Sales Compensation Planning Checklist

by Ellen Miller

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Sales Compensation Planning Checklist - Part I› (PDF, 65KB)

Download a printable summary of this checklist:
Sales Compensation Planning Checklist Summary› (PDF, 72KB)

Once the sales compensation plan design is complete, companies are often baffled after missing the first quarter targets. Sales agents are de-motivated and scrambling to look toward the second quarter for performance improvement and financial recovery. To avoid this scenario, the following items on this checklist can be invaluable in the sales compensation planning process, initiated well before the onset of the new fiscal year.

1. Business Strategy Articulated
   All incentive plans must start with the strong foundation of the identification and articulation of the company’s overall business strategy. Executives oftentimes want to start directly with designing the plans rather than spending the required time and effort in this strategic planning effort. Or once developed, they leave the business plan on the "back burner" while designing the sales plans. Sales incentive plans, and any company incentive plan, should be developed directly in support of the company’s long-term business strategy. This requires the executive team to be in agreement on the overall direction of the company and to disseminate a consistent message throughout the company so that strategy, culture, and pay programs are all in alignment.
   
   
2. Fiscal Year Initiatives Identified
   Once the longer-term strategy is identified and articulated, the same process should be completed for defining objectives for the new fiscal year. The sales incentive plans then should be designed to drive these annual initiatives toward completion. Again, the annual sales compensation planning process should not just be a quick realignment of this year’s plans, but a thorough analysis of the annual initiatives and the plans needed to drive those initiatives. This may sometimes require a major overhaul of the plans or starting over "from scratch," especially if there has been a significant shift in the strategic direction of the company.
   
   
3. Go-to-Market Strategy with Roles and Responsibilities Defined
   With an emphasis on expense management in the last several years, there has been an increased focus on streamlining the sales force to reduce redundancy, eliminate unnecessary overlay roles and steer specific skill sets to targeted markets. The mix between base and incentive then should drive behavior consistent with the role - with higher risk plans for direct sales roles, moderate risk plans for channel sales and specialists, and lower risk plans for sales management and systems or sales engineering.
   
   
4. Coverage Model Defined with Customer Buying Preferences Identified
   Designing a coverage model with the customer as the primary driver is an increasing trend. Organizing a sales force around what is convenient for the company versus the customer can be a costly mistake in terms of losing a major account. For example, the company sales force may be organized as it always has been, with regional sales agents selling into each regional customer site. On the other hand, the sales force may be organized to sell directly to the customer’s corporate headquarters with satellite sales agents in other regions/countries to drive delivery to where the product actually lands. The key here is to align with the customer’s buying preferences.
   
   
5. Sales Compensation Plan Principles Agreed Upon
   Time spent on the principles that drive plan design is one of the most critical plan design steps. It saves time in the long run and ensures plan alignment. These principles might include such issues as: pay position to market (i.e. targeted total comp at the 50th ile or better); base-incentive plan mix; or plan risk in relation to the market (i.e. higher plan risk than the market to drive individual accountability), as well as others. When debates later arise regarding various plan components, revisiting the agreed upon principles will aid in the decision-making process.
   
   
6. Pay Mix Aligned with Role
   Pay mix refers to the mix between base salary and target incentive. Generally speaking, the closer to the customer or the deal, the higher the plan risk (which equals a lower base and higher target incentive plan). The higher risk in these plans motivates these sales agents to achieve or exceed their quotas with a high percentage of their targeted total compensation weighted on incentive. Roles typically on higher risk plans include territory sales representatives, sales specialists or account managers. Roles which may be on moderate risk plans include channel account managers. Roles on lower risk plans (where the base salary is higher when compared to the targeted total comp) include sales or systems engineers, major, global or national account managers, and sales management.
   
   
7. Commission Payout Analysis of Current Plans Completed
   Often overlooked, this is one of the most critical steps in the sales compensation planning process. A review of quota attainment and actual earnings to target earnings can be invaluable in assessing the organization’s quota-setting ability, plan achievement by employee, organization, and/or territorial level (highlighting high and low performers), and linearity (consistency in performance from one monthly or quarterly period to the next throughout the fiscal year).
   
   
8. Other Bonus Payout Analysis Completed
   Similar to the review above, this can include analysis of other plan payouts such MBOs (Management by Objectives), customer satisfaction, or “fast start” bonuses as well as payouts outside of the plan (such as SPIFFs). Review of these payouts, for what some consider to be “softer” measures, can be critical in determining whether they are instrumental in driving initiatives imperative to the business success.
   
   
9. Crediting (and Other Policies) Articulated and Documented
   The most effectively designed plan in terms of base-incentive mix, upside accelerators, business-driving plan measures, and so on, will be wasted without equal attention paid to those factors outside of the plan. These include quota-setting, measurement ability, systems administration, crediting, commission splits, discounting and other such policies. Discussing, defining and communicating these with commissions and sales finance prior to any final approval of the plans will avert any issues later in the fiscal year and keep the sales force focused on hitting or exceeding their number rather than debating whether they received appropriate credit for a deal.
   
   
10. Quota Setting Process Defined and in Place
    Many companies think that the sales compensation planning process is complete with the design of plans that include critical business-driving plan components. However, time and money spent on designing the best sales plans is pointless without basing these plans on achievable yet challenging quotas. Despite the doubts of sales management and sale finance regarding an organization’s ability to set top-line goals and then distribute them down to individual contributors, there needs to be a significant level of confidence that each goal is at least attainable, if not over-achievable.
    
    
11. Targeted Total Compensation is Market Competitive
    Establishing a pay philosophy that compares the company practices to the local labor market should include the following: target percentage of targeted total compensation (such as the 50th, 60th or even the 75th percentile of the market), base-incentive mix (such as higher risk than the market to drive accountability), and target percentage of base pay (for some lower risk positions such as systems and/or sale engineering). In addition, specific “cuts” of the market should be identified that include company sales volume, market segment, select company list and overall survey results. Typically, the lower the cut, the more relevant the data. However, sometimes this can cause the data to be so sparse, that it is not as reliable as a larger segment.
    
    
12. Wide Dispersion of Pay from Average to Top
    This point follows on the first item above such that quotas should be set that yield differentiation of pay so that “super-performers” are paid well above their average counterparts. In addition, the need to disperse pay according to accomplishments particularly applies to Management-by-Objective (MBO) bonuses. These are often seen as “gimmes” with most of the plan participants achieving 100% payouts. The more these objectives can be measurable, driving initiatives critical to the business, and the more there is a wider range of payouts, the more credibility this type of plan component will have – to both sales executives and individual contributors alike.
    
    
13. Top Employees are Retained, Motivated and Well Compensated
    Especially critical in a sales organization, all employees want to see higher performers well compensated for their higher achievement. This avoids performance mediocrity and motivates those average performers to strive to meet stretch objectives. Rewards to these “super” performers, through pay and recognition, inspire the entire organization and increases confidence in sales management’s ability to effectively acknowledge performance.
    
    
14. Systems versus Manual Administration Assessment
    As much as possible, all plan components should be administered through a worldwide commissions system. This will yield more accurate and timely commission/bonus payouts and increased visibility to the plan participants as to what they are being credited or not credited for. However, it is not uncommon for a sales executive to suggest a new plan component (such as payouts for a new product line) that cannot yet be administered on the system. It then becomes a balancing act being driving the specific behavior (such as new technology sales) versus sacrificing some of the advantages noted above, often with increased resources needed for manual crediting and commissions processing.
    

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