should be created with input from all interested parties and business units. This will help the entire organization manage the direction and pace of change by outlining common rules, practices, levels, and communication requirements when customizing plans for different areas of the business.
On Your Mark: Outline the Organizational Benefits of Governance
If your organization has not had common governance practices, the first challenge may be to get all parties to agree that governance can be the means to codify “what’s important” rather than a method to control an individual business unit’s authority. Therefore, it’s critical to get buy-in from all stakeholders about the purpose and advantages of governance. To give an example, the following are common objectives that well run organizations with firm sales compensation governance programs have identified as the primary reasons for their sales incentive governance program:
- Develop, design, monitor and enforce the most effective and consistent sales incentive plans that meet corporate objectives.
- Provide a uniform compensation approach around key design steps: assessment, development, and implementation.
- Ensure that corporate cost parameters, target levels, legal, regulatory, and compliance risks are mitigated or controlled.
- Provide basic logistical support, rules, timing, and accountabilities for the assessment, design, and implementation of best practice incentive compensation plans.
Get Set: Identify the Components
Sales compensation governance provides support for the organization’s decisions on strategy, market coverage, and job roles. Therefore, it is important to outline key policies and practices that will ensure consistency and continuity in addressing the eight components of sales incentive design. These should include:
- Job RolesDefine the types of jobs that are covered under the governance guidelines and match specific types of jobs with specific governance policies and standards.
- Target Pay LevelsOutline parameters for benchmarking and define corporate policies for target levels. This will include market pay levels, pay strategy, and target compensation levels for each type of job, and also identify the types of data that must be used.
- Mix and UpsideDetail parameters for establishing salary and incentive mix based on job roles, sales cycle, and sales process factors. Set upside potential rules for top performers.
- Measures and WeightsDefine the key performance measures and relative weights that business units must use to link incentive compensation strategies to objectives.
- Mechanics and LinksDefine the types of payout formulas and mechanics that the organization should use to ensure the company is clearly communicating objectives and providing proper line-of-sight.
- Quota Setting and AllocationDefine the process to set quotas for each performance measure and outline how the organization should allocate quotas to job roles, considering market-potential and performance-based factors.
- Implementation and AdministrationEstablish guidelines for standard communications templates, plan documents, and plan policies. Outline how business units should introduce these materials to the organization, including checklists of steps to follow and suggested implementation timelines.
- Evaluation and Planning for Next CycleDefine the process to conduct “30, 60, 90” audits. Detail the metrics and dashboards that should be put in place to ensure a plan is meeting corporate standards and business unit objectives.
Go: Evaluate Current Guidelines and Create New Governance Standards
Establishing sales compensation governance needs to be an all-inclusive undertaking. The input of all parties must be sought and considered to ensure understanding of the strategic priorities and current challenges for the corporation, business units and the compensation program. Key steps in establishing sales compensation governance should include the following:
Seek InputReach out to executives, sales management and other key stakeholders to identify current issues and understand perspectives on business objectives, sales strategies, legal risks, compliance risks, costing guidelines, management supervision, roles of business unit and HR and compensation plan strategy.
Analyze Current Costs
Look at pay components such as pay vs. performance relationships, distribution of performance, and high-performer rewards across the organization. Evaluate the current salary/incentive mix, bonus, upside potential, performance measures, weights, links, thresholds, excellence levels, and mechanics used to ensure the new guidelines take into consideration current practices.
Define the Governance Design Principles
Define the eight design components to be included in the governance tool (see above). Clarify issues such as business unit flexibility and alternatives. Identify key decision makers and clarify role alignment between corporate HR and business units and how each influence the governance guidelines and design process.
Reap the Benefits
Companies that invest the time and effort in sales compensation governance realize a near-term payback in the first year and ongoing returns in subsequent years. Typically, the greatest returns from a governance investment will be seen in the following areas:
- Better expense control resulting in more predictable and lower compensation costs and compensation cost of sales.
- Improved alignment of jobs and their compensation with company growth objectives to eliminate “directional drag” from opposing company objectives.
- Increased performance and cost predictability for business planning.
- Increased performance tracking and metrics that can help monitor business units pay vs. performance correlations.
- Improved ability to attract and retain the right talent (and stem turnover) through a properly positioned pay program that includes appropriate pay levels and upside earning opportunities.
- Reduction of legal and regulatory risk from plan non-compliance or unethical behaviors by plan incumbents.
In contrast, simply adjusting payouts or replicating plans used in the industry rarely produces a positive result and often can damage the organization’s performance by creating misalignments between strategy, job roles, and compensation.
The choice seems clear: sales compensation governance can be the means to direct and motivate the entire organization to work together and out-perform the competition.
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