It’s about this time of the year that many companies are just finally releasing the current year compensation plan to the sales organization. Yes, you heard that right – the comp plan for the current year is being sent to sales almost 3 months late! That’s not motivating! It’s amazing to me, but this happens much more than you would think, and I’ve been observing this phenomenon for years. I work with my clients to help them build the sales culture, and one component of that is making sure that salespeople know how they are getting paid. Seriously – would you work for a period of time not knowing how you were paid, measured, or evaluated? Common sense needs to rule here.
Therefore, here are my 10 simple principles to creating a successful compensation plan:
- Create sales culture behaviors. The wrong compensation plan will create a silo where the sales team is set apart from the rest of the company. The right compensation plan does not reinforce “me” behaviors.
- Make sure the compensation plan is written and approved by November 15. This is a very reasonable target date and one that allows for the necessary reviews and adjustments. In fact, the framework for the plan needs to be a continuous discussion throughout the year. If the plan is well written, there is no need to do a complete rewrite once a year. Launch the plan by December 30, and get ready to start the year with the sales team ready to sell!
- Keep it simple. Simplicity is success. There is no reason a compensation plan needs to be more than one page, two at most. I have seen plans range from one to 55 pages! If the reps cannot calculate how they are going to get paid, the plan is a failure.
- Make the plan modular and scalable. Comp plans should be able to be adjusted, not gutted as the company’s needs change. It should be written in a way that allows for addition and subtraction of elements and percentages as things change.
- Include multiple components. I like comp plans that include a few different pieces, such as salary, variable compensation (VC, aka commission), and perhaps a bonus structure or end-of-year bonus. All of these components are based on achieving certain goals that drive the company’s needs. Adding in a management by objective (MBO) for personal development is always a way to drive the salesperson to see that the company has a desire to keep and develop its people.
- Recognize that compensation plan development is not a democratic process. In other words, I have seen a few too many sales leaders use the sales team as an “approving body.” I think that asking a selection of respected and successful members of the sales team for input and to review the plan as it is being developed is a smart thing to do. Having the sales team believe they have approval and veto power is an unhappy and unhealthy place to be.
- Include an income calculator. The first thing salespeople will do is to take the plan and figure out how they will make money. Make that process easy – create a simple one-page Excel-based calculator that will let the team plug in the numbers and estimate on how they will do – and what they have to do to exceed the goals.
- Align, align, and align. Perhaps the most challenging part is to make sure that the comp plan actually drives and rewards the results and behaviors that are synonymous with success. A very common mistake is creating a plan whose connection isn’t clear to the sales team.
- Benchmark. Your comp plan should reflect some element of benchmarking for your industry. What others are doing is not hard to find out. Don’t develop it in a vacuum.
- “They make how much?” If the senior leadership of the company rejects the comp plan because salespeople might make more than they do, then they don’t get it. As a sales leader, I was always thrilled to write BIG commission checks. This usually meant everyone was doing well. Yes, there are exceptions, and in the case where someone is over-earning and not driving the company objectives – then if the plan is modular, it can be adjusted.
Finally, the big key to making the compensation plan work is to have a steady and credible method of communication to the field. Comp plans that are a total surprise and a departure stand a pretty good chance of failing. Make sure that as you are developing your plan during the year that you are simultaneously talking with everyone involved about what you are thinking and what your direction will be. I have one client where we prepped the sales team for 6 months before launch that we would be adding a new business element to the plan. This gave us time to assimilate the idea and provide for training and development to meet the reps’ needs. Don’t forget to ask the salespeople what they think of the current plan. Remember that one reason that comp plans fail is that they are not understood, which leads to frustration and finally sales paralysis. You can avoid this by following the steps above and communicating the entire time.
I think number 10 is most often a problem because leadership has not done its homework on 1-9, especially 1 and 8. If the plan rewards the correct behaviors, they should enjoy writing the big check.
Marco-
Excellent points! Being shortsighted limits profits and sales.
As is so often the case, many of these points could be made about objectives in general, not just the sales force comp plan. Annual objectives are often not set until February/March and end of the year accomplishments are often required before the end of October. Translates to a commitment of ~ 7 months with the rest in limbo which doesn’t make much sense. The whole concept of year-to-year may be wrong as it tends to encourage a start/stop cycle which isn’t consistent with steady performance.
One additional note on the personal objective – I have come to realize the value of networking and leadership activities outside of work. While there’s nothing wrong with personal objectives such as an advanced degree, Six Sigma certification, etc, there may be more value to the company and the employee if the personal objective involves external leadership activities (or relevant roles dependent on the employee’s role in their company).
Thanks Ed! A great perspective..