How to make your sales compensation plans attractive and fair

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This blog was originally posted on The Sales Evangelist.

Having a great sales compensation plan in place helps our team to perform better. Unfortunately, many businesses oftentimes overlook this aspect. If you’re in a sales leadership role or vying for one, this is a must-listen episode.

Today’s guest is Rowan Tonkin. He is the Head of Sales and Marketing Solutions at Anaplan. He’s giving us some insights into the importance of making effective sales compensation plans as well as how you can design one. Rowan is from Australia and has lived in London for ten years until finally moving to San Francisco.

Here are the highlights of my conversation with Rowan:

Lessons from Rowan’s coolest sales experience when he was the customer:

Rowan bought a watch at Shinola in Detroit where he had it custom-built and it was delivered in about an hour after selecting all the things he wanted. He felt that personal touch. He didn’t feel he was sold to but he was just getting what he wanted.

Why companies have issues with compensation plans:

  • They’re very complex. You take your organizational strategy and create a virtual supervisor to make sure your sales force is executing that strategy. The sales compensation plan is designed to keep everything aligned from the seller’s perspective.
  • They’re personal. Many companies have this innate feeling of when they don’t work, you’re letting your growth opportunities and your sellers down.
  • People over-complicate them.
  • People find it hard to create disciplined sales compensation plan.
  • Not enough expertise in building or designing compensation plans.
  • You’re trying to predict the future in terms of next year’s goals and it’s hard when setting quotas and most organizations are working on target-based variable compensation so you’re really trying to guess which makes it complex.

The Key Principles to Having and Effective Compensation Plan:

  1. Make it easy to understand and communicate with your sellers.
    Make sure you can communicate it to them in a simple document. Your sellers must be able to interpret that in a couple of bullet points otherwise you’ve over-complicated that plan. And it’s going to be hard for the salesperson to execute on that plan.
  2. Understand the key factors in the compensation plan.
    If you have a capped plan for management, that’s okay. But if you have this for your sellers, this could be demotivating for them. There are different options that you can consider such as a 2x capped-type plan or a 3x uncapped or an add-on type plan.
  3. Design one for every role.
    You should have a plan for every role in your organization. It comes down to how much leverage you want over that particular individual.

Should There Be a Cap for Sellers?

Rowan believes there shouldn’t be a cap for direct sellers. The idea behind the cap is you can only earn this much even if you exceed your number. The reason most organizations think about caps is the huge bluebird deals, those we can’t predict are so great that they will blow out the cost of sale to the organization. Have an “If this, then use this…” type of plan for that type of deal.

You wouldn’t want the seller to be sandbagging the deal for the rest of the year. Once they’re close to the cap, they will just move it into next year. This is not helpful to the organization at all.

The biggest issue in compensation is that plan designers or administrators don’t get to set the target. They’re working off someone else’s factor. It’s important to get the quota setting aspect of compensation right.

Having a decelerator is okay if the only other option is a capped plan. Try to avoid the capped plan if you can otherwise have a decelerator in place.

Tips for Sales Managers in Making Effective Compensation Plans:

  1. Don’t start with the compensation plan. Do the upfront work earlier in the cycle.
  2. Think about how to appropriately set targets for those revenue and sales motions.
  3. Look at the addressable market for that. Design fair and equitable territories and achievable quotas.
  4. Then start thinking about the compensation plan. This aligns your compensation plan to the organizational corporate strategy. (Otherwise, you get odd behaviors from your sellers.)
  5. Remember that the plan should reward them for what the organizations is really looking to achieve.
  6. Ensure that the sales leaders and managers should be able to communicate the compensation plan to the sellers.

Challenges with Forecasting:

  • There’s a lot of gut feel involved and lot of nuances that get applied at different levels.
  • Sales reps need to have some reason to really invest time in forecasting.
  • Forecasting for forecasting sake ends up with inaccurate forecast and this hurts the organization in terms of agility.

How to Get Back on Track With Compensation:

  1. Start looking at total market opportunity. Look at the market. Understand where the opportunities lie.
  2. Be able to set quotas against those opportunities at varying levels. Be able to set those quotas whether at a product level, territory level, or individual seller level.
  3. Mash all of that data together so you’re designing a plan on a great data set. Having all the facts of the opportunity, where you are today, where you might be in six months or three years based on some forecasting insights you have, is important in setting up that compensation plan design.
  4. Have a flexible platform that can take lots of data sources. This allows you to manipulate that data to credit the right people. Some organizations often credit 60-70 people for one transaction. This helps you get that insight and administer and process that credit quickly and easily so that as a seller, they can see where they are today. This also enables the seller to make disputes quickly so they can get pain in their next pay run.

Rowan’s Major Takeaway:

Don’t just think of the plan as an isolated component. It’s much more than that. You really need to think about all the processes that lead up to that plan so you can set something in a more equitable and organized fashion.

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