How HR Can Make Sales Compensation Work for Small Firms

HR professionals at small businesses can play a decisive role in ensuring that sales force incentives achieve their aim.

When preparing to put a sales compensation plan in place, "HR people can make a difference by gathering and analyzing information and getting the right team together," said Donya Rose, leader for sales compensation plan design practice at Xactly Corp., an incentive pay consultancy based in San Jose, Calif.

First up, determine whether an incentive-based sales plan makes sense for the organization. "Sales incentive plans cost more to design, communicate and administer than broad-based employee pay plans. They should be used only when conditions are right to create value for the company," Rose said during a presentation at WorldatWork's 2017 Total Rewards Conference in Washington, D.C, where she addressed pay strategies for sales forces with fewer than 100 members.

Sales incentive compensation creates the most value when direct influence over customers' buying decisions is a key part of the sales role, she noted. Within the organization, the productivity of individuals or small sales teams should be:

• Reliably measurable.
  
• Directly linked to financial results for the company.
  

"Delivering sales results should be so important [to the organization] that you are willing to pay incentives to those who produce, even in a year in which the company misses its goals," she said.

The organization should have—and want—people in sales roles who:

• Have a tolerance for personal risk.
  
• Are willing to bet on their own ability to be productive.
  
• Are excited by the idea of handsome rewards for outstanding performance.
  

[SHRM members-only toolkit: Designing Compensation Systems for Sales Professionals]

Establishing Performance Standards

Even when working with outside consultants to put a sales compensation plan in place, HR can play a leading role in devising the sales team's pay structure by establishing goal metrics and target thresholds that are appropriate for the organization, Rose said. Productivity and compensation expectations should be established for each sales role, "accepting that they will change from year to year, and that they may vary somewhat by person."

"Role prominence" is a key factor to consider in determining the appropriate mix of base pay and incentive compensation such as commissions and bonuses. "Prominence is a measure of the degree to which the customer's decision to buy is influenced by the individual seller," Rose noted. When sales reps have high prominence, a greater percentage of their pay should be incentive-based.

Indications of high prominence include a salesperson's initiative and creativity, selling skill, and ability to develop his or her own customer network.

Signs that the sales role has lower prominence: when sales results are achieved through a strong brand image or competitive pricing.

Other factors that affect the pay mix decision would be:

• Long sales cycles that don't allow putting significant pay at risk, especially when longer than 9 to 12 months.
  
  
• Highly specialized and valued skills in the seller, which may command a high base salary in the labor market and limit what can be offered through incentive pay.
  
  
• Startup situations, where guaranteed pay may be appropriate as the company (or salesperson) ramps up to expected sales levels.
  

Keeping Plans on Track

"HR can play a vital role in communicating the new plan and should be prepared to track, report and administer the plan as well," Rose said.

After a plan is in place, "what's needed is testing and modeling for the effects on individuals and on the company's financials overall," she noted. "While the plan is measuring your salespeople, you need to measure the effectiveness of the plan."

Ideally, this should be done more frequently than just once a year; "preferably quarterly at least, to check if you're getting the results you intended," she advised.

Among the plan factors to review:

Motivation:

• Do salespeople understand their plans?
  
• Do they see them as fair?
  
• What do they say the plans drive them to do? Is this what you want them doing?
  

Individual Performance:

• Are at least 50 percent of your salespeople at or above target performance and compensation levels?
  
• Are a few people (about 10 percent) earning the fully leveraged incentive or more, and are these the most productive salespeople?
  
• Are fewer than 5 percent earning no incentive?
  

Plan Objectives:

• Are you achieving the results you set out to achieve?
  
• Are you attracting and retaining the sales talent you need?
  
• Have sales roles or key accountabilities changed enough that you need to revise individual compensation plans?
  

Disgruntled Sales Forces

Another view of sales force challenges shows that only 6 percent of salespeople feel "extremely satisfied" with their compensation plans.

A 2017 Sales Compensation Study by Peak Sales Recruiting, a pay consultancy headquartered in New York City, is based on responses from 600 salespeople with at least two years of sales experience. When asked how they prefer their compensation to be split between guaranteed base pay and incentive payments, the survey showed that:

• The split with the highest satisfaction (36 percent) is 60 percent base and 40 percent commission.
  
  
• The split with the lowest satisfaction is 0 percent base and 100 percent commission.
  
  
• Compensation plans with uncapped commissions were correlated with higher levels of satisfaction (33 percent) versus capped commissions (14 percent).
  

Respondents were asked what could be done to improve satisfaction of their current compensation plan. The five most frequent answers were for plans to:

• Be fair and achievable.
  
• Be easy to understand.
  
• Offer more bonuses.
  
• Make timely payments.
  
• Include higher base pay.
  

Participants also were asked to rate their overall satisfaction of their current sales compensation plan. A plurality (44 percent) were "somewhat satisfied" with their compensation plan, while 24 percent were "very satisfied" but just 6 percent were "extremely satisfied." That left 26 percent who were slightly or not at all satisfied.

Top performers (those who achieved 100 percent or more of their quota the previous year) indicated similar levels of satisfaction—30 percent very or extremely satisfied, 45 percent somewhat satisfied, and 25 percent dissatisfied.

"Developing a winning sales compensation plan is critical to attract and retain top talent and is among the most difficult tasks business leaders face," said Eliot Burdett, CEO of Peak Sales Recruiting. "If a salesperson doesn't see opportunities for increased bonuses, promotions or raises after being successful year-after-year, then they are likely to move on to a company that can offer a better compensation plan with more room for growth."

His advice: Offer a plan that pays at or above market compensation and is simple, clear and timely.

"Top-tier talent only works for above-average compensation that matches their skill set, experience level and selling potential," Burdett said. "When targeting these salespeople, executives need to offer premium compensation with simple-to-calculate commissions that have an immediate impact on their income."

Related SHRM Articles:

Keep It Simple for Sales Compensation Success, SHRM Online Compensation, November 2016

Keeping Sales Compensation on the Rails, SHRM Online Compensation, June 2015

Sales Compensation Plans Can Cultivate Growth, SHRM Online Compensation, June 2011

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