Keeping Sales Compensation on the Rails

Managing this tension between individual goals and broad corporate objectives requires vigilance

By Joanne Sammer Jun 1, 2015
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Anyone who has heard stories about incentives “gone bad” knows how important it is to keep sales compensation programs on track. After all, few categories of employees are as motivated by incentives as salespeople. When these compensation programs go wrong, the consequences—like allowing some to ‘game the system’ to maximize payouts, or unintentionally rewarding the wrong results and behaviors—can be damaging.

If there’s one most important message to take away, it is the importance of keeping sales compensation fresh and current, with incentives that motivate salespeople to take action by closing sales and generating revenue for the company.

“Sales compensation is a means to an end,” said Mike D’Amico, HR practice leader with sales compensation consultants Stratford Managers Corp. in Ottawa, Canada. That end is to achieve specific business goals and objectives. Therefore, it is crucial for companies to ensure that their sales compensation programs are working as intended. Here are some steps companies can take to keep sales compensation programs on track.

Be Flexible

Sales compensation programs are not set in stone. As the business, marketplace and company objectives change, sales compensation needs to be modified to stay current. This type of flexibility is particularly important for a growing company.

For instance, New York-based Mojo Motors, an online used car marketplace, keeps a close eye on its sales compensation as it navigates its own growth and the challenges that come from operating in both new and changing markets. “We take a good look at the sales compensation program twice a year to see if any changes are necessary,” said Nick Frank, the company’s vice president of sales.

In the last two years, the company has changed its sales compensation program three times is response to the company’s expansion and changes to existing markets. For example, the company has adjusted guaranteed compensation levels when salespeople have not hit targets because of factors outside their control, such as the time required to ramp up sales in new markets. “We want them to be on board for the long-term and make sure that they are patient, given the challenges we face when entering a new market,” Frank said.

Keep Goals Aligned

A key element of successful sales compensation is a clear line of sight between a salesperson’s actions and results, and their payouts. However, sales compensation plans that are focused on achieving enterprise-wide results can lose that link to individual salespeople. “Companies that ‘get it’ when it comes to sales compensation understand that they need to set individual goals that align day-to-day actions with company-wide results,” said D’Amico. “These goals have enough substance behind them to drive individual behaviors to achieve those goals.”

Managing this tension between individual goals and the need to achieve broad corporate objectives requires constant vigilance. “Do goals still support corporate objectives?” asked D’Amico. “If the strategy is to push new products but sales compensation doesn’t reward that behavior, those individual and corporate goals conflict and companies won’t achieve results they are looking for.”

By revisiting the program at least annually, companies can evaluate whether it is delivering. Start by asking if the program still is:

Supporting top performers adequately?

Delivering expected results?

It is very easy to get unintended consequences, for example, if the program inadvertently creates incentives for salespeople to push revenue to next quarter to get more money out of the plan.

Monitor Results

Monitoring the effectiveness of sales compensation programs is an ongoing process. Don’t wait until the chief financial officer sees higher-than-expected sales compensation payouts or HR notices a jump in attrition among salespeople. “These are all lagging indicators,” said Chad Albrecht, a principal with sales compensation consulting firm ZS Associates in Evanston, Ill.

Instead, developing a dashboard of metrics can help a company to monitor its sales program to make sure it is on target before problems become apparent. The exact metrics or indicators will vary for each company based on its specific circumstances.

“The dashboard can have 10 to 20 metrics with a red/yellow/green rating,” said Albrecht. In this case, metrics with green ratings are operating as expected and needed, while yellows require monitoring and potential action, and reds indicate problems that need to be addressed immediately.

The key is to make sure company leaders are aware of the circumstances that could impact sales compensation payouts and effectiveness. “When you are aware of a problem, you can get out ahead of it,” said Albrecht, who suggested three categories of metrics:

Payout statistics can include how many salespeople are hitting or expect to hit their sales targets, the percentage of low performers, and projected payouts for the top-most performers. By benchmarking these numbers, the company can see how its performance compares to peers.

Regular surveys of salespeople can indicate overall sales force engagement, workers’ satisfaction with their pay and how vulnerable the company is to sales force turnover. “If these metrics start to drop below historical norms, companies will need to take action” or risk significant turnover, said Albrecht.

Focus on forecasts by comparing current sales performance against projections. For example, if a company is below 50 percent of its year-end targets at the midpoint of the year, it can evaluate the overall pipeline to see if the problem will correct itself. “With customer relationship management tools, companies ought to be able to predict with reasonable accuracy where they will end up by the end of the year,” said Albrecht. This way, “the company can predict the overall spend and how much they are going to be paying out, and sales and bonus incentives.”

Create a Sales, HR and Finance Partnership

In order for regular monitoring and updating to occur, companies need to clearly identify who owns the sales compensation program. In many situations, companies benefit from making the design and maintenance of sales compensation a joint effort among sales, HR and finance leaders. Each area brings unique skills and perspectives that can lead to a more robust program.

“Sales can offer insight into achievable goals” and finance can help with the numbers and how payouts and results will drive company performance, said D’Amico. However, those two parties also have their limitations. Representatives from sales can have a major conflict of interest if their own compensation is derived or influenced by the sales compensation program.

“Finance representatives can be too aggressive” in trying to derive maximum value from the program while keeping payouts to a certain level, D’Amico said. “HR provides a balanced, objective perspective” while also bringing expertise in compensation design to the table.

Joanne Sammer is a New Jersey-based freelance writer.

Related SHRM Articles:

Addressing Pay Challenges for Inside Sales Teams, SHRM Online Compensation, March 2015

Applying Analytics to Sales Incentive Plan Design, SHRM Online Compensation, January 2015

Commission Incentive Plan and Payout Schedule, SHRM Templates & Samples, August 2014

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