Sales Compensation Best Practices
By Linda VanDeventer, JD, MBA, CCP and Bob Lindeman, CPA
**This is a republication from ChicagoSHRM, March 2021
Some refer to sales compensation plans as the “silver bullet” for business results. This myth stemming from the old carrot and stick visual we have all seen. The best results are achieved by a well-planned and thought through design taking into consideration many factors.
This article outlines those that are most important.
One right answer does not exist. Each business is unique – combination of industry, sales process, lifecycle stage, level of profitability, and product/service offering all weigh into the establishing the “right” plan for your organization. The most important factors to consider are:
First, and most important: Align measures and goals with the current year’s business plan including go-to-market strategy priorities: The measures and specific goals need to support the business plan and related strategies. If they do not, expect that the desired results will not be achieved. The fewer the goals the better so everyone knows what is most important to focus on. This changes as the organization changes.
Quotas or goals must collectively roll up to equal or exceed the annual budget: Regardless of the type of plan whether it be commission or quota based, if each person’s goal’s do not total the annual budget, expect to fail. Some organizations set goals collectively above the annual budget to plan for staff turnover, leaves of absence, or coverage for under-performers or other unexpected surprises.
Measure results versus activity: Unless a company is young/start-up, measuring activity can derail the achievement of business goals. For salespeople, measuring results are actions necessary for business success. Trying hard versus “ringing the bell” are not the same thing and should not be rewarded the same, particularly for salespeople.
Use the “SMART” acronym to establish goals: Specific, Measurable, Attainable, Realistic, Timely. Setting the right goal is a delicate balance between reasonable and unreasonable stretch goals that usually takes practice by trial and error. If goals are set too high, it is likely employees will be demotivated and not even try as they seem unattainable. Conversely, if the goals are set too low, the organization is likely to pay out more than it needs to, reducing dollars that would have otherwise gone to the bottom line.
Remove selling obstacles. Depending on the stage of the company, it may mean off-loading activities that detract the sales-person’s selling time. A study of sales activities and non-sales activities can be eye- opening. Using your best sales reps to conduct this study produces a best practice you can emulate with peers.
Hold sales representatives and managers accountable. Each resource hired (invested in) is critical to produce an ROI, especially in the sales function. When goals are not achieved, crucial conversations need to be had. Perhaps it is beyond the person and the job requirements have changed. Watch for this and train to ensure your salesforce is equipped with the right skills. Especially with COVID19, we are seeing sales roles and organizational structures changing. Technology is more important than ever.
Provide timely and visible reporting: Like driving a car down a road, a sales representative needs to see where they are at and headed. Without this knowledge, they are flying blind. The best sales representatives continually focus on their performance against goal and must have that visibility to make the greatest contribution. Real-time SKU level sales reporting is needed to maximize selling opportunities and risks. Without strong data metrics, it is very difficult to effectively client manage the customer and easy to lose one to the competition.
Periodically review the plan. Organizations change as do product and services mixes, new products, obsolete products, sales vs profits, mergers, and acquisitions, etc. Stay on top of the current year’s priorities, the vision for the future and encourage innovation from your teams. Remember your organization is a living breathing organism constantly changing.