Satisfied with your company's revenue?

Few companies are satisfied with their existing revenue streams and consequently most strive to increase them year-over-year.

In the course of doing this however, a couple of facts must be remembered. The people who have the greatest influence over revenues at any company are the sales staff. And the strongest driver of their performance is the sales compensation plan that covers their work.

Sales compensation plans represent one of the most powerful tools companies and sales executives have at their disposal to drive company success and profitability. Having said that, these plans frequently are misunderstood by non-sales and sales employees alike, because they frequently are too complicated, use faulty assumptions and formulas, or are not communicated well.

The best results are driven when your sales compensation plan is clear, understandable and tailored to a number of key variables, including:

• Business strategy
• The types of products or services you are selling
• The sales cycle
• The types of people you have selling
• The sales objectives you've established for the sales team

Every company is unique

It is also important to realize that each company is different in how it addresses these sales variables in the sales compensation plan. Seldom are any two sales plans the same. That is why it takes planning and special attention to design the appropriate approach for your organization. It is not a "one-size-fits-all" experience.

Unlike company-wide, base compensation plans that are tied to consistent reviews of comparable jobs and pay levels in the local labor market, there is no cookbook to tell you how to combine critical elements while constructing your sales compensation approach. You have to start from scratch every time, know your business and be clear about what you are trying to accomplish -- which can change during the year. Your plan has to make sense in that it pays competitively (which does require market comparison) and it must incent appropriate behaviors and results.

Types of people

Typically sales organizations are made up of two types of jobs, each requiring very different attributes and capabilities of the people performing them if they are to be successful. These two types of jobs or people are commonly referred to as either "hunters" or "gatherers". The hunters are those who go after new business in order to grow the revenue top line. Proactive and assertive, these prospectors seek and sell, and are constantly looking for new relationships and referrals. The gatherers are those who retain accounts, once initial sales are made, and expand new sales and repeat buys by nurturing relationships and maximizing referrals.

Normally the approach in determining compensation for these two types of sales people is to first target total cash pay levels for each, competitive with the market, and then look at the difference in mix of salary and commission to make up those total cash rewards. Incentives should be different for the two jobs because the relative risks and rewards associated with each are different. The behaviors necessary for hunters to be successful are not the same required for gatherers and the potential for new revenue generation is unique to each.

As an example, hunters generally will be leveraged more heavily than gatherers, meaning they have higher percentages of their total compensation at risk. This means a lower base with higher potential for incentive pay based on both the number and dollar value of new sales. Gatherers may have a higher base but less opportunity for incentives due to an established customer base and fewer opportunities for new sales. Both extremely important jobs in acquiring and retaining business -- yet rewarded differently based on very different objectives and expectations placed upon them.

Design the plan first

Here is a very important tip to consider at this point.

While sales talent is always critical -- your sales compensation plan should be designed to enable you to achieve your company's objectives first -- then consideration should turn to whether or not you have they right people to deliver on those objectives. A number of failed organizations have done it the other way around, designing their plans around existing people, and have found they could not meet new expectations. Decide what you need to achieve, set your pay and incentives to get you there and then match the best talent to accomplish it.

And don't forget -- "competitive pay for competitive levels of performance" is a must if you are to be successful.

Don't give it all away

This may sound obvious but effective incentive plans ensure you are not giving away all of your profits in commission payments. It is possible to increase sales to generate more revenue, but it is important to put emphasis on "profitable revenue". You first have to figure out your most and least profitable products and services. The most profitable generally will be more difficult to sell and so they should be incented differently.

As an example -- your need may be to migrate current customers to new products or more efficient technologies and so the incentives on these sales may need to be greater to get this to happen.

It is important to model this first so that you can analyze the financial facts of your company's reality. If you don't do this part well you can easily join the ranks of companies that have succeeded in increasing sales, but have lost money in the process.

Clarity, not complexity, is important Sales compensation plans sometimes become overly complicated because of the assumed need to quantify all aspects of a sales person's performance in order to relate results to rewards.

It is not uncommon to find plans with 10 or more performance measures, weightings, formulas, and lists of what deserves credit toward the quota and what doesn't -- all designed to quantify the sales jobs and make it clear what gets rewarded.

In reality though most jobs can't be quantified to this level and confusion sets in when you try. Just know this. If sales people don't know or are not clear about how they get paid, or if it takes them months to get their money, you have either lost the chance to motivate the outcomes you desire or at best delayed generating the revenue you need.

There should also be a "line of sight" relationship between actions, achievement and payout, as well as a clear understanding of what the rewards will be given certain levels of performance.

To be effective, the goals you establish for your sales people should be goals they can affect or influence.

If your sales staff does not understand the sales plan, you have weakened the incentive power of your plan and consequently your ability to influence behavior and results. When this happens, it is time to get an outside, third-party perspective to help simplify things.

Avoid these traps

Too much complexity in sales plans manifests itself in a number of ways, but one key clue to look for is how long it takes to calculate incentives past the performance period. Pay should follow performance as soon as possible with the target payment date being no more than 30 days after the end of the performance time frame.

Your plan also should contain no more than five established performance measures. It becomes confusing when more than five are used and incentives become less effective. In addition, weightings should be used to communicate the priorities of different goals and expected behaviors.

It is also advisable to look at the resources you have allocated to tracking and calculating payouts. If the number of people dedicated to this work is not commensurate to the size of your actual sales force, it might be wise to revisit how your plan is designed.

And finally, in your experience, if you are making too many exceptions to your sales plan as it is presently written, examine it to be certain it clearly covers everything that gets rewarded and how.

Don't be complacent

The strongest piece of advice to apply to the entire topic of sales compensation plans is this -- don't be complacent. Sales plan design and results, and sales team performance all must relate to company objectives and should be reviewed every year. Eighty to 90 percent of companies make some sort of change to their sales compensation plan every year (i.e. goal and weighting changes, threshold changes, etc.), and in fact they even review and change their plans more frequently than this if significant economic, market or company events occur.

Sales compensation plans are one of the most powerful tools companies have available to drive performance and profitability. While even the most effective plans can sometimes become complex, great effort should be made to keep them simple and clear to the sales staffs they are designed to reward.

Be proactive and make the sales compensation plan work for you. If there is uncertainty as to whether it is tuned to your current environment or nimble enough to change as your business strategy changes, get some expert outside help. The payout for your company can be significant.

--Rod Hanna, Principal
Merit Resource Group