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Confidence is critical in sales compensation modeling

by Dave Egloff  |  December 18, 2018  |  1 Comment

‘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.

modeling calc

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Compensation modeling is first and foremost about confidence.

  1. Sales compensation designers must be confident that comp plan designs will deliver the proper pay for expected sales performance.
  2. 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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Category: sales-compensation  sales-performance  

Dave Egloff
Senior Director
1 years at Gartner
20 years IT Industry

Dave Egloff is a Senior Director, Analyst in the Gartner for Sales Leaders practice. His current work focuses on key initiatives in sales strategy, sales operations and sales compensation. Read Full Bio


Thoughts on Confidence is critical in sales compensation modeling


  1. Dave Brock says:

    Great post, covering issues that are critical but too often overlooked by sales leaders.

    In the spirit of “Yes-and…,” some additional thoughts.

    1. The compensation plan must be aligned with the key strategies and priorities of the organization for the coming year. However we pay out the variable portion, if we are paying it out in a way that doesn’t support our key priorities, we have designed and implemented a bad plan. Our goal is not just to produce revenue, but to produce the right revenue in the right way.
    2. Whenever one develops a plan, one must game it. We have to put ourselves in the sales person’s shoes, thinking “what are they going to do to maximize their payout?” If the behaviors are consistent with the outcomes you want to create, you’ve created a great plan. If not, go back to the drawing board.

    As a very young sales person, I was the beneficiary of a plan that failed in both of these areas. The comp plan was announced in January. By mid February, I, along with 100’s of colleagues had leveraged an element in the plan, enabling us to pay off our social security deductions in February (through the commissions we earned). The plan continued to overpay certain unproductive behaviors. In the end, the company achieve 70% of its goal, and all of us were delighted with the fantastic commission year.

    One final, perhaps, stylistic nuance. I always prefer to look at the plan and analyze it on the basis of Total Comp. We are trying to manage within a certain budget for cost of selling (eg. Direct CPOD). Looking at commission only ignores the total spending.

    Great-important post. Thanks for sharing



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