Each year, Chief Sales Officers (CSOs) must approve the sales compensation plans. During this approval, CSOs should ensure that their sales compensation plans:
- Align with the overall sales strategy
- Motivate sellers to focus on specific targets and outcomes
- Reward sellers for their performance … appropriately and sustainably
Here are some suggested questions that CSOs should ask before offering up their approval:
1 – How do the sales compensation plans specifically reward performance aligned to our key strategies and imperatives?
CSOs establish and communicate sales strategies to prioritize goals and improve sales execution. Sales strategies should also cascade through the sales compensation plans.
Many sales strategies are specific like increase cross-sell revenue or improve new customer acquisition. Unfortunately, many specific strategies lack specific incentives. For example, a CSO may want to drive cross-sell revenue but approves sales compensation plans that reward total revenue. When the plans fail to directly align, CSOs run the risk of sending mixed messages to sellers or failing to meet specific goals.
2 – Compared to last year, what caused changes from the prior year?
Compensations plans change for a variety of reasons from shifts in strategy to cost containment to administrative limitations. In this case, knowing why things changed is as important as what changed. Along these lines, CSOs may also want to know more about potential issues with the existing compensation plan design that has not been addressed. Many times, issues related to data quality or systems limit the ability to change, even though challenges exist.
3 – Has this been vetted with any frontline sellers or managers?
Sales compensation plans are a key driver of seller engagement. Admittedly, it’s cliché, but compensation helps the organization attract, retain and motivate sellers.
Regrettably, some approach plan design as a super-secretive process with a big reveal at the start of the fiscal year. While discretion is always needed, this approach assumes too much risk. CSOs can manage the risk by including some sellers and frontline managers to the design team. As an alternative, frontline sellers and managers could also be included in the pre-approval review sessions.
4 – How was the commission expense modeled?
CSOs must be confident that the proposed compensation plan designs are financially stress-tested before they are approved. Too often, commission expense is modeled by examining the commission expense results of a proposed plan had it been in place over the past few years.
This approach is easy to execute and easy to explain but it’s extremely short-sighted. In fact, the greatest harm is that it seems defensible – leading to false confidence. To improve the stress-test, CSOs should approve plans only after the proposed plans have been through a Monte Carlo simulation, which examines the results over many simulated years.
5 – Are there any significant changes to the sales coverage model?
Sales coverage is an expansive topic that addresses sales role clarity, organizational design, segmentation, territory alignment, etc. Sales compensation plans must complement the coverage model. If either the compensation plan or coverage model changes, the alignment should be re-examined.
In smaller organizations, this might seem unlikely to happen. However, in larger enterprises, this can occur as sales coverage and compensation decisions are made in siloes without coordination. For example, an organization was using a unit-based compensation where sellers received 2% on all new revenue. Unfortunately, commission expense skyrocketed when the sales deployment shifted from an individual mandate to a team-based approach. Had the sales compensation designers known about the change, this issue could have been avoided.
Sales compensation directly influences both the top- and bottom-line financials. The top-line improves as compensation drives seller behavior and focus. As for the bottom-line, commission expense must be correlated to sales performance. With so much at stake, CSOs need to get sales compensation right and must examine plan designs from all angles. Luckily, with some straightforward questions, CSOs can offer their approval with confidence.
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