The pandemic pushed customer-sales rep interactions toward digital channels. In the time that followed, customers’ preferences evolved to lean toward these channels. The year 2020 changed how, when and whether they want to interact with salespeople.
If you’re still operating with your pre-pandemic sales compensation plan, you’re overdue for a restructure. If you did adjust your sales compensation plan in the past few years, it is still worth re-evaluating, considering the changing and increasing role of inside sales reps.
Traditionally, companies have sought to change sales compensation plans to better align sales costs with growth and other business objectives. However, that strategy can cause sales reps to settle into “comfort zones” by failing to match their activities and behaviors to what the market is doing.
Now, companies have devised new paths to solve these issues, leaving behind legacy programs. The truth is traditional sales compensation plans that are tied to territory and tenure no longer work. It’s clear that the value sales reps provide has migrated away from facilitating transactions and sharing product features toward highly specialized sales teams that engage strongly in market-making activities.
If you haven’t updated your sales compensation plan to meet these changes in how sales teams interact with customers, now is the time to act. It’s time for a fresh sales force compensation plan. The key is to make sure your updated sales compensation plan is the right one.
Though redesign requires meticulous analysis and supportive implementation, if done correctly, it’s one of the most effective ways to realign your sales team around specific goals, attract and maintain quality salespeople, and cultivate a powerful culture.
Set Guideposts Before Restructuring Sales Compensation
Before you start, define the following critical components of your plan:
What Success Looks Like
Truthfully, creating a formula for a new sales compensation plan is the easy part, but beware of self-diagnoses that can lead to focusing on the wrong problems. Remember this is a holistic process that favors long-term health over short-term fixes. Instead, clarify goals that will align with a sales compensation program that is built to last and accounts for new sales roles.
Imagine three years into the future:
- How will it make costs more consistent and lower?
- How will it grow business by either expanding the customer base or earning a larger share of wallet?
- How will it generate profitability around gross margin and costs to serve?
- How will this help in attracting and retaining valuable employees?
Assessing the criteria that are most relevant to success will guide the process.
Selling Roles
It’s important to know if a change in sales roles is already happening, needs to happen immediately or can happen over the next three to five years. This will determine if a relative or absolute blend of the two types of performance programs will be most effective.
- Relative performance programs measure results by expectations, tying compensation to specific objectives, quotas or targets. These provide flexibility to move accounts around and position different salespeople for different targets.
- Absolute performance programs are traditional commission programs where set goals have little influence. Rather, commission is primarily driven by how many Gross Profit (GP) dollars a territory or customer assignment generated, regardless of growth or how margins increased or decreased in a period.
There are degrees of these two models, but designing a strong relative performance model can provide alignment and flexibility without sacrificing the motivational aspects of absolute programs.
Sales Compensation Best Practices to Follow
Companies restructuring their sales compensation plans should take note of these five best practices:
- Use the pay plan to incentivize sales teams.
Not to manage them. Your plan shouldn’t drive the ship. That responsibility is best kept with leadership and is best facilitated by enabling sales reps to pursue innovation and practice ownership of their roles.
- Design for sustainable health.
Aim for long-term health over short-term fixes. This involves setting specific goals that are most relevant to your success.
- Determine the best performance program for you.
As outlined above, there are two types of performance programs, and it’s important to select the one that works best for your business.
- Pay people according to their work.
Changing your pay plan doesn’t mean your salespeople must work harder. Instead, strategize to capitalize on their strengths and pay according to value.
- Increase risk and reward.
This topic will be discussed in greater detail later in the article, but it’s important to increase risk and reward in such a way that motivates and ensures adoption, as opposed to only encouraging the status quo.
>> Read the full article on NAW.org: 5 Best Practices to Guide Your Sales Compensation Redesign – Value Creation Strategy
How to Design a Strong Relative Performance Program
STEP 1: BUILD THE STRUCTURE BY SOLVING FOR THREE VARIABLES
These three factors set the window for determining the mix between fixed (salary) and variable pay.
Base Salary vs. Incentive Pay
Determining how much money a salesperson will earn by generating a certain amount of GP dollars in relation to their base salary can be done objectively. Analyze historical data from commission-based compensation plans to determine the average pay of every sales rep, factoring in seasonal flow. That will capture performance that can be used to determine the portion of pay that historically has not been at risk by 100% commission-based salespeople. Base salary can be set here, or that number can be used as the inflection point to determine where incentive pay should kick in. Whether the base salary is set to be variable or constant affects the degree of risk and reward in the plan.
Inflection Point: At What Point Does Variable Incentive Pay Commence?
Setting an inflection point assumes that a certain amount of business can be expected, but, beyond that, sets a point at which incentive dollars start to be earned. Whether the inflection point is variable in relationship to base salary or constant also affects the degrees of risk versus reward in the plan.
Risk vs. Reward
Make sure the risk/reward tradeoff of a new compensation plan exceeds that of the existing plan. Because human psychology perceives losses as more motivational than simply obtaining benefit, a company is more likely to see desired changes if appropriate risk is introduced into the compensation model. This creates necessary adoption pressure because simply maintaining the same production as the year before is not standing still, but rather going backwards.
Ultimately, risk and reward can be determined by using the historical average pay of sales reps and the inflection point to determine a window wherein a lower base salary correlates to higher potential incentive money; and a higher base salary correlates to a lower potential for incentive money. The goal is to have more risk and more reward.
STEP 2: DETERMINE WHICH PERFORMANCE MEASURES TO USE
A single-factor performance measure may be built around percentage of GP dollars. It is often initially the best model to use to move away from the prevailing paradigm around total dollars opposed to total dollars relative to expectations. This can align everyone in each role around a common goal and can be organized around a fixed amount or percent of salary.
Introducing a multifactor payout structure adds one or two factors, allowing the relative performance plan to align with many goals. Beware of adding more than three factors, however, as that begins to complicate the structure and can result in frustrating instead of motivating salespeople.
To attract and retain sales and customer service reps, analyzing and defining their roles with the appropriate sales compensation and performance evaluation structures are key. Contact us if you’d like help to initiate these strategies at your company.
Are you looking to redefine or introduce new selling roles to mitigate pressures on your bottom line?
>> Download this free White Paper from Distribution Strategy Group, Sales Force Compensation in Distribution: Challenges and Solutions, written by Mike Emerson.
