Why are so many companies afraid of changing their sales compensation models when the markets change? Why are so many finding it problematic to administer the basic plans, and indeed roll out plans effectively? As channels are added to the mix, why are there so many debates on who get's paid? As Inside Sales are considered, how do companies effectively ensure segmentation so compensation is incentivized then paid to the appropriate rep? Why do companies shy away from paying fully for 'elephant' deals (those one-off mega deals)?
Over the years, I've seen many companies struggle with designing and rolling out effective compensation plans, then not being able to report then pay on time. The motivation issues are obvious - what's not obvious is the issue of dynamic change. How can you manage a sales organization effectively if you're not reporting accurately on compensation? In the truest sense of performance, those delivering their numbers are those you nurture, those who are not need close management.
Let's take a step back for a moment though. The design of compensation plans is by far the most important aspect of compensation and incentive plans. Anyone worth their salary in Sales Operations have a good grasp of this. Get it wrong, and your rollout and management will be a disaster.
What does an effective compensation design look like? The specifics need to be answered based on your companies maturity, what your strategic goals are for the period and the type of sales force you have (direct, multi-touch, indirect). The first question asked is usually 'what should we pay people on', followed quickly by 'we don't want to pay too much'. I argue that this will lead to a constrained compensation plan. Don't get me wrong - these points are valid factors, but come later. Design your compensation plan to your strategic drivers - then work from there.
So what should the payout driver be? Again, this depends on your drivers. By far the most focused and easiest option is bookings - the net or gross take home of any deal, regardless of cashflow or profit. This is simple to understand, easy to administer and will focus your sales organization on bringing deals in. What it does not do directly is control 'good' business versus 'bad' business. Margins and profit measures does this, but in smaller companies, this may not be an option. Multi-year is another one that comes up often. Should we pay out front line on multi-year, or indeed renewals? Again, go back to what you want. If you're focus is net new business, go back to your sales structure and determine if you need a separate Renewals organization - and if so you've answered that. Multi-year is something you want to compensate on (it's typically profitable business and no sales cost in future years), but you only want to do this once, and put a drive on multi-year versus single year support, but not too much. Placing more focus on multi-year will create a push to drive clients to multi-year even if they do not want it.
I encourage companies to not be afraid to change their compensation plan principle payouts on a yearly basis, IF REQUIRED. If you've focused for 2 years on bookings, moving to a revenue model is OK - as long as people understand WHY and WHAT IT MEANS TO ME. Moving to margin and profit on a quota model is more challenging, but not because of design - the ability to set solid and meaningful quotas is the issue. If you're looking to change, I'd encourage you make the decision EARLY then begin communicating the intent early on. Have the people responsible for quota setting and compensation administration together, and begin modeling REAL examples. Theoretical modeling will not help as your organization will probably just not get it. Translation tools (booking to margin calculators etc) can be a big help here.
Most sales leaders are very clear on their intent when changing a compensation model - but strategically, not operationally. The Sales Operations leader needs to advise him or her on the drivers and impact early in the design cycle - highlighting the potential issues and deciding if they can be overcome is in my opinion a better use of time than modeling 50 times (which would not be unusual in bigger companies) the financial impact.
Channels and Inside Sales adds a dimension that cannot be thought of as 'same as'. Companies have different purposes for their channels organization - and the design should be driving this purpose. In early stages of a sales organization, you should consider 'all in' quotas for channels (everything on their channel or territory) but paid at a lower rate. As the segmentation of the channels organization increases, it's recommended compensation is segmented also, but you may need to consider MBO's at this stage.
Inside Sales is similar to channels - purpose of this group should determine the compensation design. A common set up is for Inside Sales to take on a more 'administration & support' role for outside reps, whilst driving the lower end business directly. Where this model exists, considering the full payout in a given territory is important, and the primary role. Always remember that compensation will driver behavior - even if it's not desired. Consult then design, not visa versa. Make sure you know the purpose of these groups BEFORE considering designing the plan. Obvious you say, but many examples exist where this was not done.
Pre-sales is another area of consideration. Again, go back to expectations for the group. Personally I believe anyone in Sales should be taking a risk/reward, including technical. Field pre-sales aligned to reps should be tied to their quota in some way (however on a lower risk/reward split of base/commission). The further you go up into specialized areas where support is being done versus sales, the argument get's weaker. This is where I argue strongly that compensation is NOT a practice appropriate for every role in Sales. Consider certain technical roles to be on bonus schemes versus compensation.
One point not covered but an obvious one is - should you use Quota or pure Commission (set a target or pay pure commission on sale)? Here's my view - Quota is a much more appropriate model than commission. Commission works well in casual businesses (retail etc), but in high tech, SW, Telco etc, Quota gives you an ability to model/manage coverage, use real 'over target' money generated to contribute into a highly accelerated plan above quota, and it ties people together more seamlessly. My most important advise though is - never mix commission and quota. It just does not work.
I'll explore more specifics around compensation in the coming weeks. As usual, you can follow updates on Twitter @salesoperations or email salesoperationssolutions@gmail.com for more information or to contact us about our services.
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