designing sales comp
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ca. 30 pages of great information on sales compensation designTRANSCRIPT
Designing Sales Compensation PlansAn Approach to Developing and ImplementingIncentive Plans for SalespeopleJerome A. CollettiColletti-Fiss LLC
David J. CichelliThe Alexander Group Inc.
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About WorldatWorkWorldatWork®, formerly the American Compensation Association and the Canadian CompensationAssociation, is a global, not-for-profit association of more than 26,000 compensation, benefits and humanresources professionals. Founded in 1955, WorldatWork is dedicated to knowledge leadership in com-pensation, benefits and total rewards disciplines associated with attracting, retaining and motivatingemployees. In addition to membership, WorldatWork offers highly acclaimed certification (CCP®, CBPTM
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14040 N. Northsight Blvd.Scottsdale, AZ 85260
Telephone 480/951-9191 Fax 480/483-8352www.worldatwork.org
© 1993, 1994, 1996, 1998, 2000 WorldatWork
ISBN 1-57963-0162
No portion of this publication may be reproduced in any formwithout express written permission from WorldatWork.
Editing: Rodney Platt Graphic Design: Susannah Blackmon
Jerome A. Colletti is Managing Partner of Colletti-Fiss LLC, a leading source of expertiseand insight on strategic compensation issues affecting the productivity of sales and cus-tomer contact employees, with its office in Scottsdale, Ariz. He provides advice to top man-agers on the design and implementation of compensation plans – particularly, incentive payarrangements – to reward employees for sales success, customer retention and customer loy-alty. The author of more than 50 publications, the most recent, Compensating New Sales Roles:
How to Design Rewards That Work in Today’s Selling Environment (with M. S. Fiss, AMACOM, New York,1999), he has been a Cert 5 (“Element of Sales Compensation”) instructor since 1981. He holds a B.A. fromSt. Mary’s University (Minnesota) and an M.B.A. from the University of Wisconsin.
David J. Cichelli is a Senior Vice President of The Alexander Group Inc. He is located in thefirm’s Irvine, Calif., office. He consults with a variety of organizations on sales organizationdesign, marketing and sales planning, buyer segmentation, field coverage models, salesforecasting, quote allocation, and sales compensation. He is the author of WorldatWork’sseminars on sales compensation. He speaks extensively on sales effectiveness issues toindustry associations, including WorldatWork, Conference Board and Columbia University.
He holds a B.S. from Pennsylvania State University and an M.S. from Michigan State University.
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Designing SalesCompensation Plans An Approach to Developing and Implementing Incentive Plans for Salespeople
W inning and keeping cus-tomers is the ultimatecompetitive challenge.
Organizations must serve customerseffectively, and they continuallymust seek to improve their custom-er contact performance. Customersdemand effective products, betterservice and quality, and competitivepricing. Organizations attempt toproduce the right products for theright customers at the right price.
The sales force must deal withboth the changing demands of cus-tomers and the developing compe-tencies of the organization. In mostindustries, the sales force is the pri-mary customer contact resource, andthe customer often sees the sales rep-resentative as the “face” of the orga-nization. Effectively managing salespersonnel in today’s competitive en-vironment involves rethinking tradi-tional assumptions about motivatingand rewarding these individuals.
The sales force must satisfy cus-tomers’ needs with the organiz-ation’s available products and ser-vices. However, as highlighted inFigure 1 on page 3, three factors continually change: products, buy-ers and competitors. Over time,complexity increases for each factor.Organizations respond to thesechanges by reshaping their sales-organization focus. As a result ofthese ongoing changes, organiza-tions must continually examine theeffectiveness of their sales forces inmeeting customer expectations.
2
Linking the SalesCompensation
Plan to Business Strategy1
resent from 50 to 70 percent of thetotal sales-department budget.
Sales compensation is also one ofthe most powerful tools available tomanagement to achieve its businessresults. The incentive component(i.e., bonus or commission) commu-nicates the results the organizationneeds its sales personnel to achieve.In most sales organizations, the salesforce is extremely interested in thesales compensation plan. In fact,sales representatives typically judgethe plan by a single criterion: “Am Imaking more money now than I dida year ago?”
pensation plan often is the first pro-gram sales management scrutinizeswhen there is a concern about busi-ness results. There are two factorsinvolved: the overall cost of the salescompensation plan and its role inbusiness strategy execution.
Depending on the industry, directcompensation (salary plus incentivepay) can range from 3 to 10 percentof total sales volume, and it may rep-
There are several sales support pro-grams that management can use toalign business objectives with cus-tomer expectations. The sales com-
Linking the SalesCompensation
Plan to Business 1Establishing the
Design Team2Assessing theExisting Plan3
Designing theNew Plan4Implementing the New Plan5
EvaluatingResults6
3
Figure 1: Changes in the Marketplace and Sales-Organization Response
Buyers
Competitors
OrganizationFocus
Products
FROM TO
Few productsSimilar life cycles
Similar productsSimple products
Few buyersGeneral buyers
Central decision-makingSimilar-sized accounts
Transactions
Similar productsAlike pricing
Similar channels
Product focusSales-driven
Individual performanceSlow to change
Measure efficiency
Many productsVarying life cyclesDissimilar productsComplex products
Many buyers, functionsEnd-use/specific specialized buyersDecentralized decision-makingVarying account sizesRelationships
Dissimilar productsDifferent pricingDissimilar channels
Customer focusCustomer-drivenTeam performanceQuick to changeMeasure effectiveness
FACTORS
CHANGES IN THE MARKETPLACE
SALES ORGANIZATION RESPONSE
■ Return on compensation invest-ment. Today, most companiesview their customers as “assets”of the business. Thus, invest-ments in sales people are period-ically reviewed for improvement.Because sales compensation isone of a company’s most signifi-cant investments, it offers anopportunity to link pay to salesperformance. A key question:Did the organization get a betterreturn on compensation dollarsspent compared to a year ago?
If a sales compensation planworks effectively, the answers tothese questions will be positive. Un-fortunately, changes to a plan canlag behind changes in businessstrategy by one or two years, so theprogram may not be aligned withexisting business requirements.
■ Customer satisfaction and loyalty.Customer satisfaction and loyaltyplay a critical role in maintainingand growing market share in competitive markets. In such markets, the sales personnel arefrequently held accountable forretention. A key question: Does the plan motivate andreward sales force to retain andservice customers in an effectivefashion?
■ Sales talent. In most companies,the compensation plan is one ofthe more important tools usedby managers to help attract andretain the caliber of people need-ed to successfully sell to andinteract with customers. A keyquestion: Does the organizationhire and keep the appropriatecaliber of people for its sales jobs?
Management typically judges thesuccess of a sales compensation planwith multiple criteria:
■ Growth. The desire to grow – by creating new marketing, win-ning new customers and contin-ually improving processes toretain current customers – is atop priority at most companies.A key question: Does the planensure sales volume growth?
■ Profits. Increasingly, companieswant sales people to focus onprofitable business. The avail-ability of meaningful informationabout purchase transactions at theaccount level and the intensepressure in many industries onoperating profit margins aremotivating top management toexamine the mix of business soldto customers. A key question:Did the sales force sell the rightmix of products, services or both?
4
Figure 2: Four-Step Process for Plan Design
AssessExisting
Plan
DesignNewPlan
ImplementNewPlan
EvaluateResults
Step 1 Step 2 Step 3 Step 4
DESIGN TEAM
Establishing theDesign Team2
Designing an effective sales compensation plan involves a four-step process: assessment, design,implementation and evaluation(Figure 2). Before this process isundertaken, it is important to estab-lish a design team composed of rep-resentatives of several functions.Making a major change to the salescompensation plan is among themore difficult tasks a sales depart-ment can undertake. The plan mustreflect an organization’s objectivesin the following functions:
■ Sales
■ Marketing
■ Finance
■ Human resources
■ Information systems.
Typically, the organization presi-dent or division general managerestablishes the design team andappoints the functional representa-tives. The design team then under-takes fact-finding and analysis toarrive at conclusions about the ef-fectiveness of the existing sales com-pensation plan. Through a series ofmeetings and discussions, the de-sign team can develop a consensusabout the strengths of the existingplan and the opportunities for performance improvement with anew plan.
Organizations generally find thatmultifunctional design teams workbest to develop new sales compen-sation plans. The involvement ofrepresentatives from each of thesefunctions increases the likelihoodthat the new plan will align the salesforce’s efforts with the organiza-tion’s business objectives. Also, ex-perience shows that when a designteam is used to identify new planobjectives, test alternatives, deter-mine the feasibility of a preferredplan and build consensus forchange, the new plan is more likelyto be appropriate and implementedmore easily. Figure 3 illustrates therespective role of each design teammember.
The ultimate “owner” of the salescompensation plan is the sales department. This department is responsible for aligning internal objectives with external conditions.However, the involvement of theother functional areas ensures thatconsideration is given to all compet-ing objectives:
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Figure 3: Multifunctional Design Teams
Assessing theExisting Plan3
Lead processClarify objectives
State business/product objectivesEstablish forecastsDevelop sales aids
Provide performance dataValidate cost/benefit assumptions
Facilitate design processConduct pay/performance analysisGather external pay dataEnsure corporate/legal compliance
Describe reporting capabilityAdjust management information system (MIS)Provide pay and performance data
■■
■■■
■■
■■■■
■■■
Sales
Marketing
Finance
Human Resources
Information Systems
ROLES AND RESPONSIBILITIESFUNCTION
■ The marketing department pro-vides “headwater” informationabout product and marketingobjectives. New-product launch-es, margin improvement, seg-ment penetration and competi-tive positioning are elements ofthe marketing plan. These objec-tives should reflect customer ex-pectations realistically.
■ The finance department providesvolume and profit objectivesfrom the business forecast. Thesenumbers help establish quotas.Additionally, this departmentcan test pay and performanceassumptions regarding the newplan, and estimate the costs ofvarious sales-performance pro-jections.
■ Human resources plays a pivotalrole in the development of a newplan. This department is well-suited to organize and facilitatethe design process. It can bringtogether information on thesales-organization structure, jobdescriptions, salary grade and
range assignments, employeeattitudes about the plan, andexceptions made to payout cal-culations. In addition, thedepartment can provide externaldata on sales compensation lev-els and ensure compliance withorganization practices and legalrequirements.
■ Information systems contributes tothe design process by assem-bling data on performance andpay levels. Also, the informationsystems department developstracking and reporting systemsto administer the new program.It is important to avoid preclud-ing certain designs simplybecause existing systems do notreport the information. It is bestto develop the right plan andthen adjust it to fit existing prac-tices. Changes always can bemade to information systems toadopt preferred features.
An assessment of the effectivenessof an existing sales compensationplan should identify those featuresthat work effectively and
Using a design-team approach re-quires an up-front investment oftime; however, the benefits far ex-ceed the effort. Sales organizationswork best when there is clarity ofpurpose, and a design team can en-sure that sales efforts are supportedby the sales compensation plan.
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Figure 4: Sample Pay/Performance Data Analysis – Sales Volume vs. W-2 Earnings
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$1,600,000 $1,800,000 $2,000,000 $2,200,000 $2,400,000 $2,600,000 $2,800,000 $3,000,000 $3,200,000
W-2
Ear
nin
gs
Sales Volume
turnover, complaints and low mo-rale; changes in any of these factorsalso should trigger a review. Finally,sales managers should not feel thatthe sales compensation plan “gets inthe way” of effective performance.The plan should help managementdirect sales personnel and help en-sure alignment with sales-manage-ment objectives.
Measuring Intent vs. Outcome
An assessment consists of examin-ing the intent of a sales compensa-tion plan compared to the outcome.Several factors can be tested by thedesign team:
■ Support for business strategy.The existing plan specifies objec-tives for the sales force, and theplan’s performance measuresrepresent a de facto statement ofwhat is expected of sales person-nel as well as the intent of thebusiness strategy. The designteam can assess the outcome ofthis strategic intent throughexecutive interviews and fact-finding efforts with sales person-nel – first, by comparing state-
ments of performance focus (asprovided by managers and salespersonnel) to stated objectivesand, second, by analyzing per-formance data. While the salescompensation plan may not bethe only reason a sales force fallsshort of its objectives, it must beconsidered a possible reasonunless proven otherwise.
Analysis of pay and perform-ance data can yield additionalinformation about plan effective-ness. A helpful way of display-ing the data is to present a com-parison between payout and per-formance measures (Figure 4). If no close link is demonstrated,there may be a problem with thesales compensation plan.
■ Achievement of payout objec-tives. Next, it is important to testwhether payout levels have beenreached to the expected extent.The intent may be a normal dis-tribution around the target com-pensation. However, notice inFigure 5 that only 30 percent ofthe sales personnel achievequota performance whereas wewould expect 60 to 70 percent ofall sales personnel to achieve
examine opportunities to improvesales-force productivity throughnew or revised plan elements.
A sales compensation plan mustsupport the organization’s strategy.If any factor changes that may affecthow or what an organization shouldsell to its customers, the plan alsomay require changes. As may be ex-pected, any change to products,buyers or competitors’ actions mayaffect the organization’s sales strate-gy and, thus, the sales job. As aresult, the effectiveness of the planmay be limited. If the plan is notupdated to reflect existing circum-stances, the following conditionsmay arise:
■ Missed sales objectives
■ Dissatisfied sales personnel
■ Frustrated line sales managers.
Missed sales objectives – such asvolume, product mix and profit –should trigger a plan review. Dissat-isfied sales personnel may commu-nicate their displeasure through
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Figure 5: Sample Distribution of Quota Performance
0%
Per
cen
tag
e o
f P
op
ula
tio
n
Percentage of Quota Achieved
5%
10%
15%
20%
25%
30%
35%
40%
<71% 71-80% 81-90% 91-99% 100-110% 111-120% 121-130%
10%
35%
15%
5%
10%
5%
20%
Designing theNew Plan4
quota. It is important to questionwhether this type of outcomewas intended.
Comparison to external pay levels also helps evaluate thecompetitiveness of pay practices.The organization pay philosophy(intent) should match the payoutlevels (outcome).
■ Increased effectiveness of thesales force. While less easy tomeasure, sales-personnel compe-tency should grow. Turnover statistics represent a measure of sales-force retention. Reportsfrom field sales management canindicate whether a sales compen-sation plan continues to supportthe growth of sales personnel.This information also can begathered through surveys ofemployee attitudes and customer satisfaction.
The assessment results shouldprovide the design team with infor-mation about what is working welland what is not. Furthermore, theconfirmation of business strategyobtained through executive inter-views can provide initial conclu-sions about direction given to the
After the fact-finding process hasbeen completed, assessments aboutthe existing plan have been madeand preferences about future strate-gic outcomes have been identified,the design of the new incentive plancan begin. Essential components ofthe design process are
■ New-plan objectives
■ Sales-job definition
■ Design of plan elements.
New-Plan Objectives
There are three major reasons whyorganizations typically have differ-ent compensation plans for sales-people than they do for other ex-empt employees. First, salespeoplegenerally are not under day-to-daysupervision, and they have relative-ly little contact with their supervi-sors compared to other employeesat a similar level in the organization.They must set their own scheduleand work independently, often outof their home. Second, in many or-ganizations, sales is a “line” positionthat directly affects revenue attain-ment as well as profit and loss re-sults. Organization results dependdirectly on the productivity of sales-people. Third, in most cases, sales is a directly measurable activity;therefore, salespeople can be heldaccountable for the results of theirefforts and behavior.
sales force by management. Also,the results of the assessment showthe degree to which sales jobs aredefined and chartered properly. Inappropriate definition of a salesjob can lead to improper perform-ance measures in the sales compen-sation plan.
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Figure 6: Sample Sales Compensation Plan Mission Statement – XYZ Pharmaceutical Co.
PHILOSOPHY – Our company will be a leader in the U.S. pharmaceutical market by being market-oriented. This orientation to the business means our first responsibility is to our customers (i.e., the physicians, nurses, pharmacists and patients who recommend or use our products). To operate a market-oriented sales force, a team of highly talented sales managers and sales representatives is required. This team will be characterized as results-oriented and customer- and quality-focused. To attract and retain talented people for its sales organization, the company will offer, and regularly update, a competitive and innovative sales compensation plan. This plan will provide assurance to all salespeople that management is dedicated to maintaining a sales force of high ethics and integrity. These assurances are expressed in the objectives and principles that shape our plan.
OBJECTIVES – Five objectives form the strategic foundation of the company’s sales compensation plan:
Talent. Attract and retain the best person available for each position within the sales organization.
Quality work. Emphasize the importance of high-quality work performance and reward it accordingly.
Work environment. Achieve business plan results through personal growth on an individual basis and as a participant on the sales team.
Career orientation. Encourage commitment to the company by offering challenging work assignments and rewarding loyalty to the company based on performance contributions.
Recognition. Gain the commitment of all sales employees to the company’s values and beliefs by sharing the credit for business success through the informal and formal recognition of personal and team contributions.
PRINCIPLES – Four principles will guide the company’s sales compensation plan practices:
Labor-market comparisons. The company will offer and pay salaries that are competitive with other leading pharmaceutical
companies. It will be among the best-paying companies in total cash compensation. This means that sales employees will have the opportunity to earn above-average incentive pay based on exceeding performance expectations.
Performance orientation. Management is dedicated to a pay-for-performance orientation when determining individual merit increases, bonus awards and other forms of formal recognition. Performance measures and goals will be used to establish and communicate performance standards. Exceeding the performance standards will set the basis for recognizing excellence in sales achievement. Because “stretch” will be built into performance expectations, sales employees can expect to be rewarded above industry average for outstanding accomplishments.
Communications policy. The company will make every effort to communicate its sales compensation plan clearly to all sales employees. However, understanding the sales compensation plan is a two-way responsibility. Field sales managers are expected to explain and answer questions pertaining to the plan. Sales employees are expected to understand plan details and put forth behaviors that will result in expected performance. When uncertain about plan practices, sales employees are expected to ask for further explanation or information.
Administrative practice. Management is committed to the fair and equitable administration of the sales compensation plan. Communication about the plan will be published and distributed to all sales employees. Decision-making about pay and recognition will be taught to all sales supervisors and managers to ensure uniformity of practice. In any situation where any individual believes fair treatment has not characterized the reward received, the company’s internal appeal and review process should be used. The opportunity to have one’s concerns heard and resolved reflects management’s desire to be fair and reasonable in its dealings with salespeople.
XYZ PHARMACEUTICAL CO. MISSION STATEMENT
■ Serve customers
■ Sell its products
■ Achieve its sales and financialobjectives
■ Motivate and manage the performance of the sales force.
An example of a possible ap-proach to a comprehensive state-ment of philosophy and objectives is provided in Figure 6.
Because organizations have dif-ferent business strategies, the firststep in the design process is to iden-tify plan objectives. While this mayseem obvious, it often is overlooked.Too frequently, organizations relyon the traditional objective of “at-tracting, motivating, rewarding andretaining the sales force.” This objec-tive is important, but today’s orga-nizations tend to use a much morecomprehensive philosophy state-ment as the basis for their sales com-pensation plan objectives. Typically,new-plan objectives declare how theorganization intends to
For these reasons, a sales com-pensation plan can be an importantsales-management tool. This plancan help management direct thesales force to
■ Target the type of activitiesrequired against specific busi-ness objectives
■ Manage time efficiently andeffectively
■ Achieve results according to cus-tomer and product differencesand priorities.
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Figure 7: Contemporary Sales and Service Model – Elements and Key Tasks
Analyze market
Contact prospects
Qualify leads
Identify needs
Participate in trade shows
Plan sales activities
Select accounts to call on
Select products for calls
Identify buyers/buying influences
Make presentations
Overcome objections
Introduce new products
Expedite orders
Handle service problems
Train customer or user personnel
Provide customer and competitor feedback to management
Coordinate service efforts
Facilitate increased customer satisfaction
CustomerService
CustomerPersuasion
CustomerIdentification
effective compensation plan design.Increasingly, the role of “sales” is
shared with other functions outsidethe sales department, including cus-tomer service, business develop-ment functions in product divisions,e-commerce, tele-centers, channelpartners and alliance members.Additionally, many sales organiza-tions must organize into teams tocoordinate multiple contact pointsthat orchestrate total customer man-agement. As a result, in some com-panies the sales job no longer hassole responsibility to win and retaincustomers. The shift to “shared”responsibility has implications notonly for various elements of salescompensation, but also for howcompanies compensate teams. (Forkey definitions relating to salescompensation, see page 10.)
A sales representative, either indi-vidually or as a member of a custom-er team, is generally responsible for“personal selling.” Personal selling isface-to-face contact with a buyer dur-ing which a presentation is made forthe purpose of securing an order or acommitment to purchase or recom-mend purchase. Selling may be onlyone of several tasks that comprise a
particular sales representative’s posi-tion. In organizations with broadproduct lines that sell and serve adiverse set of customers, the sales jobcan be quite complex. An organiza-tion’s marketing strategy and theway customers buy may require thesales representative to perform avariety of nonselling tasks. It also islikely that the representative will besupported by other organization re-sources, including product specialists,applications specialists and/or cus-tomer service representatives. There-fore, organizations may find it usefulto have a conceptual model to clarifythe role of the sales job in the processof selling and servicing customers.
Figure 7 shows a framework thatillustrates the scope of work thatcould be associated with a sales job.For purposes of the sales compensa-tion plan, the second element in themodel is the starting point for defin-ing the role of the sales job in a par-ticular organization’s marketing pro-cess. The role of the sales job in cus-tomer persuasion largely will con-tribute to management’s decisionabout the most appropriate mix ofsalary and incentive pay in forminga competitive sales pay package.
Sales Job Definition
The changes taking place in howcompanies sell to and interact withtheir customers, largely motivatedby the e-commerce revolution, oftenresult in new sales roles. The prolif-eration of new sales roles – many ofwhich are formalized through newor changed jobs – creates the need toreconfirm what sales people areexpected to do. Essential to thedesign of an effective sales compen-sation plan is a clear definition of theobjectives and tasks of the sales job.
Sales jobs vary by industry andthey also may vary within an organ-ization. Each organization has a dif-ferent strategy with respect to targetcustomers and products offered tothose customers. Regardless of jobtitle, management should carefullyconsider the role the job plays inattracting and servicing customers.This is important because the com-pensation plan should recognize therole that the sales person plays inpersuading customers to do busi-ness with a company. Paying a sales-person for the degree of personalpersuasion exercised in the salesprocess is a fundamental principle of
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Sales compensation has a unique vocabulary todescribe various program characteristics. Follow-ing are some of the most prevalent terms:
■ Mix: The mix is the relationship between thebase salary and incentive-opportunity compo-nent. Mix is expressed as a percentage of “targettotal compensation,” which is the pay level forachieving expected performance. The mix isrealized when results are achieved at the “meetsexpectation” level. For example, a 90/10 planreflects a mix of 90-percent base salary and 10-percent incentive opportunity.
■ Leverage: Leverage represents the upside earn-ing opportunity. A common leverage amountfor sales positions is a “triple,” which meansthat three times the at-risk portion of the mixequals the upper earning opportunity for thetop 10 percent of all performers. Note that lever-age does not specify a “cap”– it only sets anupper earning target for the best performers.
To calculate triple leverage, multiply the at-riskportion by three and add the result to the basesalary. For example, a sales job with a targettotal compensation of $100,000, an 80/20 mixand triple leverage would have a base salary of $80,000 ($100,000 x .80), target earnings of$20,000 ($100,000 x .20), and a target upsideleverage of $140,000 ($20,000 x 3 plus the basesalary of $80,000).
Whether a sales job calls for triple leverage,double leverage or some other leverage largelyis driven by three factors: 1) the degree of cus-tomer persuasion, 2) profitability associatedwith the products and services sold, and 3)labor-market pay data associated with top-per-forming salespeople and what it takes to retainthe most successful salespeople.
■ Commission: A commission is a type of incen-tive. It can be expressed as a percentage of salesdollars, a percentage of gross margin (profit) or adollar amount per unit sold. A commission-onlycompensation plan sometimes is referred to asfull commission or straight commission.
■ Bonus: A bonus also is a type of incentive. Inmost cases, a bonus payment is tied to actualperformance compared to a goal (e.g., a salesquota). The bonus payment may be expressedas a percentage of salary, a percentage of adefined target incentive award or a flat dollaramount. For example, a 25-percent bonus ofbase salary may be paid if 100 percent of the
sales quota is achieved. Sales-bonus plans areused most often when the earnings potential ofdifferent territories needs to be equalizedthrough the quota-allocation process.
■ Formula: An incentive formula relates the payopportunity to performance achievement. Mostsales-incentive plan formulas fall into one ormore of the following three categories:
• Unlinked incentive formula. In a sense, eachperformance measure acts as its own incen-tive plan. Bonus or commission is earned bythe sales representative for accomplishmentsagainst one measure, regardless of whatoccurs on the other performance measures.Too many unlinked performance measuresmay motivate sales representatives to “shopthe plan” to attempt to maximize their earn-ings by doing what is easiest for them to ac-complish instead of what managementprefers to have accomplished.
• Adjusted-value incentive formula. Values of per-formance measures vary to reflect their rela-tive importance to the company. For example,with the use of point systems, values can beselected to underscore the importance of adesired sales result. Product A may be worthmore for each dollar of sales than Product B.In such a case, the point value for each dollarof Product A sales may be worth 10 points,while each dollar of Product B sales may beworth only five points. As a result, sales rep-resentatives are paid more to sell Product Athan Product B because of the greater strate-gic value of Product A to the company.
• Linked-incentive formula. Linking two or moreperformance measures in a defined mannercan ensure that sales objectives are achievedin the order of importance as determined bymanagement. In general, there are three typesof linked-formula designs: hurdles, multipli-ers and matrices. With hurdles, a stated levelof performance must be achieved on onemeasure before another measure (and, therefore, a bonus or commission payment)can be activated. Multipliers are used to calculate a second commission or bonus pay-ment based on incentive earnings from theprimary performance measure. With matri-ces, two competing performance measuresare tied together so that payout rewards arehighest when outstanding performance isachieved on both.
KEY SALES COMPENSATION DEFINITIONS
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Sales Representative Job A:70% salary/30% bonus or commission
Sales Representative Job B:50% salary/50% bonus or commission
Sales Representative Job C:90% salary/10% bonus or commission
CustomerService
CustomerIdentification
CustomerPersuasion
Job A
Job B
Job C
Figure 8: Contemporary Sales and Service Model – Sales Jobs and the Salary-to-Incentive Ratio
■ Eligibility. Determining job eligibility is the first step in de-signing plan elements. Generally,two factors are considered whenevaluating a job for participationin the plan: customer contactand degree of persuasion. Thejob must involve both contact
Design of Plan Elements
The design of a sales compensationplan requires making decisionsabout a number of elements: eligi-bility, target total compensation, mixand leverage, performance mea-sures, and incentive-formula fea-tures. Following are summaries ofthese elements, along with explana-tions of the decisions that must bemade (Figure 9 on page 12):
In general, when a sales job isgiven primary responsibility forcustomer persuasion, the compen-sation mix is 70 percent salary, 30percent incentive compensation.Shared responsibility for customerpersuasion and assignment ofresponsibilities in customer identifi-cation and customer service willincrease or decrease the salary-to-incentive ratio. Figure 8 illustratesthis concept as it pertains to threedifferent sales-job definitions.
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Figure 9: Key Design Factors for Sales Compensation Plans
Which jobs will be included in the plan?
At what market percentiles should base salaries and incentive opportunities be set?
What is the salary/incentive ratio (i.e., mix)?What percentages over target pay are acceptable (i.e., leverage)?
What is the desired level of production (e.g., sales dollar, units)?What strategic measures must be met (e.g., product mix, profit)?
Will bonuses or commissions, or both, be used?
Eligibility
Target Total Compensation
Mix and Leverage
Performance Measures
Incentive Formula
DECISIONSFACTORS
What are the caps, thresholds, performance periods and payment periods? When shouldsales crediting occur?
Formula Features
■ Mix and leverage. The mix – therelationship between base salaryand incentive opportunity as apercentage of target cash com-pensation – is determined by theinfluence of the sales job in thepurchase decision. The moreimportant the salesperson is tothe buying process, the higherthe mix (i.e., more money isavailable in incentives instead ofbase salary). Industry surveyssuggest that an average mix is70/30. Therefore, jobs with a50/50 mix should place signifi-cant emphasis on the sellingskills of the salesperson as a fac-tor that causes the customer tobuy. A 90/10 mix would suggestthat the salesperson is only oneof many factors affecting the cus-tomer’s buying decision.
Many sales jobs have a “triple”leverage, or upside earning poten-tial. A triple leverage is defined asthree times the amount of money atrisk in a given mix, and it representsthe incentive opportunity. Leverageat higher or lower rates generally isdetermined on the basis of the de-gree to which the job is subject tohigh risk/greater reward or rela-tively lower risk. For example, a bo-nus-eligible position with a 90/10mix might have a double leverage,but a job with a 50/50 mix couldhave a quadruple leverage.
■ Performance measurement.Performance measurement forincentive compensation purpos-es includes selecting the most
with customers and a persuasionrole, which means the employeeattempts to persuade customersto purchase from the organization.Many customer-service jobs mayfeature customer contact withoutpersuasion responsibilities.
■ Target cash compensation. Thetarget cash compensation for asales job represents the pay levelfor achieving expected perfor-mance. It is a combination ofbase salary and incentive oppor-tunity. Many factors contributeto selecting the target cash com-pensation for a sales job: marketdata, internal equity and cost ofsales. Each organization mustbalance these competing factorsto arrive at a preferred level oftarget cash compensation.
13
Figure 10: Performance Measures Associated with Sales Excellence
Volume
PERFORMANCEMEASURES
BENCHMARK METRICS
AND DEFINITIONS
SPECIFIC ILLUSTRATIVE PERFORMANCE
MEASURES
Metrics to gauge “top line” results in either absolute or relative terms
Revenue dollars
Units
Revenue dollars as percent of quota
New product(s) revenue
New customer(s) revenue
ProfitabilityMetrics to quantify the sale of profitable business
Gross margin dollars
Gross margin percent
Price realization (i.e., actual price to list)
Business “mix” (i.e., applications or solutions that have profit advantage)
Sales ProductivityMetrics to measure improvement in the return on sales investment
Revenue by sales job
Revenue by customer segment
Revenue per first order
Customer Satisfaction
Metrics to assess customer retention and loyalty
Survey ratings of customer satisfaction (overall; year-to-year gains)
Account or revenue retention (i.e., “churn” measurement)
Account share growth
A helpful rule of thumb suggestsa plan should have three or fewermeasures. One of the measuresshould be a volume measure that re-wards for production. This measureshould be the most highly weightedin the plan. Additional measuresshould complement the volumemeasure, directing what type of vol-ume would be the best. Examplesare as follows:
■ More profitable volume, mea-sured by gross margin dollars or price realization
Benchmarking sales performancemeasurement practices of lead-ing companies identifies fourmetric categories:
• Revenue
• Profitability
• Sales and productivity
• Customer satisfaction.
Figure 10 defines these categoriesand provides illustrative mea-sures for each.
appropriate measures to evalu-ate sales results, establishingstandards to define expectations(e.g., goals and quotas), andtracking actual accomplishment.The selection of performancemeasures is one of the most criti-cal steps in designing an effec-tive sales compensation plan.Unfortunately, many plansattempt to address different per-spectives by incorporating manymeasures. This can be an ineffec-tive approach. Often, the sourceof too many measures in a planreflects management’s lack ofagreement about the most impor-tant objective for the sales job.
14
Figure 11: Sample Incentive-Plan Formulas for a Sales Representative Job
Comments: The mix is 0/100 with a progressive ramp after 100 percent of quota is met. The strengths of theformula are its simplicity and its ability to drive volume. The weaknesses are that it can result in under- or overpayment, and it may lead to overselling the customers.
Base salary: noneCommission: monthlyTarget pay: $60,000, uncapped
Straight Commission
Comments: The mix is 50/50 with a progressive ramp after 100 percent of quota. The strengths of thisformula are its simplicity and the fact that it drives the “right” sales volume. The weakness is that, ultimately,sales representatives still can choose what to sell.
Base salary: $30,000Commission: monthlyTarget pay: $60,000, uncapped
Variable Commission
Comments: The mix is 70/30 with a progressive ramp after 100 percent of quota. The strength of this formula is that it equalizes earnings by using bonuses. The weakness is that it is very quota-sensitive.
Base salary: $42,000Bonus: monthlyTarget pay: $60,000, capped
Bonus Plan
Comments: The mix is 70/30 with no ramping of commission. The strength of this formula is that it links twomeasures: the payout of quarterly bonuses with commission earnings. The weakness is that it may be too complicated.
Base salary: $42,000Commission: monthlyTarget pay: $60,000, uncappedCommission rate on all sales: 6%
Linked Plan
Comments: The mix is 70/30 with no ramping. The strength of this formula is it addresses multiple objectivesby varying payout by product. The weakness is that including too many products can dilute the sales focus.
Base salary: $42,000Commission monthlyTarget pay: $60,000, uncapped
Adjusted-Value Commission Point Plan
% of Quota0-100%
more than 100%
% of Sales Dollar4%7%
% of Quota % of Sales DollarProd. A
3%5%
0-100%more than 100%
Prod. B5%8%
Prod. C9%
12%
% of Monthly Quota70%80%90%
100%110%120%130%
% of Monthly Target Incentive0%
50%75%
100%120%140%160%
ProductABCDE
Point Value/Unit586
102
( Each point equals 10 cents)
Gross Profit15%20%25%
Level of Commission Dollars0%
10%25%
Quarterly Profit Incentive
15
Figure 12: Guidelines for the Design of an Incentive Plan for Sales Managers
Example A Example B Example CPrimary role: To act as a “seller” by growing revenue and/or unit volume because: 1) More volume equals more profit. 2) Market share is small and opportunity exists to grow.3) All sales are “good” (i.e., undifferentiated volume is acceptable).
Performance measures: Volume in dollars or units.
Plan concept: Use an override commission (e.g., based on either a percentage of total sales produced by all sales representatives in the sales unit or on a percentage of sales-representatives’ earnings).
Primary role: To maximize sales profitability by producing profitable sales because:1) Profit flexibility exists (i.e., prices can be negotiated and product mix will affect contribution).2) Field sales costs are large (i.e., the total value of products and related services is not fully recognized in the sales process and, therefore, profit contribution is a critical measure of business success).
Performance measures: Volume (preferably compared to a goal) or profit contribution (e.g., gross margin less controllable selling expenses).
Plan concept: Use a target incentive-compensation opportunity (e.g., a bonus). The bonus opportunity should be weighted equally between volume attainment and profit-contribution performance.
Primary role: To develop human resources by developing the sales personnel in the sales unit because:1) The selling process is varied and complex.2) On-the-job training has an immediate favorable impact on business results.
Performance measures: Volume and sales-representative productivity.
Plan concept: Use a target incentive-compensation opportunity. The bonus opportunity should be weighted equally between volume attainment and, for example, the number of sales representatives reaching the sales quota.
■ More balanced volume amongdivisions represented by a singlegeneral line sales force, mea-sured by product mix sales
■ More volume realized from specific, targeted customers.
The selection of performancemeasures leads directly to incentive-formula design. This is perhaps themost critical step in the sales com-pensation design process. Unlesssales jobs are well-articulated, de-signed to be consistent with buyerexpectations and compatible withother sales and service jobs withinthe organization, inappropriate orincomplete performance measurescould be chosen. This is where management must exercise in-formed judgment to ensure that the
After the formula type has beenselected, the following elementsof the plan must be determined:
• Capping. Sales-incentive com-pensation plans should be un-capped whenever possible. Insome cases, capping may benecessary to avoid overpay-ment due to windfalls or inac-curate quota-setting. Cappingmethods include a total capon earnings; a percentage-limit bonus payment; a sales-credit limit per order or account; and a regressive(declining rate) formula thatlimits earnings.
sales jobs – and selected perform-ance measures – match the sellingobjectives.
■ Incentive-formula features.Numerous types of sales formu-las are available. The selection ofthe correct formula type dependson the unique characteristics ofthe sales job. Figure 11 providesa sample of formula types usedfor sales jobs. Figure 12 providesa description of several commonfirst-level sales manager jobsalong with performance mea-sures and incentive-plan con-cepts. Figure 13, on page 16, pro-vides a sample formula for cal-culating incentives.
16
Figure 13: Bonus Matrix Plan for Sales Managers
Comments: The mix is 80/20 with measures of volume and profit. The strength of this formula is its simplicity. The weakness is its dependence on quota accuracy.
Base salary: $64,000Bonus matrix: quarterly (see at right)Target pay: $80,000, capped
Profit
50.0
37.5
25.8
12.5
0
87.5
75.0
62.5
37.5
12.5
125.0
112.5
100
62.5
25.8
162.5
150.0
112.5
75.0
37.5
200.0
162.5
125.0
87.5
50.0
Excellence
Target
Threshold
Threshold Target ExcellenceV
olu
me
PERCENTAGE OF TARGET QUARTERLY BONUS
compensation purposes at thetime when the salespersonshould stop thinking aboutthe order.
Typically, the plan-design step is not complete until a “costing” exercise is performed to determinethe impact of the new plan undervarious performance scenarios.Costing exercises provide valuableinformation for making final deci-sions about plan mechanics (e.g., the incentive formula, threshold and excellence payout levels).Figure 14 provides a description of the process and an illustration of a format that can be used in suchan exercise.
al quota while undergoingmeasurement and earningrewards each quarter.
The most common paymentperiods are monthly, quarterlyand annually. If the sales cycleis short, the base salary is lowand the mix is high, paymentis more frequent – perhapsmonthly. If the sales cycle islong, the base salary is highand the mix is low, paymentperiods tend to be longer –quarterly or annual.
• Sales crediting. The time whenan order is credited for salescompensation purposes canvary due to an organization’sprocesses for bookings,invoice, shipment or payment.As a general rule, a creditshould be made for sales
• Thresholds. A threshold is theminimum level of perfor-mance obtained before anincentive is paid. Thresholdshelp offset the cost of basesalaries and provide perfor-mance standards.
• Performance and payment peri-ods. Measurement periods canbe weekly, monthly, quarterlyor annual. If they are less thanannual, they are either “dis-crete” or “cumulative.” A dis-crete period measures per-formance without reference toprevious periods. A cumula-tive period considers year-to-date performance. A salesper-son who is measured quarter-ly but on a cumulative year-to-date basis must continue toachieve results that meetannual objectives. Each quar-terly performance periodreflects total performancefrom the beginning of theyear, and the salesperson isheld accountable for an annu-
17
Figure 14: Sample Plan-Costing Worksheet
Step 5: Enter the sales incentive compensation cost based on estimated performance
Total Sales Volume
Strategic Sales Volume
New Accounts Sales Volume
<80%
Cost = Head Count x Incentive OpportunityPercentage Quota Attained/Performance Measure 81%-90% 91%-99% 100%-109% 110%-119% 120%-129% 130%-139% >140%
Performance Measure
Salary Grade: Salary Grade Midpoint: Head Count:Account Executive 10 $60,000 80
Total Incentive Compensation Opportunity: $18,000
Step 1: Identify performance measures and assign performance weights
Definition Weight
Sales Job:
Total sales volume. Net sales dollars (all products and services).
Strategic products sales volume. Net sales dollars on selected products (i.e., 3 or 4 key products).
Sales volume, new accounts. Net sales dollars realized from new customers.
#1
#2
#3
60%20%20%
Percentage Quota Attained/Performance Measure
Step 2: Establish expected performance distribution (by performance measure)
Target Excellence
Total Sales Volume
Strategic Sales Volume
New Account Sales Volume
91%81%81%
Threshold
Performance Range
100%100%100%
120%140%140%
Step 3: Estimate the head count at each performance level
Total Sales Volume
Strategic Sales Volume
New Account Sales Volume
<80%
Head Count/Performance Range (Rows Should Sum to Head Count)
Performance Measure
Step 6: Calculate the total sales incentive compensation cost
Total Sales Volume
Strategic Sales Volume
New accounts Sales Volume
Cost
Percentage Quota Attained/Performance Measure 81%-90% 91%-99% 100%-109% 110%-119% 120%-129% 130%-139% >140%
TOTAL
Step 4: Estimate incentive compensation opportunities for each performance level
Total Sales Volume
Strategic Sales Volume
New Account Sales Volume
<80%
Incentive Opportunity*Percentage Quota Attained/Performance Measure 81%-90% 91%-99% 100%-109% 110%-119% 120%-129% 130%-139% >140%
384
51216
382415
251524
5155
2010
124
142
$0$0$0
$0$1,800$1,800
$5,400$2,700$2,700
$10,800$3,600$3,600
$16,200$4,500$4,500
$21,600$5,400$5,400
$6,300$6,300
$7,200$7,200
$0$0$0
$0$21,600$28,800
$205,200$64,800$40,500
$270,000$54,000$86,400
$81,000$67,500$22,500
$86,400$0
$54,000$12,600$25,200
$28,800$14,400
$642,600$249,300$271,800
$1,163,700
$9,000Threshold: $36,000Excellence:
*Incentive Opportunity• At target performance (i.e., 100 percent of quota), the incentive opportunity equals the total compensation opportunity times the weight. For example, for “Total Sales Volume,” $18,000 x 0.60 = $10,800.• At threshold performance (i.e., 91 percent or 81 percent of quota attained), the incentive opportunity equals the threshold incentive opportunity times the weight. For example, for “Total Sales Volume,” $9,000 x 0.60 = $5,400.• At excellence performance (i.e., 120 percent or 140 percent of quota attained), the incentive opportunity equals the excellence incentive opportunity time the weight. For example, for “Total Sales Volume,” $36,000 x 0.60 = $21,600.• Incentive opportunity at performance levels between threshold and target, and between target and excellence, can be derived through interpolation.
18
Figure 15: Sections of a Sales Compensation Plan Description
Role of sales representatives; plan importancePurpose
TOPICSECTION
Brief summary of plan featuresPlan Overview
List of jobs that are included in the planEligibility
Description of compensation elements: salary, bonus and/or commissionPlan Components
Presentation of all qualifiers: e.g., threshold,definition of a sale, house accounts or split credits,windfalls/shortfalls, caps on incentive earnings and others
Plan Qualifiers
Relevant and/or company-specific statement indicating rights to change the planLegal Statement
Supporting documentation: e.g., salary ranges,commission rates and product categories, incentivecalculation illustration
Appendix
Implementing the New Plan5
tion plan with a formal descrip-tion. An effective descriptionexplains the objectives and illustrates the mechanics of theincentive-pay calculation. Also, it may include answers to someof the most commonly askedquestions.
Typically, a copy of the plan de-scription is given to each mem-ber of the sales force. Figure 15
Organizations with successful salescompensation plans invest a signifi-cant amount of time and effort inimplementation. There are threeaspects of implementation that re-quire attention: documentation andcommunication, training, and moni-toring change. The types andamount of support required for eachaspect vary:
■ Documentation and communi-cation. It is typical practice todocument the sales compensa-
lists the sections that most frequently are included in thedescription. If the new plan isnot announced at a nationalmeeting, then a letter to the sales force from the top salesexecutive should accompany the description. A sample letteris provided in Figure 16.
19
Figure 16: Sample Plan-Announcement Letter
■ Field-manager training for new-plan implementation and ad-ministration. Most organizationsrecognize that they must do atop-notch job of training fieldsales managers in how to man-age their sales representatives
under a new plan. Sales repre-sentatives rely on their supervi-sors for guidance and directionabout how to perform their jobsuccessfully, and one importantaspect of field-sales managementis the appraisal and recognition
of performance. The new planwill play an important role inthis process.
Field sales managers must beequipped to explain the plan to theirsalespeople. Many organizations
To: All Sales Personnel
From: Sales Executive
Subject: New Sales Compensation Plan
The new sales compensation plan is here!
It is different from previous years’ plans. As you will see, there are significant positivechanges to the plan, and it now is focused more strategically. Under the new plan, you will receive outstanding earnings for outstanding strategic sales results.
We are adopting a strategic focus because the marketplace for our products hasevolved during the past few years and will continue to evolve in the future. Because our business continues to change, we must change the way we do business. And, ofcourse, sales compensation plans must change, too. The strategic focus of our newcompensation plan makes it an integral part of our company’s success.
Strategic Selling: The Need for Change
Historically, we have been successful at building market share. However, we have concluded that not all volume is good volume. Simply switching to a pure profit orientation is not always desirable because some low-profit volume is needed to protect market share. Therefore, a single sales objective such as “more volume”or “higher profits” no longer meets our selling needs.
We must begin to sell strategically — to focus on meeting multiple sales objectivessimultaneously. Our requirement is that all new volume be profitable. All our sales mustadd value. We must sell the breadth of our product line, and we must control expenses.
Your Information Packet
The following material presents your new plan. It describes the key principles and concepts of the plan and shows some examples of calculations and incentive payout.After reviewing the material, you may have some questions about the plan. Please askyour manager to answer your questions.
We are excited about our new sales compensation plan. Together, we will build astrong future for the company and a financially rewarding future for you.
I look forward to your support of the new plan and your commitment to our mutual success.
20
have training sessions that teachfield sales managers how tocommunicate and manage withthe new plan. Typically, this training session covers thefollowing topics:
• The role of sales-incentivecompensation in sales-forcemotivation and management
• Explanation of the organiza-tion’s sales strategies for thecoming year
• Discussion of the former planand reasons behind changes
• A description of the new plan,including objectives and keyfeatures
• Sales-performance objectivesand how those objectives areassigned
• Use of the plan as an effectivemanagement tool.
Training in these topic areas canequip field sales managers to increase results with the new plan.
■ Monitoring for plan under-standing and changed behavior.Shortly after a new plan is intro-duced, it is beneficial to confirmthat the sales force understandsthe plan. Management needs to
know if sales representatives arealtering their selling behavior toachieve desired business results.A simple but effective way todetermine the level of under-standing by the sales force is toconduct a brief survey. Figure 17is a sample questionnaire.
Management needs to know if sales
representatives are altering their selling behavior
to achieve desired business results.
21
Figure 17: Sample Follow-Up Survey for a New Sales Compensation Plan
Three months ago, we introduced the new sales compensation plan. We are conducting this brief survey to see how it is progressing. Please answer the questions below and return the questionnaire to us by (date). Thank you.
1. Position/Title
2. I understand my new compensation plan.
3. The plan was explained to me thoroughly by my immediate supervisor.
4. My immediate supervisor explained to me how I could make money under this plan.
5. I have a good understanding of the plan mechanics.
6. What I like best about the plan:
7. What I like least about the plan:
8. My current performance against (quota/target) is:
9. My new (quota/target) is realistic.
10. I will change my selling behavior as a result of the new plan.
Yes No
Yes No
Yes No
Yes No
Top 10% Average Below Average
Yes No
Yes No
Region
To: All Sales Personnel
From: Vice President, Sales
Subject: New Sales Compensation Plan
• Implementation issues that mayhave been overlooked (e.g., pro-cedures covering sales-quota allocation).
• The areas (i.e., districts, regions)where additional communicationmay be needed
• Sales-force concerns about thenew plan
Survey results can be helpful tosales management in assessing:
• The number of sales representa-tives who understand the new plan
22
EvaluatingResults6
Results desired under a new sales compensation plan depend onthe organization’s objectives. Salesmanagement generally looks for anew plan to increase sales produc-tivity. When evaluating results,management focuses on three areas:
■ Customers. A starting point forevaluation of results is an analysisof sales by customer class. Forexample, if sales growth is a keyobjective, a useful analysis wouldbe of sales volume produced bynew accounts plotted against in-centive compensation earned forthis result. Analysis will showhow much bonus or commissionmoney has been paid for new-account volume and if theamount is consistent with theresults expected by management.
■ Products. Some products carryhigher profit margins than others. If sales management hasestablished sales strategies forthe products it sells, a usefulanalysis is an examination of theamount of incentive money paidfor new or priority product sales.
■ Costs and productivity. Typical-ly, organizations budget forsales-incentive compensationexpenses based on projectedsales. At the end of a year, it isuseful to compare actual pay-ments to budgeted expenses. Ifthe sales force underachieved thesales plan, actual incentive costsshould be less than the budget.However, organizations oftenunderachieve sales plans whilemaking incentive payments at or
above the budget amount. If thisoccurs, the new plan may beflawed and, therefore, requirerefinement or redesign.
At the end of the year, sales man-agement will want to know: “Didthe plan help us sell to the right cus-tomers, with the right products, atthe right price, with the right salesmessage, so that we achieved ourbusiness objectives?”
The foundation for business suc-cess is the ability to attract and keepcustomers. Because the sales force is avital link between an organizationand its customers, it holds one of themost important keys to success. Aproperly directed and motivatedsales force will make a significantcontribution toward the achievementof business objectives. Therefore, awell-designed sales compensationplan will provide explicit directionand sufficient rewards to motivatethe type of selling effort needed toreach or exceed business objectives.
Challenges of the Future
For most companies, the essence ofbusiness success is the ability to attractand retain customers. Because thesales force is a vital link between acompany and its customers, it holdsthe key to business growth and prof-itability. A properly directed, motivat-ed, and rewarded sales force willmake a significant contribution to theachievement of these business meas-ures. In the years ahead, the challengeof keeping the sales compensationplan aligned with business objectiveswill increase significantly. Four majorfactors will contribute to this challenge:
1. Global expansion and businessconsolidation. In the quest forgrowth, many companies will contin-ue to expand their business presencearound the globe by organic growth,through mergers and acquisitions, orboth. As a result, the sales organiza-tion is often characterized by a mix ofglobally and locally deployedresources focused on meeting theshifting needs of increasingly com-plex customers. Additionally, as com-panies are merged or acquired, salesorganizations, often with widely dif-ferent sales cultures and value sys-tems, must be brought together suc-cessfully to realize the benefits of con-solidation.
The key to successful design ofsales compensation plans in this ever-changing business environment is toconsider three guiding principles:“focus, flexibility and simplicity”.Focus means knowing what to con-centrate on. One of the most effectiveways to establish focus for a salesorganization is through the measure-ment system. Often times what getsmeasured gets rewarded. Whether acompany is expanding globally orintegrating sales organizations, acommon set of metrics – usually nomore than three – increases the likeli-hood of success.Flexibility is required in the design ofsales compensation plans since sellingsituations vary widely, not only inlocal markets within the U.S., but alsoon a global basis. The challenge facedby the plan designer is how muchflexibility to provide in the elementsof the compensation plan. We findthat the creation of design “tem-plates” is an effective approach tohelp guide the customization of plans.
Organizations often underachieve salesplans while making incentive paymentsat or above the budget amount. If thisoccurs, the new plan may be flawed and,therefore, require refinement orredesign.
23
Simplicity in plan design isrequired so that sales personnel notonly understand how they are paid,but also can easily move throughoutthe company’s national or globalsales organization. Typically, sim-plicity is most important in con-structing payout formula. If partici-pants in a sales compensation plancannot readily calculate their actualearnings under the plan, ourresearch shows that a significantamount of motivational value is lost.The challenge plan designers face is, thus, how to keep in their line ofsight the importance of balancingthese requirements – focus, flexibilityand simplicity – with the constantlychanging business environment inwhich plans must operate.
2. Growing purchases options. E-commerce joins tele-centers, channelpartners and direct sales as an addi-tional method for customers to makepurchases. Customers will continueto experience ever expanding pur-chase options that will challenge thesales compensation planner’s abilityto locate the “owner” of the sale forincentive compensation purposes.Use of advance order tracking meth-ods will grow as well as “channelneutral” reward systems thatencourage the sale of products, butdo not dictate the order fulfillmentmethod preferred by the customer.
3. New sales roles and talentrequirements. A growing number ofUnited States and foreign companiesare introducing new sales roles intotheir organizations to retain currentcustomers and gain access to newcustomers. A sales role can bedefined as the “part” an employeeplays in the process of interactingwith a customer. Top managersintroduce new sales roles into a com-pany based on an evolution in thenumber and types of customersserved, the size of the product line,and the basis for doing business –transactional vs. relationship. Vir-tually no company is immune to the
changes that are taking place in theways customers want to do business.This means that companies are con-stantly adjusting the sales coverageprocess and the roles – and thusimpact on its jobs – to meet customerneeds. The challenges related to howto compensate employees for per-forming new sales roles falls intothree categories:
1) Clarifying or redefining jobs –sales and other customer contactpositions – as a result of assign-ing or re-assigning responsibili-ties to employees for playing apart in retaining, expanding, or acquiring a revenue streamthrough interaction with customers
2) Altering compensation plan(s) to reflect job accountabilitiesassociated with new sales roles
3) Implementing new sales compensation plans to supportnew sales roles which are oftenobjected to, resisted, or both,because the sales force is reluctant to accept change.
4. Automated sales compensationmanagement systems. The days of“spread-sheet” sales compensationadministration could come to an endwithin the next three to five years. Asa result of advances in computerhardware and software, plan design-ers will have available to them newoptions to truly “manage” all facetsof the sales compensation plan’sdesign, cost and administration. Oneof the more difficult, yet excitingchallenges companies face is how to
take advantage of the new systemsthat are either available or will beavailable to give the plan designermore flexibility in adapting salescompensation to changes in businessstrategy and objectives. Plan admin-istration software ranges from standard, pre-packaged solutions tohighly sophisticated, customizedsolutions. Research studies showsthat it is not unusual for a companyto spend in the range of $1,000 to$2,000 per sales representative inplan administration cost. Obviously,if an automated plan administrationsystem can help a company reducethis cost and, at the same time,improve plan reporting and commu-nication, it is essential that plandesigners learn about and takeadvantage of this opportunity.
Concluding RemarksThe sales compensation plan is acritical link in the sales/businessmanagement chain. By itself, it can-not successfully pull an organizationtoward achievement of its goals.When linked with other manage-ment processes and programs, it canbe a powerful tool in motivating,directing and rewarding the salesorganization. Maintaining the prop-er perspective on the role and influ-ence of sales compensation is, there-fore, an important contribution thathuman resources and compensationprofessionals can make to theirorganizations.
Flexibility is required in the design of
sales compensation plans since selling
situations vary widely …
24
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Measuring the Marketplace: An Approach to Designing and Con-ducting a Salary Survey (ISBN 1-57963-0049)
Mastering Market Data: An Approach to Analyzing and ApplyingSalary Survey Information (ISBN 1-57963-0057)
Determining Compensation Costs: An Approach to Estimatingand Analyzing Expense (ISBN 1-57963-0065)
Communicating Compensation Programs: An Approach toProviding Information to Employees (ISBN 1-57963-0073)
Documenting Job Content: An Approach to Job and WorkAnalysis (ISBN 1-57963-009X)
Evaluating Job Content: An Approach to Establishing a Job-Worth Hierarchy (ISBN 1-57963-0103)
Building Pay Structures: An Approach to Establishing theFoundation for a Compensation Program (ISBN 1-57963-0111)
Developing Statistical Job-Evaluation Models: An Approach toBuilding a Job-Worth Hierarchy (ISBN 1-57963-0138)
Linking Pay to Performance: An Approach to Designing a MeritPay Plan (ISBN 1-57963-0154)
Designing Sales Compensation Plans: An Approach toDeveloping and Implementing Incentive Plans for Salespeople(ISBN 1-57963-0162)
Employee Compensation Basics: Developing the Direct PayComponent of Total Compensation (ISBN 1-57963-0197)
Compensation Basics for HR Generalists: Understanding theRole of Pay in Human Resources Strategy(ISBN 1-57963-0383) SPECIAL EDITION
Business Basics for Compensation Professionals: Linking Pay to Financial Performance (ISBN 1-57963-0359)
Internal Consulting Basics: Developing and ImplementingIncentive Plans (ISBN 1-57963-0367)
Understanding Skill-Based Pay: An Approach to Designing andImplementing an Effective Program (ISBN 1-57963-0499)
Conducting an Audit of Direct Compensation Programs(ISBN 1-57963-068-5)
Benefits Management Series
Mergers & Acquisitions: A Guide to Understanding the EmployeeBenefits Basics (ISBN 1-57963-080-4)Paying for Time Not Worked: An Approach to Developing aComprehensive Workplace Policy (ISBN 1-57963-012X)
Employee Benefits Basics: Developing the Benefits Componentof Total Compensation (ISBN 1-57963-0146)
Communicating Benefits Programs: An Approach to ProvidingInformation to Employees (ISBN 1-57963-0200)
Implementing Flexible Benefits: An Approach to FacilitatingEmployee Choice (ISBN 1-57963-0227)
Helping Employees Plan for Financial Security: An Approach toEducating the Entire Work Force (ISBN 1-57963-0243)
Managing Retirement Assets: An Approach to Administering In-vestments for Qualified Plans (ISBN 1-57963-026X)
Planning for Disability Management: An Approach to ControllingCosts While Caring for People (ISBN 1-57963-0278)Labor Law Basics: Understanding the Impact of FederalRegulations on Employee Benefits (ISBN 1-57963-0308)ERISA Basics: Complying with the Rules for FiduciaryResponsibility (ISBN 1-57963-0316)
Planning Benefits Strategically: An Approach to MeetingOrganization Objectives (ISBN 1-57963-0421)Self-Insuring Benefits Programs: An Approach to ControllingCosts and Maintaining Quality (ISBN 1-57963-0456) Retirement Plan Basics: Selecting Programs That SupportOrganization Objectives (ISBN 1-57963-0464) Strategic Outsourcing of Benefits Administration: A Frameworkfor Creating Successful Outsourcing Solutions (ISBN 1-57963-060X) Paid Time Off: An Idea Employers Can Bank On (ISBN 1-57963-090-1)
Performance and Rewards Series
Measuring Team Performance: A Seven Step Guide to TeamSuccess (ISBN 1-57963-0634)Benchmarking Rewards Systems: An Approach to Identifying andApplying Best Practices to Facilitate Organization Change(ISBN 1-57963-0251)Designing a Goalsharing Program: An Approach to RewardingEmployees for Achieving Business Goals (ISBN 1-57963-0502)Managing Individual Performance: An Approach to Designing anEffective Performance Management System (ISBN 1-57963-0375)Rewarding Group Performance: An Approach to Designing andImplementing Incentive Pay Programs (ISBN 1-57963-0294)Providing 360-Degree Feedback: An Approach to EnhancingIndividual and Organizational Performance (ISBN 1-57963-0324)Understanding Performance Measures: An Approach to LinkingRewards to the Achievement of Organizational Objectives(ISBN 1-57963-0340)Maximizing the Impact of Recognition: An Approach to RewardingEmployee Contributions (ISBN 1-57963-055-3)Unveiling Your Total Rewards Perspective to the World: AnApproach to Effective Web Design (ISBN 1-57963-088-X)
Executive Compensation Series
Designing Management Incentive Plans: An Approach toDeveloping a Short-Term Incentive Plan for Managers (ISBN 1-57963-0081)Securing Nonqualified Arrangements: An Approach to Choosing aFunding Mechanism for Executive Deferral and Retirement Plans(ISBN 1-57963-0219)Administering Stock Option Plans: A Guide to Implementing aRecordkeeping and Reporting System (ISBN 1-57963-057X)Granting Stock Options: An Approach to Designing Long-TermIncentives for Employees (ISBN 1-57963-0332)Designing Omnibus Stock Plans: An Approach to AwardingIncentives (ISBN 1-57963-0391)Designing Nonqualified Plans: An Approach to DeliveringExecutive Retirement Income (ISBN 1-57963-0405)
International Remuneration Series
Compensation Basics for North American Expatriates:Developing an Effective Program for Employees Working Abroad(ISBN 1-57963-0189)Compensating Globally Mobile Employees: Approaches toDeveloping Expatriate Pay Strategies for the Evolving InternationalCorporation (ISBN 1-57963-0286)Entering Global Markets: An Approach to Designing HR Programsand Policies (ISBN 1-57963-043X)Conducting an Audit of the International AssignmentManagement Programs: (ISBN 1-57963-069-3)