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Fast Track Your 2008 Sales Compensation Plans
December 10, 2007
Tired of implementing late, less-than-effective and hard-to-manage incentive compensation plans? Here are ten best practices for creating and deploying compensation plans and processes that better align sales behaviors with strategic corporate objectives.
By Dr. Jimmy C. Duan
This is the wonderful season when companies start putting together their make-or-break sales compensation plans for next year. But despite best intentions and efforts, the unfortunate truth is that only 50 percent of all sales plans will be ready for company sales-kickoff meetings. In fact, for many companies, quotas may not even be established until several months into the year, meaning that for the first few months the company either pays draw or continues to pay sales commissions by using the plans, quota and rates from the previous year.
Not only is this a pain for finance or sales operations—which has to go back and reprocess months' worth of commissions and true-up results—but it's also seriously demotivating for the sales force. Since the idea of a compensation plan is to get sales efforts aligned with a company's business objectives, this sad scenario means that a whopping 50 percent or more of companies are having a late start to meet the corporate objectives and not maximizing the return of investment incentive.
It doesn't have to be this way. Here are 10 best practices that will help you fast-track your 2008 sales compensation plans and optimize your incentive investment from Xactly Corporation.
1. Keep it simple.
A straightforward plan makes it easy for reps to see how they'll be paid. Don't confuse and demotivate your reps with plans that try to do too many things. A plan is considered too complex if there are more than three to four performance metrics in the plan, or 10 or more conditions exist to determine credit allocation and payment release. Complex plans are hard to administer and maintain: They make it difficult to set up plans, to generate accurate results, and to timely respond to inquiries and disputes from sales reps. This can cause significant payee satisfaction issues.
2. Keep it consistent.
Plans that compensate consistently encourage desired behaviors, long term. An effective compensation plan is one that motivates sales behaviors that are in line with corporate objectives. Many plans fail at this and allow some individuals to maximize their commissions at the expense of corporate objectives. Consistency is paramount to drive desired long-term behaviors.
3. Keep it flexible.
Use special performance incentive funds (SPIFs) and contests to drive desired short-term behaviors within a straightforward, consistent foundation structure for encouraging long-term behaviors. Introduced midstream in a plan cycle, they are highly effective kickers for responding to market opportunities, moving excess inventory and so on.
4. Communicate before deploying.
Share new plans and changes with finance, sales operations and HR. Don't plan in a vacuum and then spring surprises. That's a sure way of having to go back to the drawing board. Ensure buy-in from all stakeholders—including marketing, finance, HR and sales management and operations. This makes sure that everyone is on the same page regarding sales strategies and corporate goals, and how compensation will support these strategies and objectives.
5. Be ready to communicate after deploying.
You also should establish an effective process to communicate with your sales force during and after plan deployment. Consider distributing plan documents electronically for rep approval and digital signature—that way you'll streamline the process, and have a computerized record and audit trail. Provide Web-based visibility into plans and the compensation process so reps can quickly and easily see how they're being compensated, where they stand in regards to their plan and their peers and how much more they can make if they engage in certain sales behaviors.
6. Don't go in blindly.
Assess costs, benefits and risks before launching a plan, process or policy. Model your plans and plan changes prior to implementing them to determine their impact in advance. This will let you see, for example, how different order forecasts (using actual or projected orders) will impact budget for incentives or how proposed changes to the organizational structure or quota might impact the top and bottom lines. And be prepared to continue modeling even when the plan is deployed—this will allow you to manage expense accruals more closely, respond more confidently and timely to new opportunities by offering SPIFs on the fly, realigning the sales team or revamping incentive structures.
7. Keep it meaningful.
Use attainment measures that are meaningful, understandable and realistic. There's no room for plans that are restrictive or punitive, or that result in numerous plan-year exceptions. Choose your goal and march positively toward it. If the goal is to increase revenues or market share, incent on sales per rep, sales by product or sales by business region. If it's to increase profits, incent on profitability by customer, profitability by business unit and profitability by order type.
8. Establish a process to handle retro changes and exceptions.
Unfortunately, retro changes and exceptions are a fact of life. While you obviously want to minimize their chance of occurring, you also need to be ready to efficiently handle them when they do occur. Building disciplines through a set of policies that are easy and practical to follow will help avoid extensive retro-processing and exception handling.
9. Prepare to provide payees access to preliminary results.
You don't have to wait until period-end. Again, we're talking about motivating reps to support corporate objectives. Don't wait until the end of a pay period to start processing and sharing results. Let sales reps see in "real time, all the time" what's coming to them, as accurately as possible. As in tip No. 5, use the Web to deliver this visibility.
10. Measure frequently.
Don't wait to the end of the year to measure the effectiveness of comp plans. Plans aren't static—they have to adjust for changing market and business conditions and actual sales performance. You need to be on top of this with quarterly or mid-year fine-tuning of quotas, commission rates, territories, etc.
Consequently, companies should do with sales compensation management what most have already done with their CRM processes—automate for efficiency and accuracy, Web-based visibility, cost-effective scalability and easy manageability. Just as the on-demand delivery model has made CRM eminently affordable for more and more companies, it is doing the same for sales compensation management. Improving payment accuracy by only one percent of monthly commission payouts alone can more than pay for an entire year's subscription to an on-demand solution. As can the ability to create, deploy and manage an effective compensation plan—on time and on-target.
Dr. Jimmy C. Duan, vice president of client services, is responsible for building, managing and growing Xactly Corporation's implementation, education, business process outsourcing, and support services and organizations to support Xactly's customer base. He is one of a handful of industry executives who possesses the depth and breadth of skills and experience in leading large-scale system implementations, business services and management consulting for sales compensation and sales performance management.
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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