Sales Compensation Strategy Step 1: Define Sales Goals and Objectives
In this step, Schum advised, you must begin by defining “what is important for the year – either margins, profits, [or] market share – and then making sure that those specific tactical items will be consistent with the compensation philosophy that the organization has as a whole.”
You’ll need to take a look at sales goals, both short- and long-term, and ensure that they have a tie-in to the overall business needs. Once you’ve done this analysis, communicate the overall goals to impacted personnel.
Remember, the goal is that you don’t pay only for activity, you pay for results!
Sales Compensation Strategy Step 2: Understand the Sales Process and Job Design
Once you know the overall goals and ensure they are consistent with your organization’s compensation philosophy, you need to determine what your sales model is. Putting these two pieces of information together will allow you to determine the best sales compensation plan.
Schum advised that you need to be “identifying key factors in the sales process. What is your typical sales cycle? . . . Also, are you looking for new business? Or are you looking to increase existing business or just hold on to existing business?”
“All of that helps in defining the role of salesperson and the tie-in to how the organization is going to market the products that you’re asking the salesperson to push.”
In short, you have to understand how the sales cycle works to understand how you can work within it to incentivize the behaviors that help reach the organization’s goals.
Sales Compensation Strategy Step 3: Develop the Sales Compensation Plan
Knowing the sales and organizational goals is the first step; understanding the sales process is second. Now we’re ready to develop the actual sales compensation plan. Here are some steps to help you on your way:
- Do market research on best practices.
- Determine the competitive pay rate for your market and industry using compensation surveys.
- Identify the appropriate mix of fixed vs. variable pay within your own organization.
- Define the type of plan you would like to implement, such as quota-based or commission-based (or another form that suits your organization) and assess the target income level.
- Define the variable component of your sales compensation (i.e. commission, bonus, or a combination).
- Determine the appropriate award percentages (i.e. the commission rates for different levels of performance).
- Weigh your payouts based on the desired focus (i.e. focus on new vs. existing business; focus on specific products or services).
- Develop an objective process for defining and assigning goals. Sales management, finance and HR need to look at this from a quota or target sales perspective, keeping everything above in mind.
- Provide flexibility to change. While you don’t want to change course midway through, circumstances may change that require flexibility.
Sales Compensation Strategy Step 4: Implement and Administer the Plan
The best plans are only effective if they’re implemented effectively. Here are some tips:
- Prepare an implementation plan that addresses transitional issues. This may include a phase-in process during the transition from the existing sales compensation scheme.
- Confirm tracking capabilities up front – are all systems ready to track the information to ensure everyone is paid accurately and on-time?
- In advance, train administrative personnel on the process to ensure the paychecks are done right and on time.
- Develop plans for communication, coaching, and continual feedback to and from the sales team.
- Get the timing right. Typically, these types of implementations are done at the end of the year to start the new year on the new system; either way, be sure you think through the best timing for your implementation before you get started.
Sales Compensation Strategy Step 5: Ensure Sales Effectiveness Through Training and Plan Evaluation
“Once the program has been rolled out and is implemented [and] you start tracking things: are what you expected happening, based upon all the items that went [in] up front?” Schum asked. You also need to ask yourself: “Is there a direct tie-in to performance and pay? Are we paying for the right thing? Are we motivating for success through timely payments? Are we basically fulfilling, as an organization, our promises to the sales force with this new program?”
There are many actions you can take with your sales team to improve overall performance. The sales compensation strategy you use is just one piece of the puzzle. You’ll need to also be sure you’re utilizing training to increase sales abilities, and that you’re providing periodic feedback on performance.
In short, this final step of training and plan evaluation gives you the opportunity to ensure your team is the best it can be, while also giving you the chance to assess the performance of the team against expectations and determine what tweaks or retraining are needed.
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Harry J. Schum is a Senior Consultant with Compensation Resources Inc. His areas of expertise include executive compensation, variable pay, incentive strategies and human resource planning, and program implementation.