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Can You Pass Sales Comp 101?

Posted by Chuck Csizmar | Posted in Articles, Universal Compensation | Posted on 08-01-2018

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Salesman, by Chris FithallWhen I was a new Compensation practitioner I used to think that, of all the schemes out there, the most detailed, the most carefully crafted, the most committed to memory were for the sales force.  Sales employees always seemed to know everything about their incentive plan; the exact figures for what they sold, where they stood year-to-date and exactly what their incentive payment check should show.

That may still be true in your organization, but my confidence regarding common practice has been shaken.  With increasing frequency I’ve found myself immersed in a client’s troubled sales compensation plan designs, struggling to salvage the motivational element of companies whose reward train had plunged off the track.

What happened?  Studies have shown that it is often not the design but the communication of the sales compensation design that is often to blame.  Even quality programs find it difficult to overcome the damage caused by errors in explanation.

Flubbed Message Sinks the Plan

Plan effectiveness is weakened right out of the gate when an organization fails to properly inform their sales force as to what is expected of them, and how they will be rewarded.

What follows is a list of critical elements that should be included in every sales plan document.

  • Show the money:  Highlight the target incentive figure and you’ll get their attention.  The more at risk the greater likelihood behavior will change in the right direction.
  • Objective clarity:  If you want to steer someone’s performance, give them a sense of direction.  The sooner the employee knows what you want them to do, the sooner they’ll start to focus.
  • Clarify thresholds and caps:  Two questions commonly asked are, is there a cap, and when do payments kick in?
  • Administrative rules:  Not exciting but necessary to help employees understand the plan and how it works.  Transparency dispels confusion.  Put it in writing.
  • Estimate earnings levels:  Specific examples drive the message that better performance delivers greater rewards.
  • Limit the key objectives:  Focus employee efforts to maximize performance.  Provide no more than four objectives – with none weighted less than 10%.  Below 10% no one pays attention.
  • Appeal process:  Spell out the method of handling payment calculation issues (i.e., what is recognized revenue?).  Questions/challenges are to be expected but don’t make employees search for remedies.  Be upfront about how to deal with problems.

Directing Traffic

Compensation literature describes sales plan initiatives as when you shout “go!” at the start of the year the sales force rushes out in a coordinated and well-orchestrated campaign of selling activities that achieve results.  What we often get instead is a mad dash of individual egos, each frantically pursuing the almighty dollar – with little consideration as to what impact their activities will have on colleagues, and on the business.

Left to their own devices some sales employees could drive the business right off the cliff and into deep financial problems – if the pay inducement was good for the wrong kind of selling activity.  Such a scenario can also pump up revenue without a corresponding increase in margin. Generating revenue without profit is just being busy, and that shouldn’t be anyone’s objective.

What do you face if you fail to provide clear and effective communications within your plan document?

  • Confusion:  “What exactly am I expected to do?”  “How am I to be rewarded?”  These are questions you don’t want your sales force to be asking.
  • Dissatisfaction:  An employee unhappy with their incentive plan, no matter the reason, will likely tamp down their degree of enthusiasm and engagement.
  • Unwanted activity:  Chasing sales that don’t maximize margins or that fail to push desirable new product/service lines.
  • Unrealized expectations:  “But I thought my check would be for X?”, or “I didn’t know you wanted me to focus on that.”
  • Missed opportunities:  If your marketing focus goes in one direction while your sales force heads in another, the achievement of critical results (i.e., revenue, new customers, market share, profits, etc.) may be left in limbo.
  • Reduced engagement: Ineffective communications will hinder (block, slow, complicate, etc.) the sales force effort, which in turn will weaken business results.  Which also reduces employee engagement – ultimately resulting in a higher level of separations.

If you know what is considered “success’ for the company (objectives attained), and you aim your rewards to complement the achievement of those objectives, then you can afford to provide healthy rewards to those who perform.  Because you’ve created a win-win scenario.

Just make sure you tell the right folks.

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