Successful sales compensation plans are specifically designed to drive desired behavior. One form of desired behavior is that your top sales reps don’t quit. Especially in small and medium-sized companies, Sales VPs must retain good reps. Smart compensation plans can be a big factor.
Sales rep comp plans are the most important comp plans in the whole company. Why?
- Sales people interact directly with your customers
- Sales people typically earn more than most of your other employees
- Sales people directly impact top line and bottom line results
- Sales comp plans usually have a large variable component
If your turnover isn’t where you want it, assess your comp plans now. Don’t wait for the annual compensation review. Compare them to best practices. To start, download the Sales Compensation Best Practice Guide. Quickly and easily evaluate how your comp plans stack up.
Sales incentive compensation plans are designed with four elements in mind:
- Target Pay: The “at plan” number a sales professional is expected to make. This consists of salary, bonus, and any incentive pay.
- Salary-incentive balance: The percentage of target pay that is performance-based.
- Metrics: The metrics that drive calculation of the incentive pay (e.g. revenue, margin, product mix, customer satisfaction, etc.).
- Incentive Compensation Type: Captures the way incentive pay is distributed to the sales force. Usually cash commissions, but may also include bonus, stock options, and non-cash rewards.
However, within these four elements are dozens of individual options. Get a few wrong, and the plans don’t work. Reps get upset and leave. Remaining reps don’t adopt the proper behaviors. You miss the number.
What’s an example of an option many companies get wrong? A common one is how many different metrics are used to calculate incentive compensation. World-class companies opt for simplicity. Our research reveals they average 2.1 metrics per plan. Laggard and median performers average about 30% more. Best practice says your plan should not use more than 3 different metrics. Furthermore, the payout on any metric shouldn’t be LESS than 15% of total variable comp.
We recently assessed compensation for a client struggling with high turnover. We discovered they had 8 different metrics in their incentive comp. The target payout for one metric was only 1% of the total target pay.
This was a classic example of using a comp plan in place of management. Each time leadership wanted to change behavior, they tacked another metric on the plan. The result was a confusing plan with too many small metrics. A rep who makes $150,000 will not change behavior for $500 a quarter. Another unintended consequence was that reps couldn’t easily explain their plans. Confusion = frustration = turnover.
Our clients who’ve implemented successful compensation plans identified many attributes as critical to success. Here are three:
- Plans reviewed more than once per year
- Plans include an account loss mitigation provision
- A Compensation Communication Plan that provides details and transparency
To see the complete list, and learn about other best practices that will “turnover-proof” your sales force, download the Sales Compensation Best Practice Guide here.
In many companies, the 80/20 rule is in play. 20% of your team is producing 80% of the results. Sales VPs have got to keep their top performers. The team often uses these individuals as barometers of overall company health and morale. Lose one, and others usually follow. Pay them right, and B players aspire to perform better. They see the potential. A great comp plan inspires, because the average rep believes he can maximize it.
Sales compensation planning requires benchmarking data—our specialty. If you have questions after reviewing this article and the tool, contact me. I’ll help you out.
