The Pay Puzzle

Salary has never been a subject that people feel comfortable talking about. “What’s your salary range?” is a question that job applicants cringe at even more than, “Where do you see yourself in five years?”

However, millennials, who are credited with changing many longstanding mores of corporate culture, are more comfortable than their baby boomer counterparts having frank discussions with colleagues, family and friends about what they earn. As a result, a number of companies are amending their policies to encourage people to speak up when they think something is amiss in how they or others get paid.

Experts in sales compensation structures say that just as companies are becoming more comfortable implementing glass-door policies about their salary structures, they would also benefit by examining their compensation models for sales teams and having more frank discussions with sales personnel about what can be improved.

Getting it right

“Sales compensation is one of the trickiest aspects of the sales organization to get right,” states Aja Frost, a blogger for sales and marketing software developer HubSpot. “The more variables you introduce to a sales comp plan, the likelier you
are to unintentionally promote competing behaviors. You also make it harder for your reps to understand how they’ll be paid, meaning they’re less inclined to go in the direction you’re intending.”

Also writing for BlogSpot, Mark Donnolo, founder and managing partner of sales consultancy SalesGlobe, says, “For every driver of behavior, there are several wrong roads your salespeople can go down.” He offers these tips for designing a better sales compensation plan:

Begin your plan with strategy and sales roles

The sales strategy answers questions about types of products and services you’re going to focus on, your target industries, and your sales potential and profitability goals. The answers to these questions must be clear before you introduce metrics to drive behaviors to those goals.

“You should also understand the sales talent you will need. Hunters? Farmers? Inside salespeople? Channel partners? Each of these roles will require a separate sales incentive plan,” Donnolo says. “Don’t skip this step and jump straight to mechanics. Many sales organizations do just that and are left with a plan that, at best, asks the salespeople to guess at strategic priorities, and, at worst, drives them to sell the wrong products and services.”

Frame the plan with solid fundamentals

Determine the total target compensation (TTC) for each role, and then set the pay mix, which is the proportion of salary and incentive at quota. Pay mix will vary by job type in an organization and is driven by several factors, including characteristics of your sales process, the type of sale and customer personas.

For example, a role focused on new customer acquisition for mid-sized accounts will likely have more incentive pay as a percentage of TTC (perhaps 50 percent base salary and 50 percent target incentive) than a role focused on current customer management for major accounts (perhaps 70 percent base salary and 30 percent target incentive).

Make sure your plan includes upside potential — incentive pay above TTC — for your top performers. “Without upside potential, the incentive compensation plan favors the company, but leaves it with only average sales talent. A core principle of incentive compensation is that the rep is putting incentive pay at risk in return for a significant return if she performs at a high level.”

Link pay and performance

Performance measures define the focus areas that are most important for each role. Each measure should represent the most significant pieces of the sales strategy that the role can control, such as revenue for a salesperson versus customer retention for an account manager.

A challenge for many organizations is determining which measures should be included in the sales compensation plan, which should be part of the performance management program, and which should simply be core expectations of that job, Donnolo states.

For each measure, the organization must define the level at which that measure will be tracked for the plan. Each measure will also be measured and paid on a certain timeframe, such as monthly or quarterly. Measure too infrequently, and the rep may have little control over their payment. Measure too frequently and the cycle may be out of sync with a long sales process.

Donnolo warns companies not to attach too many measures to a compensation plan, recommending no more than three. No measure should carry less than 10 percent weight, he adds. “The compensation plan doesn’t have to accomplish everything — in fact, it can’t. Find a balance between what you should pay for and what you should manage to.”

An accuracy problem

Last May, Xactly, a provider of software as a service (SaaS) tools for sales performance management and effectiveness, conducted an annual sales compensation best practices study to define the key trends and metrics for organizations that want to motivate a high-performing sales organization. Respondents to the study said incentive compensation management is a key foundational component of success for planning, executing and optimizing a well-rounded sales performance management program. Yet more than 60 percent of respondents ranked their company as average or lower when it comes to sales compensa­tion administration, meaning they are not using sales compensation as strategically as they could.

“This is an opportunity for most organizations to focus on improving, especially given the correlations between sales compensation helping to improve overall performance and the impact that accurate, on-time payments have to ensure sales representatives’ success,” the report states.

Staggeringly, but perhaps not surprisingly to some, the Xactly report found that 83 percent of organizations struggle with payment inaccuracies and adjustments — a factor that can erode sellers’ confidence and cost the business time and money.

A big part of the problem is lack of tracking. Xactly found that six in 10 companies do not track payment accuracy. They are making a best guess about the accuracy of their commission payments.

“Tracking the accuracy of cost of errors as a percentage of total expense, including the quantity of errors, can help a business gain a clear understanding of what could be gained by improvements in payment accuracy,” the report states. It suggests improving and clarifying the pay metrics, implement­ing automation and simplifying the pay plan (reducing the number of metrics) are three key steps to improving payment accuracy.

Time to payout is improving as more companies implement new technology into their processes. However, when asked how long does it typically take from the last completed calendar period to process incentive payments, nearly one third said it takes four weeks or longer to process payouts.

“On average, businesses spend 10 percent of revenue on payments. This is a large portion of money being spent on sales compensation,” the report states. “Given this metric, efficiency and optimization of processes and accuracy of calculations is often a key initiative for business leaders. More than 40 percent of respondents said their payment ratio was above 20 percent, which makes improving the payment metrics even more important.”

Simplify, simplify, simplify

The Xactly study found a correlation between plan complexity and other key factors, such as payout accuracy and sales rep attrition. “Whatever you can do to reduce the complexity in the plan and process will allow you to improve accuracy, gain the trust of the sales team and motivate sellers in the right direction,” it states. “The highest performing companies utilize a governance board to monitor comp plans and their effectiveness, gaining the ability to modify as appropriate, combined with ongoing benchmarking to give intelligent insight into the metrics. Plan complexity has a hidden impact on sales rep attrition.” (See the sidebar on page 29 for tips on simplifying your pay plan.)

The ABCs of sales compensation

Justin Lane, senior director of strategic services at Xactly, offers an ABCs of building a better sales compensation model:

Align your plan to the sales roles. Sales reps tasked with bringing in top-line revenue and new logos should not be paid the same as relationship managers helping facilitate a transactional renewal. Different incentive plans are required for each sales role, and each plan should be tailored to the individual role’s parts in the sales process.

Base your plan on company culture and philosophy. How do you want to differentiate pay between low- and high-performing reps? Do you want to create a competitive moat around your sales force with an appropriate market pay strategy based on industry, job role and geography? Your answers to these questions will help determine the level of reward for each role in your incentive plan.

Construct your pay plan to drive the right behaviors. A strong sales compensation model should be aligned with company goals, simple to understand and communicate, and give sales reps and managers target objectives to work toward. Ultimately, this will help your plan incentives drive your desired sales behaviors.  

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