Seven steps to successfully manage your sales compensation plans
In my years in sales, I’ve come to believe incentive compensation plans often function as communication plans in disguise. In my experience, a company’s culture and values are rarely articulated more clearly than in the sales behaviors its incentive plans aim to inspire. And, there is nowhere where senior leadership can better drive the priorities of the organization, or the goals of the enterprise, than in their company’s variable incentive programs.
These cultural values also reveal themselves in the way organizations manage their compensation programs throughout the year. Although some companies view simply creating a fair plan as accomplishment enough, best-in-class companies distinguish themselves by putting as much time and effort into managing their comp plan as they put into creating it, and by treating the ongoing management of their plan as a way to set their salespeople up for success.
I partnered with Rachel Parrinello, principal for sales compensation practice at the Alexander Group, to discuss this issue. In a rich and detailed webinar, “Sales compensation program success: Seven must-do actions now,” we walked through a number of very useful practices for effectively managing a compensation plan. In particular, we laid out what Rachel describes as the seven best-in-class actions sales compensation leaders can take to drive revenue with their compensation program. Let’s dig in.
Seven steps to effectively manage a compensation plan
According to Rachel, effectively managing a comp plan involves embracing the following seven steps. (In the webinar Rachel goes into great—and very useful—depth on each of these steps; what follows is just a summary.)
- Ongoing communication. If any single activity can ensure success or derail your comp plan, it’s communication. As Rachel puts it, “In most cases, good communication for a mediocre plan is better than poor communication for an amazing plan.” Importantly, plan communication shouldn’t stop after rollout, nor should it be one-directional. Some best practices:
- Communicate in multiple formats. Include a formal presentation, create brochures and documents, and post an FAQ online.
- Survey the sales force after rolling out the plan, then clarify points of confusion.
- Re-communicate plan specifics after the first payout, when reps are most likely to have questions.
- Use feedback from your sales force to inform your future plan designs (this is a practice many companies fail to consider, to their peril).
- Sales compensation reporting. To measure the ongoing effectiveness of the comp plan, companies need to produce regular reports. Best-in-class companies generate different reports for different stakeholders—salespeople, managers, leadership, administrators—each with its own metrics and cadence. Rachel prefers to group the various metrics into four categories:
|Pay for performance||Plan design effectiveness||Employee motivation||Operational efficiency|
- Post mortem. After you’ve generated the plan, rolled it out, and tweaked it to accommodate feedback from the sales force, you should plan a post-mortem session to discuss what did and did not go well. Some common problems Rachel has seen include:
- No model for effective governance. If a company doesn’t clearly specify roles and responsibilities, it’s easy for comp plans to suffer from having too many designers (or too few) or insufficient involvement from necessary stakeholders.
- Gaps in the end-to-end process. Although things like insufficient analytics, poor communication, or a go-to-market strategy developed too late aren’t necessarily part of the comp plan design process, they can easily undermine the work that went into the plan.
- No best-in-class design framework. As with the model for effective governance, your design framework should clearly articulate the steps in the plan design process and the responsibilities associated with each step. This design framework should also ensure assignments are tied to actual jobs, not simply HR titles.
- Outdated operational systems. Things like legacy systems or manual processes are not always limited to the comp plan, but they can make creating and managing that plan far more difficult.
- Program updates. After completing the post-mortem, use the information gleaned there to update your foundational program. By “foundational,” we mean the elements you put in place to drive your year-in, end-to-end plan management process. These elements include:
- Appropriate role descriptions. Often HR titles are too high-level; jobs in the platform should describe the specific attributes necessary for each role in the plan management process.
- Timeless principles and guidelines. These timeless guidelines educate stakeholders and inform future plan design decisions.
- Governance and process. This ensures all relevant parties know what to do, when to do it, and how to do it, including elements like the governance structure, process map, role matrix, and calendar with critical tasks.
- Mid-year plan changes. Although reps generally don’t enjoy having their compensation plan changed in the middle of the year, there are occasionally legitimate justifications for modifying a plan. For example, things like new acquisitions, strategy changes, product mis-launches, and customer changes can impact your company’s go-to-market strategy in a way requiring modifications to a comp plan. When making mid-year changes, many companies convene steering committees during the design and approval process. Best-in-class companies generally convene these steering committees year-round, with monthly meetings dedicated to escalations, like dispute resolutions, design requests, credit or split adjustments, and other mid-year changes.
- Education. Again, best-in-class companies use the offseason time to educate themselves. Rebecca suggests a number of resources:
- Books: Compensating the Sales Force, Sales Compensation Made Simple
- Certification: WorldatWork’s Certified Sales Compensation Professional
- Events: WorldatWork’s Spotlight on Sales Compensation conference, AGI Sales Operations Forum
- Anaplan Webinars: You can also educate your company’s stakeholders by bringing in experts to conduct in-house workshops or by sending your team to local training sessions or seminars.
- Revenue segments. Incentive payments are often the biggest marketing expenditure in your P&L statements. Many companies spend upwards of 12-15% of total revenue just on sales incentives. Being able to accurately forecast and model these costs are crucial to keeping your organization financially healthy.
- Sizing and deployment. To ensure your reps can deliver against your comp plans, you need to make sure you have the right-sized headcount, the right talent on your staff, and a territory map logically and equitably grouping accounts.
- Productivity quotas and metrics. Although many organizations use CRM pipeline data to generate revenue estimates, CRM systems generally lack the advanced modeling capabilities to show how these things ebb and flow over time. Best-in-class organizations leverage advanced algorithms and “what-if” scenario planning to make these predictions more accurately, as well as to create effective quotas.
- Performance management and rewards. This includes not only your comp plan, but also comp plan modeling, accrual forecasting, sales crediting, and other techniques for incentivizing your sales force.
- System and tool upgrades. It’s in planning out your systems and locating the right tools where you bring all the pieces of your go-to-market strategy together. In particular, managing your comp plan effectively depends on having the following data-intensive processes in place:
As should be clear, these processes are all interconnected. It’s like a row of dominoes: When one falls, you can see its impact cascade. Whatever technological tools you use need to give you both access to and control over the whole system.
The key point is this: As we move away from thinking of our incentive programs as isolated entities, and toward approaching them as 1) something warranting ongoing care, and 2) one part of a connected chain of elements comprising your go-to-market strategy, it becomes increasingly crucial to have a solution keeping the various elements working in unison. Doing this is what lets you manage your comp plans in a way that drives revenue throughout the year.
Watch the full webinar to get more detail into these seven steps, or to hear how to best manage your sales compensation plans.