Mar 28, 2010

Is Your Compensation Plan Designed For Success?

Is Your Compensation Plan Designed For Success?

Some companies recognize the link between compensation plans and their success. Others fail to understand that the sales compensation plan is a critical factor in keeping and rewarding their best sales people, and their sales suffer for it. Here are some tips about how to do it right.

Businesses that measure their sales teams efforts by the number of transactions or units sold generally are using value based compensation systems. The foundation of value based compensation plans work by paying more for an ever increasing amount of gross sales. But, these same companies should ensure their compensation model is aligned with the overall strategic goals of the company to ensure long term growth and success.

These types of plans are a favorite with sales people because those that can "close the deal" get paid the most. Productive and Motivated sales people see a direct link between their efforts and their paycheck. Accounting folks seem to like this as well; easy to calculate and simple to understand. Everybody wins, right? Maybe, or not, depending on the long term goals of the company.

Align Your Plan with Your Goals

What if your company's business model is to offer an initial deal that is designed to get your foot in the door of the customer and then most of your profit is in the add-on or service that is provided later. The plan may not deliver on those sales at all.

Think about cell phone companies here. They used to concentrate on selling the physical phone when that was profitable; yet now will give you the phone for free for a service contract commitment. (This is where the profitable money is.) Same thing is true about most of the commodities in the marketplace are today. Computer manufacturers do the same thing with service contracts on machines with thin profit margins.

   Your compensation plan should align with your strategic plans for growth.

If your goal is expansion in new markets, then reward higher for those that open accounts in new markets or industries. Want more service work for your company, increase commissions on service contract sold at the time of initial sale or for renewals sold. Your sales staff will focus on the items that generate the most commission, it is just human nature.

Want to increase overall sales numbers, set the quota higher. Not so high that it is perceived as unreachable. But high enough that it stretches the sales teams' ability, then make the reward for getting there much higher. They will rise to the challenge, trust me. Another method is to calculate the amount of growth you want, say 40%, divide the goal among the various team members and each quota can be determined based upon years with the firm, the prior year's quota attainment percentage, and an analysis of each rep's ability to achieve specific goals.

Make Team Goals a Priority

In addition to individual goals and rewards, it is also important to have special incentives for the sales department's overall achievement, which also benefit each individual in the group. This may take the form of an additional bonus, group dinner at a fancy restaurant, weekend trip, or other special compensation based on a contest, etc.

Publicize Results

Also important, to the success of your program is to keep each sales team member informed about their progress, or lack of, in reaching the targets you have outlined. These updates should be provided at least quarterly, but monthly would be better. The lower their rate of success the more frequent the feedback should be. Do not wait until the end to discuss the progress. They might need some help from you in reaching those goals.

You will need to review your compensation plan annually to ensure that it stays aligned with the goals you have. These goals may change over time and a modification may be necessary. Discuss any changes required with your sales team before implementation so surprises are kept to a minimum. In any case, reward the behavior you want, discount the ones you don't. Your sales team will do what pays the most, they always have.

Name: Is Your Compensation Plan Designed For Success?
Author:  David Brydson