The Complication of Compensation

By Malcolm Fleschner

On paper, creating effective sales incentive and compensation plans sounds simple enough. Just put enough financial carrots out there and salespeople will race after them, right? Not exactly. As anyone who’s had to design a sales compensation plan knows, the competing interests of salespeople, customers, the sales organization and the larger corporate agenda rarely align perfectly. As the editors at point out, it can be challenging to create sales compensation strategies that keep salespeople motivated, address customer needs and still support corporate goals. But it’s not impossible. They suggest the following five-point strategy.

1. You get what you pay for. If a company wants its salespeople to actively promote new products, but the sales incentives skew toward existing product lines, which do you think sales reps are going to focus their attention on? When designing comp plans, companies first need to determine what activities drive the business strategy and flow to the bottom line. Then the incentives need to be attached specifically to the most important activities.

2. Consider niche motivations. Today’s sales environments are notoriously complex, with salespeople’s responsibilities ranging widely depending on the customer, the product and the stage in the sales cycle. In these cases a one-size-fits-all incentive approach simply will not work. Salespeople need to be compensated specifically for the job they’re expected to do.

As an example, the article describes a program run by Hologic, a medical imaging company with products that often sell for more than $500,000. Fully 25% of Hologic’s revenue comes from the service side of the business, however. In recognition of this fact, Hologic created different reward structures for the front-line salespeople and field engineers. While the front-line reps are compensated for the original sales, field engineers have a separate plan that rewards them for selling extended contracts, cross-selling and upselling.

In the past, Hologic saw many of its service opportunities slip through the cracks. With the new reward strategy, as well as a software solution that notifies field engineers two months before a customer’s warranty expires, the company has dramatically improved its performance by renewing contracts faster and more frequently.

3. Keep reps informed. Salespeople like to track what’s owed them and when, yet many companies still calculate compensation using homegrown systems that provide little visibility to sales reps. As a result, many reps try to calculate their expected pay by themselves, which winds up being a drag on productivity.

Salespeople also aren’t accountants, and as a result they frequently miscalculate what their compensation will be. Then, when they receive less than they’ve anticipated, resentment and frustration grow.

One solution to this problem is to adopt an incentive compensation management (ICM) software solution, such as TrueComp from Callidus. ICM systems help management provide up-to-date Web-based payment reports, deliver compensation promptly and give sales team members a transparent view into their own performance and what they can expect to receive in return.

4. Keep it simple. As your business strategy changes, so should your compensation plan. The more complex the plan, the more difficult it will be to adapt to changing market forces. Instead, keep performance metrics down to three or fewer and make them simple for salespeople to understand.

What should the metrics be? To find out, talk to senior management about expected sales objectives and to sales personnel about possible improvements to the current system. Then design goals that at least half the salespeople should be able to reach and 15% will exceed.

5. Don’t rush preparations. Don’t expect your new comp plan to be an overnight success. Large organizations should take four or five months before fully implementing a new plan. Smaller sales teams of 10 to 50 reps may be able to do it in two months while organizations with fewer than 10 reps can get a redesign done in a month or less. But when it comes to a new compensation strategy, patience is a virtue. Give it time to show results. Besides, as soon as you’re sure the comp plan is working properly, it probably will be time to begin the redesign process all over again.