Measuring the Success of Sales Compensation Plans

You are the senior HR leader.  You paid a million more in commissions last year than the year before, yet your revenue was flat. How is that possible?  Your CFO and CEO are questioning sales expense to revenue (or booking ratios). Did you make the necessary changes to the compensation plan for 2015? How are you measuring the success of your compensation plans?

Successful Compensation Plans:

1. The top 20% of your sales force earns 3x the amount of the bottom 20%. You attract “A” player talent.
2. The plan has 4 or fewer performance measures. It is easy to understand and track performance.
3. Two-thirds of the sales force achieves quota. There’s a balanced distribution of participant contribution.
4. Over performing reps earn above market income. You retain “A” player talent.
5. Underperforming reps earn below market income. There is no incentive for them to stay around.

Underperforming Compensation Plans:

1. The sales team you support missed the number. You are not driving the right behaviors.
2. Sales missed new product launch numbers. Your compensation weighting is unbalanced.
3. Sales exceeded the expense budget and missed the number. Your allocation is poor.
4. “A” player turnover is high. You are allocating poorly and/or not paying market rates.
5. “C” player turnover is not high enough. Your plans are unbalanced and not driving the right behaviors. 

Exceeded the compensation budget but missed the number:

Chances are your quota attainment curve looked a lot like figure 1. Consider the following attainment scenarios and the impact on compensation payouts.

• Poor quota setting, effective quota allocation – attainment curve is ideal but you missed the number. You underspent on the budget but missed the number.
• Effective quota setting, poor quota allocation – you made the number but you overpaid, the expense to revenue ratio is out of alignment.
• Boom or bust – more than half the team missed the number, the other portion crushed it. This is the reverse of what you want. So you missed the number and overpaid.

Is it just Compensation?

Consider other root causes for failing to make the number.

1. Poor hiring and onboarding. You may have a great compensation plan but poor talent.
2. Current team has not kept pace with the market. This means a lack of training or sales performance conditions (updated personas, buyer process maps, sales aids, sales process, marketing collateral, lacks social selling skill, etc.).
3. Market potential analysis not updated annually.
4. Territories unbalanced. You’re overloading some reps and starving others.
5. Minimal to no marketing Lead Generation (Demand Gen & Lead Management).

Your sales compensation program is not delivering the sales results you want. As the senior leader in Human Resources, alignment with your people strategy is critical.  You need to consider your corporate, sales, marketing, product, and people strategy when designing compensation plans. Failure to align can result in overpayment for poor results and the loss of great talent. 

Call to Action:

Your payout curves should be aligned to the sales plan. Work with the sales leader to review and monitor compensation models. Confirm payouts relative to sales performance are aligned. Work with marketing and sales operations to confirm training, onboarding, quotas, potential analysis, and other performance conditions are maintained. Review the current risks in the compensation model and make adjustments early.

If you’re interested in reviewing your compensation plans or model 1:1 or if you have any questions, connect with me via a LinkedIn Inmail.