‘Tis the season for many joyous things. Between holidays, PTO, great food and time with the family, it’s a remarkable time of year. For sales compensation designers this is also the season to model sales compensation expense.
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Compensation modeling is first and foremost about confidence.
- Sales compensation designers must be confident that comp plan designs will deliver the proper pay for expected sales performance.
- Sales and executive leaders must be confident that proposed comp plan designs are stress tested before offering approval.
The executive team should not approve sales compensation plans without scrutiny, especially on the expected financial consequence.
How much more/less will we pay in commissions as compared to last year?
Will the proposed change drastically impact any sales role or group?
How much more will we pay if we exceed our sales target by 5%?
How does our expense change if we add 10% more sellers and reduce territory sizes?
What were the sales performance assumptions used in the expense modeling?
These are all legitimate questions that a sales compensation professional should anticipate before socializing with the leadership team. In fact, the difference between a good sales compensation designer and a great one is the ability to avoid surprises. In this world, predictable is good!
To avoid surprises and to answer these important questions, compensation plans must be modeled to anticipate commission expense. Often, the approach was to take a few prior sales years and show how much the proposed plan would have paid. It’s easy to model and easy to communicate but it’s extremely short-sighted. In fact, the greatest harm is that it seems defensible and leads to false confidence (and potentially misinformation). Executives approving sales compensation plans should be challenging the design and modeling approach. A lot of scrutiny goes into the design, but sadly, too little goes into the modeling.
As an alternative to the short-sighted approach, each compensation plan design should run through a Monte Carlo simulation. Yes – that’s fancy talk! Monte Carlo simulations are randomized, what-if scenarios that can simulate many years of results. Sure, compensation plans can be tested with past years’ results, but it is more effective to stress test the plan design with many random years of results. While some SPM technologies offer this functionality, designers do not need anything more than MS Excel to build a Monte Carlo simulator. For the record, I still recommend the simple approach, but it cannot be the only approach.
With all change management, avoiding surprises is paramount. It’s even more important since, for many organizations, sales commissions are the single largest variable expense. With so much at stake, can you afford not to take these extra steps?
Happy holidays and new year!
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