The sales compensation plan is one of the most significant drivers of performance in the sales organization and represents one of the single largest expenses a company incurs. Mark Donnolo, managing partner of SalesGlobe, a sales effectiveness consulting firm states, “the sales compensation plan is a thin but vital long-distance line that keeps the daily connection between corporate growth and the rep on the street. It trumps leadership messages, sales strategies, sales management and sales training. If there is a hard wire between the customer’s office and the corner office, sales compensation is it.”
But if a compensation plan’s message isn’t clear or to their liking, sales reps will interpret it in their own financial interest. “As a corporate leader, you’ll get what you measure and what you pay for — and it may not always be what you expect,” Donnolo says.
In SalesGlobe’s work with clients over the years, Donnolo says it became evident that many companies wrestle with a gap between how to design an incentive compensation plan that also represents where the business wants to go, and how to get the organization to work together toward that goal. His work to resolve this problem resulted in a book: “What Your CEO Needs to Know About Sales Compensation” (AMACOM, 2013).
Framing the discussion
Whenever you begin a sales compensation discussion, one of the risks is people jump to talking about commission rates, Donollo says. “The first thing that comes out when you start to talk about a sales compensation plan is the calculator. People start talking about changing the commission rate or the point values. That’s exactly in the middle of the process on the mechanics. It helps to start at the very beginning and establish the goals and the roles and keep it all in order. You eliminate a lot of the cycling back and forth if the team knows there is a process to follow.”
Everyone has an opinion about sales compensation and everyone is an expert, yet few agree on the best approach to drive performance toward the company’s objectives. Sales, sales operations, human resources and finance regularly engage in battles over questions like:
- Does the plan represent our business objectives?
- Are our highest paid salespeople actually our top performers?
- Is the plan too expensive?
- Can we better motivate our organization to pursue the sales strategy?
- How can we promote more of a performance-oriented sales culture?
- Can we make the plan simpler to understand?
- Can we make the plan easier to administer?
- How can we set quotas that better represent the sales potential in our markets?
Too often, Donnolo says, these battles lead to sales compensation programs that are compromises between parties, ultimately leading to underperformance in the business. One of the first things SalesGlobe does when it looks at sales compensation is understand the sales strategy. It’s critical to ask: How should the priorities of the business be represented in the sales compensation plan?
“So many of the issues that come up with incentive compensation are actually not incentive compensation proper. That is, they’re not just confined to the incentive compensation plan, but can be coming from other places.”
The Revenue Roadmap
When thinking about sales strategy and sales compensation, it is critical to have a framework. “The comp plan is the caboose, not the engine,” a director of human resources at a global workforce solutions company told Donnolo. “Compensation should never be driving the strategy. The strategy drives the compensation. Comp issues are often symptoms of bigger problems, and it’s the easiest, most tangible thing to look at. The challenge is: Do we have the right job designs? Do we have the right people? Those are the harder conversations.”
To that end, SalesGlobe developed the Revenue Roadmap, which identifies four major competency areas and 16 related disciplines that must connect for the organization to grow profitably (Figure 1).
• Insight – Involves understanding the voice of the customer, the macro market, competitor moves and performance, and the performance of the business. That understanding will drive certain decisions to the next downstream level, which is Sales Strategy. It’s essential to understand any shifts that are occurring in the macro market environment and to know how competitors are performing from a growth and financial perspective. In evaluating your company’s historic and projected revenue and profit performance, you should determine where any growth has come from — retention of current customer revenue, penetration of customers through increased usage or additional products, or the acquisition of new customers. By doing this, you can identify strengths and weaknesses and adjust your sales strategy accordingly.
• Sales Strategy – Defines the sales organization’s action plan to achieve its goal. The sales strategy will drive decisions concerning product and service focus, concentration on certain markets, value propositions and the resulting approach to market. Once the core and strategic products and services that the business provides are clearly defined, segmentation and targeting help to organize and prioritize customers. The most effective segmentation and targeting considers characteristics such as customer industry, sales potential, profitability, common needs and overall fit with the sales organization’s business.
• Customer Coverage – Identifies how the organization will use its channels, roles, processes and resources to go
to market. Sales channels and sales roles integrate with
the processes for working with customers. Sales processes lay out the common approaches for how the sales team identifies prospects, qualifies opportunities, develops solutions, manages the momentum, closes the sale and implements the product or service for the customer.
• Enablement – Supports all of the upstream disciplines within Insight, Customer Coverage and Sales Strategy. Enablement includes areas such as incentive compensation and quotas, which align sellers to the sales strategy. It also includes recruiting and retention, as well as training and development. Tools and technology provide leverage by enhancing the effectiveness of the other three layers of the Revenue Roadmap.
Paradigm shifts
As shifts in technology and other aspects of an industry change, it impacts sales roles and sales strategies, often because the buying process has shifted as well. Looking at the Revenue Roadmap, the value proposition has to shift as well as the approach. Donnolo says the organization must evaluate its current inventory of sales talent to determine if the people on board have the skills required in their new sales roles and if they need to be trained, coached or replaced.
“As the organization makes those changes, the sales compensation plan starts to pop like a circuit breaker. If this company has a compensation issue — perhaps people weren’t hitting their quotas or people weren’t earning as much or as quickly as they used to — it’s likely because the plan was designed for a different sales model,” he says.
Inconsistencies in a sales compensation plan must be addressed as the upstream and downstream alignments shift. “We see this situation play out over and over in different industries, from technology to manufacturing to business services,” Donnolo says. “Where the business evolves, sales evolves as well, and sales compensation must evolve to support that change.”
When SalesGlobe works with a client, it can’t always influence the other disciplines that work in conjunction with the strategy, the sales process and similar components. “We fix what we can fix as a team,” Donnolo says. “By fixing that thing, we may be repairing something that could be better addressed if we aligned the entire system. If you’re working on sales compensation and some of those other disciplines fall out of your range of authority, the question becomes, how do you engage the other executives so that you can start to get that alignment?”
5 questions you should ask your team about sales strategy
1. How effectively have we articulated our priorities around target customers, core and strategic products, channel mix, sales talent and financial growth?
2. How well does our compensation plan reflect decisions made in our Revenue Roadmap and C-level goals?
3. Which challenges are uniquely related to sales compensation and which may be indications of larger strategic issues?
4. How will the design of our plan help us to reach our objectives?
5. Have we followed an evaluation and design process that logically covers all of the bases?
