Top Ten Ways to Ensure Sales Compensation Plan Success

by Ellen Miller

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1. The Plan Should Fit the Role.
   One of the first steps in the sales compensation design process is to articulate the go-to-market strategy and roles necessary to fulfill that strategy. This includes the hunter vs. farmer, direct vs. indirect, sales rep vs. systems engineer, generalist and specialist, and seller vs. manager.
   
2. Manage the Balance.
   This refers to the balance between plan complexity and driving specific behaviors. It is common for sales executives to want to drive a number of business initiatives critical to the success of the company, such as margin, product mix and so on. This then increases the plan complexity and potentially decreases the focus on the most critical initiatives. This is an ongoing challenge in the sales compensation plan design process.
   
   
3. The Fewer the Measures, the Better.
   Experience has demonstrated that at least 15% of the total incentive must be weighted toward one incentive element in order for it to drive the focus of the sales agent. My recommendation to clients is that this should be as high as 50% with no more than three incentive plan components.
   
   
4. Quotas are the Key.
   For quota-based plans, it is critical that the sales force perceive that the quotas or targets accurately reflect the potential in the account or territory. The most beautifully designed sales compensation plan is useless without achievable yet challenging quotas. In terms of either a top-down or bottoms-up quota-setting process, a combination of the two is probably the answer.
   
   
5. Quotas and Targets Should be Set to Differentiate Performance.
   This applies to both revenue-based and MBO-driven performance measures. Achievement should be distributed such that the bottom and top 10% are clearly identified, recognized and compensated accordingly. Plans and quota distribution that fail in this will promote performance mediocrity and minimize the value of super-achievement.
   
   
6. Use Caps and Minimum Thresholds Strategically.
   Minimum thresholds are used to drive plan participants to achieve a minimum level of performance with the ultimate goal of achieving the company target. Thresholds are typically used for management and those paid on a team goal, such as systems engineering. Caps, on the other hand, are used to provide upside protection against unforeseen windfall sales. These can either be fixed with no management discretion, or a "soft cap," lifted only with prior executive review before payout above the cap percentage.
   
   
7. Measure Current Plan Payout Effectiveness.
   Often overlooked, this is one of the most critical steps in the sales compensation planning process. A review of quota attainment can be invaluable in assessing the organization's quota-setting ability, plan achievement by employees (highlighting your high and low performers), and linearity. (What’s this? Either define it or change it)
   
   
8. Use Market Data Effectively.
   Prior to completing the market analysis, ensure you have established your target pay objectives relative to the market and you agree on the set of companies from which you will collect data. Once you obtain the data, evaluate the market pay practices in terms of how you value the roles in your organization.
   
   
9. Ensure Sales Compensation Plan Systems Administration.
   Systems should not drive business decisions, but successful sales compensation plan systems administration results in prompt payouts, increased visibility and higher motivation.
   
   
10. Compensation Plans Cannot Do It Alone.
    However well designed and implemented, compensation plans cannot stand alone in driving results. They must be aligned with the culture and go-to-market strategy and reinforced continually by leadership. In addition, management must clearly understand and communicate the plans, goals must be set effectively, and payouts must be accurate and timely.
    
    

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