With multiple revenue streams, longer-term contracts, shifting strategies and multiple job roles, the typical HR or sales compensation professional is more dependent than ever on business leaders and a defined process to help construct robust, performance-based compensation programs that motivate and reward the right sales behaviors and deliver profitable results.
The importance of sales comp to the organization—and the complexity of getting it right—lead many to seek training and certification, like the WorldatWork Certified Sales Compensation Professional (CSCP)® designation. Unfortunately, with fast moving business realities, tightening budgets, and time constraints, many individuals cannot receive training as quickly as they need it. This creates the risk that new sales compensation program designs may lack some of the strategic emphasis, logic, and discipline that a highly trained and experienced CSCP might design. In lieu of specialized training, focusing on a few key points can help you navigate the sales incentive design process and implement an effective incentive program much like a CSCP would.
Know what you are trying to accomplish
A CSCP knows that effective compensation design is driven by an organization’s decisions on strategy, market coverage, and job roles. Many companies struggle with the basic tenets of how to motivate and reward a sales organization, but if you understand the basics of your organization’s business strategy and how it makes its profit, you have the right basis for tying someone’s compensation to this strategy.
To design a strategic sales compensation plan, you need to first ask yourself: What is the organization trying to accomplish? A sales compensation plan is there to incent a sales rep for certain behaviors, such as: selling more product, retaining current customers, or acquiring new customers.
Once you know the priorities in your sales strategy, you can create a compensation philosophy statement. This is an effective tool that acts as an explicit guide for plan structure and helps lay the foundation upon which compensation design decisions are based. By surveying stakeholders and creating a statement that tackles an overall corporate position, prior to design, it helps you think like a CSCP and mitigates the emotional decision-making that can plague a design project.
Typical philosophy statements have multiple components to them that include a plan ownership/management statement, business objective link, pay level positioning and prominence policy, pay for performance guide, and performance and management timing rules. There are no right or wrong wordings for these statements; the key is to define the “swim lanes” that your decision makers need to stay within.
Know the jobs
Knowing a job role’s specific objectives is one of the most critical elements in the design process and one of the most overlooked. CSCPs know they must understand what a job does, how it does it, and why it does it. Different sales jobs have different goals and priorities that should be reflected in the design of the incentive plan. When sales roles are clearly defined with detailed job descriptions, skills, and competencies, the incentive plan can better drive the desired objectives, behaviors, and results. If a job is not well defined, it’s your responsibility to challenge the organization and ask for a better description. If you do not understand the role, you won’t know its value.
Know where incentive comp fits into your philosophy
Thinking like a CSCP requires knowledge around the different priorities in pay positioning and prominence. Not all sales organizations necessarily want compensation to play the deciding role in influencing sales rep behavior. Compensation is only one element of the overall relationship between the sales rep and the company. There may be other more important elements (e.g., benefits, career progression, work content) that can be more effective talent management tools and, as a result, compensation may not need to be as prominent. Clearly understanding and stating the intended prominence of sales compensation determines how much of a sales rep’s day-to-day actions should be tied to compensation.
Additionally, not all organizations can or need to pay at the market rate midpoints. There are many business-based factors that can affect where target compensation levels should be positioned relative to external benchmarks. Applying this pay factor logic will help create target compensation levels that more accurately reflect the needs of the business and market conditions, rather than simply the pay levels of your competitors.
Getting the incentive mix right
CSCPs are aware of the shift to a stronger pay-for-performance model, thus creating a more aggressive mix: more dollars on variable incentive versus fixed base salary. Thinking like a CSCP means understanding that many factors determine sales rep prominence and pay mix. Market share, buying patterns, selling versus non-selling activities, and control over the sale are key points to be considered. When a rep has less influence and a less assertive role, the mix is typically weighted more towards base pay, say 70/30 base/incentive. Conversely, when a job requires a high level of skill and drive, and a sale requires more effort, or competition is very strong, a sales rep’s job is harder. To help keep high performers motivated and engaged, more performance-based pay is necessary, perhaps a mix of 50/50.
Know what to measure
When considering incentive plan measures, many constituents will offer opinions, which can create a struggle in deciding what measures to use, how many measures to include, and how much emphasis to place on each measure. To make it simple, the measures used in an incentive plan define the specific performance standards or criteria that determine success. Achievement against the measures becomes the basis for assessing sales results and awarding incentive payments. There are typically four types of measures that CSCPs use. If you break it down to these categories, it will help with your decision making.
Financial/Production Measures typically are the core measures, weighted most heavily in an incentive plan. They focus on sales dollars, margin or margin dollars, or units, and are typically based on volume.
Strategic Measures are also core measures, but generally secondary to financial/production measures. They deal with anything that drives a specific strategic need, like customer or product mix..
Activity Measures focus on a rep’s activities, events, or milestones, such as customer events, qualified leads, conversations, or sales calls. CSCPs use these measures when the organization is trying to achieve milestones, has a long sales cycle, or when other criteria are difficult to measure.
Subjective/Judgment Measures are less quantitative and more qualitative, making them more difficult to measure. They may include professional objectives or discretionary behaviors that a rep’s manager will document or observe. Typically, CSCPs use these measures sparingly and with less weight.
Mechanical Elements and Pay Periods of a Compensation Plan
Payout formulas, payment terms, caps, thresholds and modifiers are where the rubber meets the road in compensation plan design. These components create the structure and formulas for how a plan pays out given a rep’s balanced level of achievement. The key for a novice designer is to use them with care, as these mechanical elements can create complications in plans and cause sales reps to lose their line of sight from sale to payment. Common types of mechanical elements include:
Thresholds and Deceleration. A threshold is a performance level required for receiving incentive payouts. Companies often will either not pay anything below the minimum or will severely decelerate payouts until the performance threshold is met. In pay-for-performance plans, thresholds help to fund accelerated payments or to stay within fixed compensation budgets, by shifting payouts from low producers to high producers.
Multipliers and Acceleration. These are increased payouts for overachievement, used to create differentiation among average and top performers. Payments accelerate over 100% of performance and continue to pay out at multiples above target, typically 3x to 4x target incentive.
Incentive Payout Caps. This is a limit on payouts. They are used to prevent overpayment or to ensure the company does not go over budget when paying out. Most CSCPs try to limit incentive caps on primary compensation measures.
Measurement Periods and Pay Frequency. Measurement periods are the time during which you measure someone on their performance, such as monthly, quarterly, bi-annually or annually. Many CSCPs use cumulative pay periods, typically a year (cumulative YTD results), as companies often like to hold back excellence payouts until total cumulative results are tabulated. Reps do, however, get paid on their performance up to 100% for those non-cumulative periods.
Increasingly, sales compensation design is becoming a highly specialized practice due to today’s sophisticated selling models. Educating yourself and understanding how strategy plays into design, then understanding compensation principles and applying a disciplined mindset much like a CSCP, will help you navigate the plan design and create an effective compensation plan.
For more insights from Korn Ferry and other industry experts on how you can design and deploy a transformational metrics-driven sales performance strategy, watch our on-demand webcast.