Companies with sales compensation systems that go off the rails and reward salespeople for bad behavior grab headlines, as Wells Fargo did. But what about the more common problem of sales compensation and incentive programs that are simply out-of-date, poorly designed and not monitored closely enough?
Such pay systems do not necessarily result in bad publicity. Instead, these systems can lead the sales force to underperform and hamper an organization's growth and profitability.
In some cases, sales compensation systems become ineffective because they are not rewarding the right results. For example, if a company wants the sales force to bring in new or larger clients, then it should pay a premium for signing those clients, said Kristie Jones, principal with consulting firm Sales Acceleration Group in St. Louis. And "if they want to do a better job at retaining clients, then that should be the variable compensation focus" and they should pay bonuses for keeping clients happy.
Learn How Problems Start
Problems with sales compensation can begin during plan design and rollout. Or they can take hold over time if the compensation plan is not updated and refreshed as strategic goals and priorities change.
Even a carefully crafted compensation plan won't be effective if the design rollout is not backed up by appropriate sales goals and adequate time to communicate the plan to the sales force. "That increases the risk that something could go wrong," said Shawn Rossi, a partner with consulting firm Mercer based in Atlanta.
And sometimes, sales compensation managers are not doing enough to reward and motivate the sales force. Make sure to "take an open-ended approach and try to reward every dollar brought in," urged Henning Schwinum, co-founder of Vendux, a fractional sales leadership company based in Kansas City, Mo. "Otherwise, you risk having salespeople who are not selling as aggressively" as they should.
He also recommended that companies focus on what makes salespeople unique and find ways to reward that. "It's all about instant gratification with sales teams, who are competitive by nature, always looking for the next thing," Schwinum said.
'It's all about instant gratification with sales teams, who are competitive by nature, always looking for the next thing.'
— Henning Schwinum, co-founder of Vendux
"Rewarding them monthly or quarterly, instead of at the end of the year, is a way to keep them intrigued and engaged," he added.
Keep an eye on the appropriateness of sales goals and the mix of pay. Individual sales goals that are too high or plan designs that offer a low base pay/high variable pay mix can both lead to trouble. "With more money at risk, the greater the chance of aberrant behavior," Rossi said. "This is particularly true when sales is very transactional," such as in a retail or financial services environment, rather than focused on building long-term relationships.
One of the keys to making sure sales compensation is aligned with company strategy while also motivating the sales force is frequent monitoring. Depending on the type of business involved, the length of the sales cycle and the size of the sales pipeline, assessing the effectiveness of the sales compensation plan quarterly, or even monthly, can help make sure it stays on the right track.
In general, the shorter the sales cycle, the more frequent the compensation review cycle should be. By catching problems early—such as pay practices that create incentives for unethical sales practices—and addressing them quickly, flawed pay designs have less opportunity to damage sales force effectiveness, employee motivation or customer relationships.
While evaluating how well the sales organization is working, executives can also be on the lookout for any signs of problems. "Red flags include things like drops in performance, poor lead quality and a deeply unhappy sales team," Schwinum said.
Other data points to review include whether total compensation costs are aligned with sales targets. If costs are well above or well below target levels, that can indicate a problem. It is also important to determine if turnover is higher than expected—and, if so, what departing salespeople are telling the company during exit interviews.
[SHRM members-only toolkit: Designing Compensation Systems for Sales Professionals]
Ongoing monitoring requires technology. "The reports and dashboards in the customer relationship management system should be set up to identify which [sales] behaviors are ending in positive results and which ones aren't," Jones said. For example, reporting should be set up to monitor the "health" of each salesperson's pipeline in terms of current and long-term quota levels. When salespeople are not on target to meet a quota, they should understand the extent that they'll need to step up their game going forward—and, if possible, offered help to do so.
Jones also recommended that companies monitor outbound sales activities, including daily reviews of customer and prospect calls, e-mails, and scheduled meetings, as well as reviews of revenue versus goal data at least monthly.
"Each sales leader should have leading indicators to determine if each sales rep and the whole team are on track," she said. This can include the number of discovery appointments set each week, number of new deals added to the pipeline each month, average sales amount and close rate.
Watch the Big Picture
While sales compensation is an important driver of results, it is not always at the heart of disappointing sales force results. "It could be poor training, lack of motivation, a bad product; there are lots of reasons why sales reps may be missing quota," Jones said.
Employers should make sure all aspects of sales are working as intended, even as they review and update sales compensation programs.
Related SHRM Articles:
Regulator Criticizes Wells Fargo’s HR in Wake of Phony Accounts, SHRM Online, December 2019
Paved with Good Intentions: How Employee Incentives Can Go Awry, SHRM Online, February 2018
Addressing Pay Challenges for Inside Sales Teams, SHRM Online, March 2015