Don’t Tweak Your Compensation Plan

By Lain Ehmann

Ninety percent of sales compensation plans are changed every year, according to David Cichelli, author of Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans (McGraw-Hill, 2004). Cichelli, senior vice president of the Alexander Group in Irvine, CA, says that while change isn’t necessarily a bad thing, tweaking or changing individual components without examining the overall pay program could indicate that you’re moving in the wrong direction.

When a company says its plan isn’t working, what they mean is the organization isn’t hitting its objectives, isn’t growing at the targeted rate, isn’t selling the desired mix of products or isn’t selling profitably, says Cichelli. The managerial team then looks at the compensation program, hoping to solve the company’s problems by paying people to do more or different activities. But this approach expects the compensation plan to set the pace for corporate change, which is too much to expect. Instead, says Cichelli, “The pay system is a caboose, not an engine. It follows the strategic plan of management.”

A good pay program, according to Cichelli’s tips for compensation plans has the following characteristics.

Focuses on objectives. The compensation plan, particularly in more mature companies, is looked at as a way to accomplish various business objectives, many of which are not directly sales-related, says Cichelli. “As a result, the compensation program becomes overburdened,” he says. The solution is to focus in on what you’re trying to accomplish. “The definition of focus,” Cichelli says, “includes knowing what not to do.”

Incorporates only key measures. One common tweak to the pay plan is to measure and compensate on more factors, says Cichelli. “But the compensation plan starts to lose its utility when you start to increase the number of measures,” he explains. He recommends that no more than three measures be incorporated into a compensation plan.

Uses effective job designs. If management thinks the compensation plan isn’t working, they often start fiddling with the formula, hoping a change will fix the problem. But not all compensation plan problems are formula problems, says Cichelli, noting that more often problems are related to job design. Effective sales job designs aren’t blended or corrupted with nonsales tasks, even administrative ones such as CRM data entry. “The more you add to the sales job, the more difficult it is for the incumbent to solve it,” he says. And the more nonsales tasks that are added, the more time your team members will spend away from revenue-generating activities.

While Cichelli doesn’t say companies shouldn’t change their compensation plans, he does encourage them to make changes that are more than skin-deep. He explains, “Change is good, but alignment and focus are preferred.”

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