Variable compensation programs are an essential tool for managing sales organizations and rewarding great sales rep performance. But variable compensation—when done correctly—is inherently complicated, and there sometimes can be a disconnect between the way compensation is assigned and the “rules” that reps must follow to earn their variable compensation. For example, many organizations use multiple metrics to evaluate sales rep performance, but their variable compensation plan might use outdated technology that doesn’t reflect the full complexity of the sales reps’ work. As a result, reps start to become disengaged and frustrated when their pay doesn’t accurately reflect their achievements, or when their pay is based on different metrics than they expected.
According to a recent report from CSO Insights and Anaplan, 52.6 percent of sales organizations reported that variable pay makes up more than 40 percent of a salesperson’s annual compensation package. With almost half of sales reps’ paychecks made up of variable pay, many organizations find themselves at risk of a disconnect between the metrics of their variable compensation plan and the way their plan actually rewards effort. Instead of using variable compensation to motivate sales reps at a higher level, these sales organizations tend to underperform because they have not fully aligned their compensation with the activities and metrics that they want to encourage.
Here are a few key insights from the report which can help sales organizations better align their variable compensation plans to enhance overall sales effectiveness.
Consider using more sales metrics
The CSO Insights survey found that 30.7 percent of sales organizations used only one or two metrics to assess variable compensation, while only 17.1 percent used five or more metrics. At the same time, only 25 percent of sales organizations said they are successful at engaging 90 percent or more of their sales force. Overly simplistic variable compensation programs—which do not account for all sales activities and goals that sales reps are asked to achieve—are often the cause for this lack of motivation.
When developing your variable compensation plan, be sure to consider all the activities and metrics you want your sales team to focus on—not just simple ones like total sales or revenue growth. Of course, driving revenue is important, but there are often more nuanced goals that contribute to that top line number. Make sure your variable compensation reflects the full complexity of what you expect your sales reps to deliver.
Complicated sales goals cause a disconnect
Alternatively, many sales leaders set complex goals for their teams—which is understandable, because sales teams have multiple objectives in addition to “increase revenue.” For example, the CSO Insights survey found that sale leaders’ top two sales objectives were “capture new accounts” (58.4 percent) and “increase sales effectiveness” (40.2 percent). Both these goals are highly important, but they are accomplished by different means.
The activities needed to win new accounts are often different from the activities needed to improve other aspects of the sales team’s effectiveness, such as lead generation or boosting customer loyalty. And if your variable compensation plan is not fully aligned with your team’s complex sales objectives, you might unintentionally cause frustration by creating a disconnect between what you say you want your sales team to do, and what you actually pay them to do.
Striking a balance between new accounts and returning revenue
Another challenge many variable compensation programs do not fully address is striking the right balance between finding new customers and the ongoing engagement of current customers. A sales team might be asked to bring in new customers as well as grow the revenue of the current customer-base, but these activities take much different levels of effort and strategy, so compensation must reflect this. Companies can often drive revenue more quickly by upselling or cross-selling existing customers, so if sales reps are not properly compensated for their effort in finding new accounts, you may see a decrease in newly acquired customers.
Consider executives’ vision and goals—is it to break into a new market or industry? Or is it to expand current accounts to create a strong fundamental customer base? Unless your variable compensation program is aligned appropriately with the business’s top strategic objectives, you run the risk of motivating the wrong sales activities.
Unless your organization’s variable compensation plan fully accounts for all the team goals and individual activities needed to improve sales effectiveness, your variable compensation program might be working at cross-purposes with your organization’s overall business strategy — and you might lose good sales people along the way.
Getting variable compensation right requires a clear strategy to ensure you aren’t oversimplifying or overcomplicating the compensation variables. Finding the sweet spot can be accomplished with better technology as discussed in a recent blog–then creating a plan that ensures your reps are paid based on their ability to deliver the right results for your organization.
Learn more about how to align your variable compensation with your sales organization’s most important sales goals by reading the white paper from CSO Insights.