Five Steps to a Winning Compensation Plan

By Heather Baldwin

If you think selling is tough, try putting together a sales compensation plan. You practically need a degree in statistics to understand all the variables – and even then an effective plan that drives performance at all levels without draining profits can be elusive. Bob Davenport, vice president, sales force effectiveness practice at Hay Group (www.haygroup.com), has designed incentive plans for more than 140 companies over the past two decades. He says sales managers must do five things to ensure their compensation plans are built for performance.

1. Get out of the office. Get out and talk to reps, the CFO and the CEO. A lot of sales managers think they have all the answers, says Davenport, but “you don’t always know. You have to find out what reps are thinking, whether they’re motivated by the plan and what they want.” It’s a good idea to do an objective survey of your reps that asks how they make money and what are the best and worst things about the compensation plan. Also talk to the CFO, who will have some good insights about what should be driving company profits and how the sales plan relates. Ensure that the CEO is in full agreement with the plan’s structure by setting up a meeting and talking through ideas. It all starts with leadership, says Davenport. The CEO has to support what the sales organization is doing and communicate that support to the team.

2. Do an ROI analysis. Do you really know what the performance you’re getting is costing you? Many managers don’t. To figure it out, create a chart where the X axis shows your key performance objectives (revenue or profit) and the Y axis shows how much you are paying the sales force for each of those objectives. Look at the threshold, target and outstanding performance levels to see what you’re paying versus what you’re getting in return – or how much differentiation there is in pay versus performance. The other question to ask yourself is whether you are truly rewarding people who are delivering substantial results. A good rule of thumb, says Davenport, is that an outstanding performer should be earning twice as much as an average performer. (See sidebar.)

3. Validate the motivation in your payout curve. You need to ensure there’s motivation at each step on the way toward and beyond quota. A common decision faced by reps who have reached quota is whether it’s worth it to keep going and selling more. Yet above quota is where organizations can make a lot of money, so the rewards for rocketing past quota figures should be significant. Chart your compensation plan and take a hard look at the entire pathway from 0% of quota to 150% and beyond. Are there adequate incentives to keep selling above 90% of quota? Above 95%? Above 100%?

4. Find out why your top reps left last year. You’ll need to hire someone outside your company to do this because ex-employees usually won’t tell you the real reason they left. But here’s why it’s important: In general, the most common reason employees leave their job is their boss. The number one reason top-performing sales reps leave their jobs, however, is the pay plan. If that’s the case, figure out what they didn’t like and fix it.

5. Challenge existing wisdom. Take a hard look at your compensation plan and question everything about it. “Sit down and look at all your assumptions. Look at the distribution of performance by rep, by territory size, by experience and so on. What is the performance data telling you?” asks Davenport. “Do people in small territories always go over quota while people in big territories never go over quota? That type of analysis is critical.” It’s easy to get lulled into using the same compensation plan year after year because that’s the way it’s always been done, but you might find the data show your assumptions aren’t working.