There are three income statement lines affected by improved sales compensation plans:
- Revenue – total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, etc.).
- Margin – by focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.
- Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down by paying less to sales people for the same productivity. More often costs are managed down by expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.
The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing the plans, what benefit you expect to gain. Ideally, substantial changes in sales focus that yield business results are the result of a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes in the sales job will be successful without support from the sales compensation plans. So the ROI is usually best calculated based on the overall change initiative of which sales compensation is a part.
We have two sales VPs with remarkably different team revenue quotas. One at $12MM/yr, the other at $20MM. To date we have targeted the same variable comp for each in part because it was competitive but also necessary to recruit the one with the $12MM quota . Should the VP with the higher quota have a higher target incentive?
When it comes to sales leadership roles, there is oftentimes dramatic variability in quota sizes without significant variability in compensation levels. While it may take more effort and skill to manage a larger quota, it’s also the case that in sales leadership lower quotas are often associated with market development and team construction requirements, which may actually take skills and initiative not required in the ongoing management of a well-penetrated region. One useful “test” here is to ask if the people were switched, would the quota change. Consider these questions:
- If Mr. $20M were to be assigned Ms. $12M’s team, would the $12M go up?
- Is Ms. $12M capable of doing Mr. $20M’s job?
- Does one of these jobs take more Skill, Experience, Leadership ability (SEL) than the other?
- Are these two people in different levels of leadership, or are there just different expectations based on what is expected from their sales team’s specific assignment?
If it’s the assignment, then there’s a strong argument to keep the target incentive the same. If it’s different levels of leadership, then both base and target incentive should likely be higher for Mr. $20M.
Avoid the use of a true commission for sales leaders.
Regardless of your answers above, I would caution you against proceeding with any kind of commission concept for a sales leader. If you step away from market-based comp, you’re on a path to serious comp excess if/when the business scales. I could tell you stories of VPs of Sales earning $1.2M at target in $1B divisions of $15B companies that should know better. Then when they inevitably have to unwind it because market comp is $500k or so, it’s a real disaster for the sales leader, the sales team and the business.
Increase base to recognize superior persistent attributes IN the same job. Increase the base pay range, base pay and target incentive to recognize a higher level of the leader job. But stay away from any kind of % of sales concept for sales leaders.
After the incentive plans for sales representatives are completed and modeled, the next step in a plan design project is to develop plans for the front-line Sales Managers. Companies generally take one of three approaches based on their pay philosophy.
The first approach identifies Sales Managers as members of the company’s management team and should be on the same management incentive plan as other managers in their pay grade. This usually means that some portion (typically 70%) is based on one or two financial measures at the region/area/sales channel level with the remainder based personal objectives (which are also used to determine merit pay increases). At times one of the measures are as high as the total company level; however, these are less effective since measurement at that level is so far from the line of sight of the managers that there is the perception that there is little, if any, alignment to everyday sales management activity.
The second approach sees Sales Managers as team leaders and therefore they should have their incentive pay directly linked to the performance of their team of sales representatives. In this approach, one or two of the key components of the sales representatives’ plan become the measures for the managers. Focus is on outcomes (e.g., new revenue, revenue growth, profit) not on sales activities (e.g., sales calls, closed leads). Activity measurement is best for the annual performance appraisal for the managers’ merit pay increase. The performance measurement for this approach is typically quarterly when the sales representatives are on monthly plans or aligned when both are on quarterly plans (with in some cases of an annual component in some cases for one of the measures).
The third approach is a mixture of the two, for example, 70% weight on team performance and 30% on financials. This sends the message that the primary responsibility is meeting the sales goals that support the Company’s financial metrics. The company stresses the importance of the sales representatives meeting or exceeding goals while also recognizing Sales Managers’ status are members of the management team. In this case as well, other performance measures are used for merit pay increases.