We recently helped a client evaluate their sales compensation plan (it was not working well) and in the process we recommended and they agreed that they start over and create one from scratch.
It was an interesting process and reminded me of some key principles around compensation in general and sales comp in particular that I learned a long time ago, they are:
- Any compensation plan must be simple to understand, measure and track (this is the 30 second rule: if you cannot explain it completely in 30 seconds, it is probably too complex).
- Results must be easily and regularly reported so that the employee knows whether or not he/she is winning or losing at all times. I prefer that the sales person / employee be able to track and monitor her/his own results with the finance team available to support and verify.
- The plan must be consistent over time (i.e., you cannot change the goal line).
- The plan must clearly be in line with and support the business’ overall strategic goals. I can’t tell you how many times I’ve seen compensation plans that actually provided perverse incentive to the employee!
With respect to sales and incentive compensation, in my experience the more you can leverage compensation to results, the better off you’ll be in the long term. As the CEO, that means allowing your sales employees to earn more from their profitable sales results than they can from their salary. If their efforts provide profitable growth for the Company, do you really mind that they make more money than some of the company’s executives? Absolutely not! Rather you should be delighted – and so will they be.
The problem with salary-heavy compensation, of course, is that it decreases motivation and makes it virtually impossible for a small company to scale. Commission or bonus-focused compensation plans, however, provide tremendous upside for growth and allow CEOs to truly leverage their people. I’m not talking about a unitary system here that’s only good for the company – those plans will never work. Bonus-heavy compensation is ultimately better for everyone, providing ample opportunity for each member within the sales team hierarchy (and the company itself) to make more.
If your incentive compensation plan is not providing the incentive for your key sales team members to excel, it may be time to re-think and re-design a plan the better aligns everyone’s interests.
Author: Kent Thomas @advancedCFO