Developing a sales compensation plan takes hard work, careful planning, and constant monitoring. Plan designers must deal with diverse opinions amongst stakeholders about the right plan design for the sellers. Hence it becomes extremely important to understand and embrace the plan design fundamentals. It is also important to educate all stakeholders on these concepts so that everyone follows a common framework.

Align the Plan with the Strategy and Job Roles

The foundations of a successful sales compensation program are – a clearly articulated sales strategy and a well thought out coverage model. The coverage model refers to the deployment of sales resources such as field sales, tele-sales and channel partners to pursue the sales strategy.
Every sales role must be defined in terms of its critical success factors, role descriptions, and competencies. Are the Base Pay, Draws and Performance Measures aligned with the job role, or do your pay components reflect a job that has changed over time? The job’s critical success factors should provide direction on Target Incentive, Pay Mix, and Performance Measures. Determine the correct relationships between these components based on the top three job priorities for each role.

Pick the Right Measures

Performance measures represent the top sales priorities of each job. These typically include financial measures, strategic measures, and may include leading indicators of success. Consider whether performance measures directly mirror the sales strategy and each job’s critical roles. Do relationships between measures (weights, links, hurdles, multipliers) represent the organization’s priorities? Does the plan communicate objectives to the employee in the clearest way or is the message complicated by unnecessary elements?
Common mistakes are too many measures, wrong measures, duplicate measures, and measures that can’t really be measured. Best-in-class plans rarely use more than three primary measures. Any measure that represents less than 10% of target incentive is often perceived by sales team as somewhat irrelevant, and doesn’t provide any motivation. Don’t create a plan that allows reps to pick and choose, or creates confusion about what’s important to the organization.
Incentives implemented to push the sales of strategic products or cross-sell often lead to duplicate and redundant measures, causing confusion to the plan.

Define Crediting Rules

Crediting rules are the basic building block of every sales compensation program. Sales crediting rules define when and how much of the sales is assigned to the salesperson for quota retiring and compensation calculation. Assign sales credit only when salespeople have completed their customer tasks regarding the order. This might be when the order is booked, when the order is invoiced, or at the receipt of cash.

A well-designed plan ensures that all sales roles have the same crediting event. While sometimes it becomes necessary to split sales credit between booking and invoice, this introduces calculation as well as reporting complexity. It’s best to select one point in time to credit sales.

Develop a Clear Connection Between Pay with Performance.

The sales compensation plan, at its core, is a tool to communicate business objectives and reward for the attainment of those objectives. Does your plan pay for revenue, profit, growth, base retention, or other priorities? Does your plan reward for dysfunctional behaviors or gaming? Total pay, total incentives and other pay components for each plan measure should be tightly linked to the company’s critical measures of success and should clearly communicate how pay is associated with each performance result. If a simple regression analysis shows a pay to performance correlation of less than 0.5 for your most important business measures, then the plan may be off-track.

Communication is Key

Unless communicated effectively, even the best of plans can fail miserably. It is your responsibility to improve the clarity of sales compensation plans. Sales personnel should not have to guess on the complicated incentive designs. Ensure that every complicated plan component is explained with the help of examples, including corner cases.

Plan design is not rocket science when fundamental design principles are followed. Align the jobs, pick the right measures, use unified and simple crediting policy, connect the pay with performance, and communicate well.