Let the Good Compensation Times Roll

By Heather Baldwin

If you had to pick a theme song for this year’s sales compensation plan, what would you choose? If yours is like most organizations, songs like “Let the Good Times Roll” and “The Future’s So Bright I Gotta Wear Shades” would come to mind. That’s because sales management is planning an average 6.6 percent increase in pay for the primary sales job in 2006, according to the 2006 Sales Compensation Trends Survey, an annual examination of pay trends by The Alexander Group.

“The poor sales results of 2002 and 2003 have been long forgotten by most sales departments,” observes survey editor David Cichelli, senior vice president of The Alexander Group (www.alexandergroupinc.com). Optimism abounds: the 280 major sales organizations that participated in the survey expect average revenue growth of 14.3 percent; 59 percent of companies expect head count growth in the sales department this year; and 74 percent of the respondents expect more than half of their sales personnel to reach or exceed quota in 2006.

Not surprisingly, 95 percent of companies will make some type of change to the sales compensation program this year, be it a minor tweak or major overhaul. For the primary sales job, the most common changes, in order of prevalence, will be to change: (1) performance measures, (2) pay mix, and (3) ramps/accelerators. “If you don’t change your compensation plan this year, you’re unusual; you might be running a museum,” Cichelli warns. Compensation plans must be continually adjusted to reflect changes in the market, in customer buying habits and in a company’s products.

One of the study’s more interesting findings, says Cichelli, is that 34 percent of companies use some type of pay cap to “manage” a sales rep’s pay within a target range. This practice is counterproductive to encouraging increased effort. The last thing you want to do, he says, is put a cap on the earnings of people who have the ability to persuade customers to buy.

So why do a third of companies cap compensation? Typically it happens for one of three reasons: (1) the sales job is more about service than persuasion; (2) the company can’t effectively manage its quotas; or (3) the organization is plagued with large, mega-orders and doesn’t know how to quota them. In other words, caps are often the result of a company not being able to manage its compensation plan.

Cichelli’s message to sales leaders: if you cap pay and your sales reps are responsible for persuading customers to buy, you need to take a hard look at your compensation plan. It may need an overhaul. You should also take a look at the entire sales organization. “The compensation program is an early warning device,” he explains. “If it is starting to have problems, it could be an indicator that the structure of the sales organization is becoming obsolete.”

For more information about the survey and for a free copy of the Executive Summary, visit www.compensatingthesalesforce.com.