It’s getting to that time of year where sales compensation design discussions are about to kickoff. For many stakeholders — including compensation plan designers, sales leaders, and senior executives — the process starts with two simple questions:
- How is the sales compensation plan performing?
- Is the compensation plan design fit for the next year?
How is the sales compensation plan performing?
This question focuses on the compensation plan performance and not sales performance. Importantly, these are two very different sets of data. While compensation plan performance hones in on the linkage between pay and performance, it also helps to address avoidable issues.
Pay for performance cultures reward sales results, drive sales behavior and control costs. As a result, high performing sellers should earn more in commissions as compared to their lower-performing counterparts. Stakeholders should review and discuss how the top performers and low performers were impacted by the compensation plan design?
Were top sellers limited by the earnings cap (if one was in place)? How many sellers fell below a minimum performance threshold? Were the commissions earned reasonable relative to the performance? In many cases, the commissions paid could have been too punitive or too generous. The compensation plan performance needs to be fair — to both the seller and the organization — and put into context with other variables like quota setting accuracy and sales results.
Additionally, stakeholders should reflect on the recurring issues that might stem from the sales compensation plan design. These issues surface in a number of ways:
- Unnecessarily lumpy payouts or clawbacks
- Misaligned sales behavior
- Additional special incentives needed to fill performance gaps
Obviously, rare and infrequent occurrences are not a signal of systemic problems. However, the compensation plan must be evaluated as a potential cause — or at least a part of the remedy — as issues become more prominent.
Is the compensation plan design fit for next year?
Sales compensation stakeholders must also scrutinize the compensation strategy on a prospective basis. Specifically, does the compensation plan design complement and reinforce both the overall sales strategy as well as the specific sales role priorities. Three important follow-up questions include:
- What are the upcoming sales strategies and priorities?
- Have expectations of the seller’s role or performance changed?
- What does the sales coverage model look like?
Remember, sales compensation intends to reward sales results and drive seller behavior. Before that can happen, there must be a direct and conscious alignment between what is desired and what is rewarded. Unfortunately, many sales compensation plans remain relatively stagnant, despite evolving sales priorities.
Undoubtedly, there are certainly many steps to a sales compensation redesign. The questions about sales compensation past performance as well as fitness for the next year serve as a starting point. These open-ended questions will get the ball rolling and lead to a continuously evolving and improving compensation strategy.
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