Time to Re-Think Your Company’s Sales Compensation Plan

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Years ago, a recruiter for an IT company asked me for details about my earnings history in a prior sales role. Although many hiring managers make the same request, hers went further. She wanted copies of my past three years of W-2’s. “It’s part of our interview process,” she told me. “We need earnings proof so that we can propose an appropriate base salary and commission for this job.”

I asked her for the rationale. “Because we might end up providing significantly more overall comp than you were making before. If we paid you 15% over your earlier income, that would be tantamount to a raise,” she told me. “We don’t think we should be doing that.”

I pressed her on this point. “What if the pay I received at my previous job was inequitable. Are you telling me that the compensation I earn for one job should ratchet down my income for future jobs?”

At this point, you might figure that my interview process did not progress past this conversation. You’re right. But the outcome was mutually beneficial. As much as I chafed over this wrongheaded pay policy, I was irked by what the recruiter made clear through her request, but failed to say directly: “By joining our sales team, you’ll make a middling income as a pawn in a cost center. If that vision is appealing, you’ve come to the right place! . . .” Honest disclosure would have saved everyone some time.

This company’s pay practice was misguided. Fortunately, I never encountered it before – or since. In addition to turning off qualified job candidates, it’s hard to imagine how this plan could have been administered. Various compensation levels for sales reps contingent on what they were previously earning would make a payroll administrator gnash their teeth, and clamor for reassignment to a different department.

In a way, I felt sorry for this hiring manager. She was transparent in her effort to sidestep a vexing challenge for organizations: how to assign value to the contribution a sales role provides to the company, and what is fair remuneration when someone is successful at it. Hard stop: A person’s income at a different company has no bearing on either.

There are many things that companies ask salespeople to do, but ultimately, they are paid for delivering a result that is difficult  for most people to produce: in the face of uncertainty, persuading a person – or persons – to make a specific decision, and succeeding again, and again, and again. If that’s not valuable to a company, I don’t know what is.

According to sales consultancy The Alexander Group,  a well-structured sales pay plan includes the following elements:

  1. Definition of eligibility. This is especially important if there are multiple plans used to pay different categories of sales personnel (e.g. inside sales and outside sales).
  2. Target total compensation, including the intended pay curve for lower producers, those at the middle or median, and those at the top.
  3. Ratio of fixed compensation (salary) to variable compensation (commission, incentives, and bonuses).
  4. Upside leverage that, when achieved, skews compensation toward the higher end of the pay scale.
  5. Objective measures and metrics that are (or will be) used to calculate fixed and variable pay.
  6. Performance and payout period for how long a company will pay for attaining a goal, milestone, or target, and the timeframe between achievement and payout.
  7. Commission rates and calculations for deriving variable pay.
  8. Quotas and targets.
  9. Accounting policies regarding revenue recognition, and company policies on payouts for revenue booking, territory splits, account registration, and channel sales.
  10. Special incentives and rewards (monetary and non-monetary)

Unfortunately, simply having these elements does not ensure success. To be strategically effective, pay plans must have other characteristics:

Dynamic. Companies quickly found that the Covid-19 pandemic upended their pay plans. “Two Alexander Group surveys on sales compensation/quotas (March 30 and April 20, 2020) revealed that more than 80% of the companies were implementing pay protection methods to replace some or all lost target incentives for sellers. The most popular methods include pay guarantees (percent of target earnings), quota adjustments and formula changes.”

Reviewed regularly. At least annually or semi-annually.

Cohere with other management, talent, and retention tools. For example, to reduce sales force churn, a software company converting from selling one-time licenses to a SaaS model must make congruent changes to its pay plan.

Fit the job. Companies that have multiple sales roles, such as inside, outside, and retail sales should consider maintaining different plans for different roles.

Simple, transparent, and easy-to-understand. At an IT hardware manufacturer where I worked, the VP of Sales proclaimed his objective was to “fit the commission plan onto the back of a business card.” He never got there, but it was a worthy goal.

Centrally administered. When payroll activities are distributed, the opportunities for foul play and unfairness are magnified.

Process for appeal and resolution. Even the best pay plans contain ambiguities, creating the need for judgement. Companies should have an internal process available to employees to document, adjudicate, and resolve pay disputes.

Risk informed. All pay plans carry the risks of unintended consequences. Companies must understand the potential and mitigate conflicts-of-interest before policies are enacted.

Ethical. Above all, a pay plan must never sacrifice stakeholder safety. A top-level question to ask: “Could this plan or policy hurt our customers, employees, suppliers, contractors, channel partners or investors?” And if the answer is “yes” or “maybe”, don’t do it.

Sales pay has an important influence on growing revenue. By thinking of it as a vital instrument for sales strategy and execution, and not as a pesky cost to be squished into the budget, you will make better decisions.

The post Time to Re-Think Your Company’s Sales Compensation Plan appeared first on Contrary Domino.

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