• More emphasis on new products with current accounts, or
• A push to increase the number of new accounts, or
• Increasing emphasis on selling higher margin products.

Often this communication begins a sales force survey, selected sales rep interviews, or a meeting of Sales Council members about the current plan design.  In addition, it also occurs when sales management begins discussing changes in the go-to-market strategy after the business planning process is completed, typically late in the third quarter.

The formal plan communication process generally follows these ten steps:

1. Develop a PowerPoint presentation of the new plan comparing it to the current plan (what’s new, what’s not changing, and what is being eliminated plus the change in the plan component weightings) for the rollout  to all sales reps in the annual sales meeting;
2. Develop the plan document detailing the plan components, gives calculation examples, and provides the terms and conditions;
3. Develop an Excel earnings estimator to help sales reps model the impact of the new plan on their incentive earnings;
4. Develop specifications to revise the sales compensation software or Excel spreadsheets used to calculate payouts;
5. Review and approve the presentation and plan document (Sales, HR, IT, and Legal) and make the any needed revisions;
6. Develop the presentation script for sales management to use in delivering the PowerPoint presentation;
7. Coach the first line sales managers to discuss the plan changes via a management team meeting, conference call, or WebEx;
8. Ensure that sales managers conduct  sales rep one-on-ones where plans are distributed and signed copies are made, and frequently asked questions (FAQs) are gathered from the sales reps;
9. Develop and distribute sales management’s written responses to the  FAQs to all sales reps by their managers; and
10. Develop a follow up email questionnaire or on-line survey to be administered to the sales reps after the first three to six months of play payouts (dependent whether the payouts are monthly or quarterly) to assess if minor policy and payout revisions are needed.

While changing the sales compensation plan is a prime example of an organizational change management effort, the process is infrequently viewed as this type of effort.  Effective communication of the new plan is the foundation to grow a company’s revenue and profit; an ineffective effort generally gets the sales force off to a slow start due to confusion, resistance to the behavioral change needed, or a perceived negative impact on earnings.  Anticipating these issues with thorough communication and the involvement of both the key stakeholders and the sales reps is the hallmark to a successful plan implementation.

Common pitfalls in product launch sales incentives

• Putting the new product sales into the main quota/goal. New product launches may have schedules, but we know that they often slip, or turn into a phased launch. In addition, it’s very difficult to predict how fast demand will pick up, especially by sales territory or customer. For these reasons, adding the expected sales from the new product into the sales goals is almost certain to result in unintended side-effects for any compensation plan that depends on a goal (and that’s most of the plans we’ve seen).
• Offering an incentive that is not right-sized. If the incentive is only available to the first few who sell the new product, it may be out of reach for most. If it is too small in value, it may inadvertently send the message that these sales aren’t very important. And if it’s too large, you may distract sales people from their important responsibility of keeping the non-new part of the business thriving and growing as well.
• Making new product success essential for maintaining historical compensation levels, then failing to deliver the product (on time or at all). This is in the disaster category and should only be risked (via high-stakes incentives) if the success of the new product is a bet-the-business imperative.

Keys to successful product launch incentives

Goal: Operating Income = -$200,000

To build the payout table, we’ll need threshold and excellence performance levels, a target payout, and a leverage factor.

Threshold = -$400,000

The Threshold is the level of performance below which no payout is earned. Usually the goal is aligned with the annual operating plan. No payout at all below goal means goal setting precision must be very high. A modest payout as goal is approached is often a better design.

Excellence = $0 (breakeven)

In this case where a loss is expected, it may be the case that breakeven would be a fabulous result for the coming year. If so, a handsome reward could be delivered at that point.

Target Incentive = $10,000

Someone reading this is thinking that it’s hard to pay an incentive to reward someone to deliver a loss. And clearly this is not a sustainable business model for the long run. But in come-back situations, or years of investment, it may be a great idea to have those who influence the outcome with compensation at risk, along with upside, for delivering against the annual operating plan.

Remember that we’re talking about sales compensation here, so the assumption is that the incentive pay is true at-risk pay, not over-and-above pay. The person with this incentive opportunity has put some portion of their market value at risk with the expectation that they do influence the outcome materially, and that when they do a great job they could earn back all that they have put at risk, and then some.

So what does the payout table look like? Here’s a sample:

A value-creating plan document includes the following sections:

 Overview

The overview of the plan outlines the go-to-market strategy of the company, names the specific jobs that are eligible for the particular plan, describes the go-to-market strategy of the company, discusses the pay mix of base salary and target incentive and how it was set, presents an overview of the plan components, and specifies the amount of target incentive and the amount paid on each when the sales reps makes their goals.

Component Details

The pay components are then outlined in detail, arranged from highest weighted to lowest weighted to emphasize and communicate the degree of importance to the sales rep.  Included in the component detail is a description of frequency of incentive payout, how results are measured, and what level of performance constitutes minimum, target, and excellence expectations.  Also, using these levels as anchors, tables are generally included to show the percentage or actual amount of incentive payout.  Incentive calculation examples show the sales rep how to calculate the incentive earnings based on performance assumptions – these examples should always illustrate the sequential step format of the calculation.

Terms and Conditions

Plans should always include a section on the terms and conditions which may also highlight administrative provisions.  Typically, this section of the plan includes items such as:

• the plan term, e.g., January 1^st to December 31^st,
• payment eligibility provisions,
• documentation required for sales crediting,
• the implications for falsifying or manipulating sales information,
• company policies on extraordinarily large sales,
• how windfalls and shortfalls will be treated for sales crediting,
• the conditions for incentive pay chargebacks, timing or payments,
• incentive pay guidelines for new hires and transfers, and
• the benefits eligibility/treatment of incentive pay.

In some cases companies make the terms and conditions a separate document for easier updating as situations arise that require addition of revision of administrative provisions.

Acknowledgment Page

The acknowledgement page has language where the sales reps confirm that they have received a copy of the plan document, had questions addressed by management, and understand the terms and conditions of the plan.  Once they sign the page, it is usually then signed by their immediate manager, and the next level of management; and a copy of this page is then forwarded to Human Resources to be filed in the sales reps’ personnel file.  In some cases no payout is made until this page is completed.  Because the plan often becomes a legally binding contract between the company and the sales rep it should be reviewed by legal counsel before it is distributed.

Management should never lose sight of the fact that the sales compensation plan is one of several communication tools used to inform and motivate the sales reps when changes are being made in the company’s go-to-market strategy.  For its term, it is the reference point for resolving payout calculation disputes and for determining incentive payout amount due in the case of terminations, transfers, and promotions.  A carefully crafted plan document will cover most issues that arise during its term; however, it is important for sales management, legal, and human resources to review it each plan change to take into account new or unusual situations that have occurred in the day-to-day administration of the plan that may need to be clarified when producing in the next version.

1. Stop base pay increases and add to the variable pay over time.

If you have a pay structure with salary ranges you can red-circle* the reps who are above the salary maximum, and over time hire in newer reps at a lower salary level.  From a practical standpoint, the red-circled reps will be ineligible for salary increases unless they are promoted into a position with a higher range, or the range moves for their position based on market adjustments.

The problem with this approach is it does nothing to increase the motivational value of the incentive plan for the reps who have high base salaries, and it also will likely increase your overall cost of compensation if you simply layer on a higher fixed target incentive for all reps in the role, without decreasing base salaries.

2. Treat a portion of the current base to a non-recoverable draw against variable pay during a transition period.

If you find you must decrease base salaries, it is best to do it over time, converting the salary to a draw in a series of steps.  Under this methodology, if a rep had a salary of $100,000 that you wanted to reduce to $80,000 with a $20,000 target incentive, you could convert the salary to a non-recoverable draw in $5,000 increments over 3 to 6 month periods.  The first $5,000 in incentive earned would cover the draw, and any incentive earned above the $5,000 would be paid as additional income.  If the draw is not covered, the negative is not typically carried forward (which is why is it called a “non-recoverable draw”), but if by the end of the transition period reps are not covering their draw they will be in jeopardy of losing their jobs.

This approach allows reps time (typically 12 months) to adjust their finances to the new lower salary amount and to make whatever adaptations are needed to begin earning the additional pay from their incentive.  If done properly, the increased upside should more than outweigh the risks for your top performers, but expect that you will have some turn-over among your lower performing reps, and even among some of the higher performers who cannot or will not adapt to the new reality.

*”Red-circle” is comp-speak for freezing base pay at the current level for a period of time.

New business sales jobs focus primarily on acquiring new accounts.  The incentive plan rewards for new revenue or profit margin brought to the company.  In contrast, account managers often are assigned a book of business that includes several new business sellers’ territories. Their focus is on retaining and growing established accounts (so new business sellers can continue to bring in new customers).

The territory manager we will discuss is a hybrid of the two with the expectation to not only acquire new customers but also retain these customers (and grow revenue or profit margin). The compensation plan that results is often is a hybrid of the hunter and farmer plans’ key components that may let the territory manager decide whether hunting or farming will maximize the incentive pay regardless of sales management’s preference for a more balanced approach.

An alternative approach that has been more successful in achieving sales management’s objective is to measure performance and pay incentive pay based on net new business revenue or profit margin.  This approach communicates to territory managers that any lost business must be offset by new customer acquisition or selling additional products or services to current customers.

The key is that the net new business goal is set based on historical territory performance plus the desired growth.  The goal will not usually be as great as for a direct seller since the lost business goal for account managers is an offset to the growth.  In addition, there is often real work involved in servicing and maintaining the established book at historical levels before any growth is achieved. However, the net new business goal should always be a positive number – new business exceed anticipated losses to keep the territory manager focused on growing the business by at least the overall percent the company is expecting revenue or profit margin to grow.

When goal setting is a challenge for this job and results may be volatile, and effective compensation arrangement may be a mix of bonus and commission.  For example a prorated bonus is paid for performance above threshold to excellence (e.g., 80% to 120%) then a commission is paid for above excellence performance (over 120% in this example).  This approach retains the needed linkage between pay and performance while ensuring that the additional incentive dollars are self-funded.

• Are we achieving the results we set out to achieve?
• Is our compensation cost as a percent of revenue (or margin, or bookings…) improving?
• Is the plan motivating to the sales people? (Do the sales people understand their plans? Do they seem them as fair? What do they say the plans drive them to do? And is that what we want them doing?)
• Are we attracting and retaining the talent we need?
• How does our performance distribution curve look? (Are at least 50% of our people at or above target performance and compensation levels? Are fewer than 5% earning no incentive? Area few people (about 10%) earning a substantial payout, usually 150% to 300% of the median payout?)
• Are the most productive people earning the most money?
• Have sales roles or key accountabilities changed enough that we need to reinforce the changes with aligned changes in the compensation plans?

First, what is a SPIFF?

A SPIFF is a short-term incentive usually focused on driving a specific sales result that is needed right now. It probably started as an acronym, but there are at least five compelling answers from experts as to exactly what it stands for – usually something like Sales Performance Incentive FFund (<– that’s not a typo – it’s humor). A typical SPIFF might provide an added x% of sales for all sales in a specific product category in a specific time frame – something like: All sales of SuperNewProduct will be worth an extra 2% of the contract value for all contracts signed this quarter.

SPIFF-ing (and, yes, it’s also a verb) is a great way to get results when…

• A sales focus priority comes up that could not have been anticipated in the sales comp plan designs
• The need for focus is short-term (e.g., focus for a quarter or two)
• It’s important enough to put some meaningful money behind it (maybe as much as 5% of the normal total variable pay budget)
• It’s not important enough to change the core comp plan mid-year

Typical examples of the right time to SPIFF include

• New product launches (when the plans are being designed and the goals set, there may not be good clarity about launch timing and total expected sales for the year)
• Product or service focus in the face of a competitive threat
• The first few sales of the offering of an acquiree after sales training in the new offering
• New customer acquisition for a short period of time to change behavior and demonstrate what’s possible to the other reps
• Targeted customer acquisition, e.g. customers in a specific industry or size category, or…
• Teams that beat a stretch target for a period (e.g., a quarter).

But beware

Businesses that predictably provide a SPIFF most quarters may inadvertently train their reps to “wait for the SPIFF” – much as we all know to wait for the sales in January to get a better deal on substantial purchases. Your SPIFFs may be undermining your compensation plan’s intended focus, distracting your sales people, and/or creating less value than their cost if…

• You’re running the same type and value of SPIFF most quarters at quarter-end and /or years at year-end, and have the feeling that “They won’t really turn up the sales unless we SPIFF them”
• The total comp delivered via SPIFFs is substantial compared to the rest of the variable pay (/commission) cost, and we’d call anything over about 10% “substantial”
• You have product/service divisions or business units running their own independent SPIFFs to compete for the attention of the sales force
• Your outside partners (leasing companies, suppliers of offerings your sales force sells, etc.) are SPIFFing your sales people “outside the plan” to draw focus to their interests without coordination and oversight from you
• You are using SPIFF money to make up for the fact that your goals are so high that your best sales people will under-earn and you are concerned that there will be retention issues if you don’t offer a SPIFF.

Summary

SPIFFs are a valuable tool in the sales compensation toolkit, but can be mis-used to the point that the SPIFFs seem to be in charge rather than sales management. Excessive SPIFF use is a clear sign that the core comp plan is not working as it should.

We’ll leave a lot of that to your other advisors and focus here on the compensation piece with the basic steps you need to complete to arrive at the right comp plan for your new hire:

1. Your first step is to determine a reasonable level of total compensation for a sales person in your business — in the U. S., that’s what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person will sell in that first year — the cost needs to be associated with a reasonable return. You’ll get better at that as time goes by, but you’ll have to start with some kind of working assumption based on others in your industry, leadership’s experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
2. Next you need to decide how the risk will be shared — how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even non-existent. 30% to 50% of the target total compensation is a good starting place. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
3. Since you know the target total cash and the base, you can subtract to determine the incentive at target. Your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There’s more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date). But many early stage companies do fine with a straight commission paid monthly – a single rate based on the incentive at target divided by the productivity expectation (e.g., x% of revenue, y% of margin, $z/unit).
4. Your last design step is to check the plan’s appropriateness across a broad range of possible levels of productivity, and be sure you’re comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company’s owner.
5. Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person’s manager and the sales person. Here, you should probably ask for a review by your legal counsel.
6. And finally, determine how you will administer the plan – where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.

Then after you’ve been living with the plan for a few months or quarters, have a look again to see if it’s meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don’t adjust during the plan year unless you’ve got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.

We have a freemium model [offering a valuable service for free, typically online, with options to upgrade to a paid "premium" level of service] where all of our current customers buy online with a credit card. Zero sales interaction. No contract, no lock-in. The customers pay for the resources they’ve allocated to their application monthly in arrears.

But there are a lot of prospects and customers who would benefit from interaction with a sales person.

What we’ve started to do: We recently hired a sales guy. He’s being alerted to existing customers who do something that demonstrates deepening interest or commitment (i.e move from a shared to dedicated database). The sales guy e-mails the customer to see what they’re doing and how we can help. Once the customer replies and we connect with them, we help them be more successful on the app — which often times leads them to spend more. The goal is to get wider and deeper in the organization, piggybacking on the existing user’s early success.

But how do you comp that? There’s no close date. There’s no ACV [Annual Contract Value].

Answer:

At a high level, my suggestion is that this can’t be a high-risk/high-upside role since it will be hard to attribute definite income statement effects to the successful sales person’s effort. But some variable pay (20% – 25% of total comp at target) with a measure like average spend per customer (for customers > $xx in ACV), or average number of users/customer (again for “substantial” customers, or customers at least 6 months old or, …).

Try to find a measure that would improve if the type of customer that has long-term potential is finding more value in your offering, but be careful not to let successfully bringing in a lot of new early-stage customers drive the measure down. That’s the reason for measuring only those who have been with you for some length of time, or have some threshold level of established usage. Then the evidence of “sales” success would be making that sort of measure improve by a few percentage points – no incentive pay if it doesn’t improve, target payout at the targeted (and achievable) level of improvement, and meaningful upside if improvement exceeds expectations.

Would love to hear other ideas – please comment below if you can add to the discussion.