Updating a Compensation Plan
/A reader writes, "I inherited the current sales compensation plan from my predecessor. With a lot going on, I made the decision to live with it for one year. Now I'd like to make some changes. What time of year is best to get started on a project like this? What constitutes a good comp plan?"
Your question is well timed - October being the month when many businesses start revamping or making changes to their sales compensation plans.
To answer your question, I spoke with Robert Blohm, Senior Vice President Sales and Alliances with OpenSymmetry, a consulting company that specializes in the planning, implementation, and management of SPM (Sales Performance Management) solutions.
What constitutes a good comp plan?
Rob: "A good sales compensation plan includes some basic tenets... it aligns with the overall sales strategy, and the job / role it is supporting. It is easy to understand. While there are many layers to each of these tenets, they are good reference points when evaluating your plan or creating a new one."
How often should comp plans be revisited?
Rob: "Sales compensation plans should be assessed for their effectiveness and overall alignment with the jobs and sales strategy on an annual basis. The basic structure of a sales plan designs usually has a shelf life of 3 to 4 years. But some key parameters will likely need adjustment each year, things like an acceleration rate or the weight distribution between incentive components. While you may not need to build new plans every year, companies need to continually assess and ensure the plans align with the company's goals."
When should companies start working on their comp plan?
Rob: "A normal timeline for assessing, developing and testing new sales compensation plans is largely going to be determined by the size of the organization, number of roles, complexity of the plans, and degree of change required. That said, a normal timeline for a smaller company may be 4 to 6 weeks to get through these steps while a larger more complex organization would need 3 to 4 months.
"Work out a project plan that allows for assessment, development, testing, and preparation of communication materials to determine when the project should start. Keep in mind that this timeline does not account for implementation of the new plan in your current administration process / technology."
What's the best time to announce the new comp plan?
Rob: "Best practices for communicating sales compensation plans to the sales force would be soon after the close of the prior sales year. By waiting until you have closed the prior year you keep reps from delaying deals to the new year (if they think they can make more by doing so), and it keeps the sales team focused on closing out the year, holding the distraction and excitement of next year's plan details until the start of that plan year."
How does a company assess whether or not their comp plan is working?
Rob: "There are a number of factors that could be considered when looking at the health of a sales plan. We will most often look at the plans through two dimensions:
Qualitative: this is an opportunity to evaluate the plans as they are written to find out how well they align with the goals and expectations the company has of the jobs they are assigned. Through executive management, payee interviews and focus groups you can gauge how well the plans are aligning with the company's sales strategy.
Quantitative: this would be a deep dive into the pay and performance data to find out how well the plans are driving sales and delivering on the original business expectations. Looking at performance distributions, performance analysis and other metrics, you can start analyzing the data in a way that will show where the gaps in the current plans may lie."
What mistakes do companies typically make?
Rob: "One of the more common mistakes associated with sales compensation plans relates to over-complicating them. Studies have shown that three metrics is the optimal number (this is a general finding). When we come across what we affectionately call the "kitchen sink plan" where they have 7 or 8 metrics... this creates a situation where the rep will most often just focus on the one or two metrics where they think they can make the most money."
Any additional thoughts?
Rob: "I would strongly recommend anyone who is interested in learning about sales compensation best practices look into the wealth of information provided by consultants and / or bring a consultant in to discuss your situation. Many consultants will happily provide an hour or two of their time to discuss your situation and provide some basic feedback. It is a great way to test the waters to find out if there is value in getting outside help or if you can manage on your own."
There are a number of books that focus on sales compensation plan design.
"Compensating the Sales Force: A Practical Guide to Designing Winning Sales Reward Programs" by David J. Cichelli
"What Your CEO Needs to Know About Sales Compensation: Connecting the Corner Office to the Front Line" by Mark Donnolo
