• 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.

• The incentive plan pays “now” for work completed “before” – A sales person works for months to craft a deal. The deal closes a week after the sales person begins a leave of absence. The sales person completed most if not all of the work to close the deal prior to the start of the leave. We would expect the sales person to be paid an incentive for this deal. Whether the incentive paid is 100% of the calculated incentive or a prorated amount would most likely depend on who else was involved in closing the deal and what role they played. Bottom line, the sales results may have come to fruition during the sales person’s leave of absence, but they were driven by significant work completed before the leave began.
• The incentive plan pays “now” for work completed “now” – A sales person has ongoing responsibility for a group of accounts within a geographical territory. The sales person calls on accounts regularly and maintains ongoing relationships that drive a flow of business. For every month, the sales person is paid an incentive based on the aggregate performance of the accounts in their territory vs. an assigned goal (perhaps a revenue goal). If the sales person begins a leave of absence in the middle of a month, we would expect the sales person to be paid a prorated incentive based on the number of days of active work during the month. Most likely a manager or peer is covering the territory while the sales person is on leave. The “covering rep” may or may not be receiving additional compensation for their effort.

Of course, the above are only general guidelines and not legal advice. Talk to your legal adviser to evaluate any proposed approach in light of applicable laws. Some countries outside the US, as well as some states in the US (California and New York come immediately to mind), have very specific guidelines about incentive payments. These guidelines often vary based on the type of incentive and the amount of pay at risk.

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.

The question of whether or not to have a threshold is largely philosophical, though one could make a case that there is some relation to pay mix, in that a higher base salary would pair with a (relatively) high threshold  and a lower base salary would pair with a lower (or no) threshold.  For plans without a threshold, it is likely that  a substantial portion of the incentive that is paid from the first dollar is actually a “phantom base salary,” acting much like fixed compensation, and therefore not truly variable (or motivational).

It makes good sense to consider no-threshold plans for…

• Roles with low base pay as a percent of total compensation at target
• New business roles without any existing book of business to manage
• Roles in which compensation is calculated by transaction or deal (not aggregate results)
• Roles in which it is important for the sales person to have a clear understanding of the comp value of any proposed deal.

Is makes good sense to consider a plan with a threshold for…

• Account manager / territory manager roles with an existing book to manage
• Established/mature markets where growth is a priority
• Roles with good historical performance data enabling management to confidently set the threshold so that 90% of sales people are likely to exceed it
• Roles measured on aggregate performance measures (e.g., total sales, or total margin value) vs. deal/transaction-level measures.

Tips for picking the right threshold if you’re going to use one

If a plan does include a threshold, we generally recommend that the threshold be set so that no more than 10% of reps are performing below threshold.  Some organizations tie the level of the threshold to a base salary, or the fully loaded cost of an employee to the organization (which is often a multiple of the salary in the range of 2-2.5x times to account for benefits, overhead, etc.), expecting the sales person to “fully recover” their cost before additional (incentive/variable) compensation is earned.  However, this approach leaves little flexibility for times when the company needs to deploy a resource to sell a new product or service, or to build a new customer market.

While calculating the marginal cost of the next sale, or the next sales person, can yield good insights, it’s better to think about the overall cost of compensation as a system (total employee cost divided by total productivity) than at the person by person level.  This will enable you to set a threshold (or not) based on the minimum productivity that is acceptable given the different key accountabilities, and goal-setting confidence, for the different selling roles.

This also gets at the fundamental question of whether or not a higher goal actually causes a higher level of productivity. We put mechanics into the compensation plan to give people the extra motivational traction to get up to and beyond the quota, generally in the form of acceleration over quota. If your actual performance expectation is 80% of the quotas you have deployed, then you should have some kind of acceleration at that point, and the acceleration that you have at 100% of quota is out of reach for most (and therefore not very motivating).

Moreover, when you start stating your official productivity expectation as being beyond what you really expect, and stating your target compensation as being more than you actually intend to pay, you start having to keep two sets of books – what you said (the official quota and target comp) and what you meant (what you actually expect people to produce, and what you intend to pay them when they do that). And your salespeople will start to think you don’t understand your own business model and are disingenuous when you tell them what you expect of them and how much you intend to pay them.

It’s also helpful to remember that salespeople (and most people, but especially salespeople) really care about being “winners.” Intentionally setting them up to mostly not meet the officially stated expectation makes morale challenging, and may drive away solid contributors who need both a reasonable income and validation that their contribution is acceptable or better. It’s hard for many people to keep going in a challenging job when the systems in place consistently tell them they aren’t quite good enough.

Double quota/double credit

Description: Each participant in a sale receives full quota and full credit for the sale (or “their” piece, e.g. Product Specialists take only their product slice)

Advantages:

• Strong encouragement for participation of multiple sellers in an opportunity
• Clear message regarding expectations communicated via quotas

Disadvantages:

• Difficult to model selling costs in relation to sales productivity
• Special care must be taken to ensure the team size is appropriate for the opportunity

Appropriate use:

• When it is possible to anticipate the requirement for participation of each team member in a certain class of selling opportunities
• When teaming is essential to the execution of the sales process

Credit splits

Description: Credit for all sales is divided among participating team members, with total credit adding to 100% of actual sale value

Advantages:

• Easy to model and anticipate selling costs in relation to results
• Opportunities will tend to be handled by the smallest effective team

Disadvantages:

• Disincentive to team with others due to anticipated reduction in sales credit
• Expectations regarding degree of teaming are not communicated via quotas

Appropriate use:

• When it is important to be able to assign a team to an opportunity “on the fly”
• When it is difficult to anticipate the teaming required, and therefore to set quota

There are ample variations on both of these types of incentive, including

• “Layered quota / layered credit” in which more than two people are involved in a sale (e.g., Account Manager, Product Specialist, and Channel Manager)
• Split credit with more than 100% of total sales being distributed (e.g., allow up to 200% credit, but with no more than 100% going to any one person/role)

Most complex sale requiring involvement of multiple sales people in most deals benefit from some form of shared sales credit. The appropriate form will depend on the intended coverage model and key accountabilities of each sales role. While the CFO will be concerned about “double paying” when several people receive sales credit and compensation for one sale, these concerns are generally allayed through rigorous modeling of the total cost of the selling function as it relates to overall sales productivity.

Advantages of relative ranking payout systems include:

• The dispersion in variable pay is known in advance, designed, intentional, and totally controlled.
• The total cost of variable pay for the organization can be budgeted with confidence – regardless of overall results, the total payout is unchanged.

Disadvantages, however, are significant:

• The payout doesn’t vary with overall business results – total pay delivered in a “bad” year is the same as that delivered in a “blowout” year.
• The sales people end up competing with their peers in a very real sense – “The only way for me to ‘win’ is for you to ‘lose.’” This is the reality of a relative ranking plan, and can undermine a sense of collaboration and shared success.

Relative ranking plans work best for sales forces in which collaboration is not a key requirement for success, the sales force is large enough that sufficient dispersion in pay can be created in the designed payout distribution, the sales role has limited influence on overall results (customers are buying from the company more than from each sales person, and the sales person has more influence over awareness than over the final buying decision – think of pharmaceutical sales reps).

For most sales roles, the more direct tie between performance and payout, independent of the performance of peers, provides the better combination of motivation for the sales people and alignment between sales results and the cost of compensation.

To focus some of the sales effort on more strategic results, flexible incentive components focused on Strategic Sales Objectives (SSOs, also known as MBOs, KPIs, KSOs) may be used. The goals for these objectives are generally communicated in sentences, not numbers. To get the best results, we would recommend:

• Put enough of the incentive opportunity against these objectives to make them meaningful to the salesperson, ideally in proportion to the amount of time people spend on them in the year. For example, a salesperson who is expected to spend 70% of their time closing deals this year and 30% of their time laying the groundwork to close longer-term opportunities in future years should have 70% of their incentive at target available through in-year results and 30% available for success with SSOs.
• Limit the number of objectives. These are supposed to provide focus, which means there should probably be five or fewer of them for a year.
• Focus the objectives on prospect action, not salesperson action. A good objective might be for a salesperson to obtain a commitment to a field trial, or a limited first order, or a visit by a prospect to a current customer. Avoid objectives which are salesperson activities, and focus on objectives which can only be achieved when the prospect objectively demonstrates deepening commitment to your company’s solution.
• Offer limited upside. A good guideline for motivating compensation design is “No risk without upside.” However, allowing salespeople to earn twice the target incentive for SSO type components is probably not a good idea. Ideally, the upside on these components is delivered when the deal is closed and the large check associated with the numbers comes in. Nonetheless, it may be appropriate to define some over performance criteria, and offer as much as 150% of the target amount to those who “over perform.”
• Monitor objectives and ratings across the organization to ensure consistency. Require some level of approval of the objectives before they are communicated to the salespeople, reviewing them to ensure that all sales managers are approximating “equal stretch” as they deploy these objectives. Then after the objectives are assessed and the payments are made, check to make sure that the payout distribution seems sensible for the amount of progress that has actually been made by the sales team.

Strategic Sales Objectives are hard to do well. They take significant organizational discipline, and require thoughtful review to ensure they are being used appropriately. In long sales cycle businesses they can be vital, but recognize that doing them well is a significant investment for sales leadership and for those administering the plans.

The first approach identifies Sales Managers as members of the company’s management team and should be on the same management incentive plan as other managers in their pay grade. This usually means that some portion (typically 70%) is based on one or two financial measures at the region/area/sales channel level with the remainder based personal objectives (which are also used to determine merit pay increases). At times one of the measures are as high as the total company level; however, these are less effective since measurement at that level is so far from the line of sight of the managers that there is the perception that there is little, if any, alignment to everyday sales management activity.

The second approach sees Sales Managers as team leaders and therefore they should have their incentive pay directly linked to the performance of their team of sales representatives. In this approach, one or two of the key components of the sales representatives’ plan become the measures for the managers. Focus is on outcomes (e.g., new revenue, revenue growth, profit) not on sales activities (e.g., sales calls, closed leads). Activity measurement is best for the annual performance appraisal for the managers’ merit pay increase. The performance measurement for this approach is typically quarterly when the sales representatives are on monthly plans or aligned when both are on quarterly plans (with in some cases of an annual component in some cases for one of the measures).

The third approach is a mixture of the two, for example, 70% weight on team performance and 30% on financials. This sends the message that the primary responsibility is meeting the sales goals that support the Company’s financial metrics. The company stresses the importance of the sales representatives meeting or exceeding goals while also recognizing Sales Managers’ status are members of the management team. In this case as well, other performance measures are used for merit pay increases.

What is a quota?

A quota, for the purposes of this post, is a sales goal. It can be stated in terms of revenue or margin value (e.g., dollars), units sold, or any other measure of sales productivity. Ideally, the quota is the level of performance expected of the reasonably productive contributor; the person who achieves quota is not a “star” and not a problem – doing just fine.

In some businesses, the word used may be “goal” or “target,” but the concepts are the same.

Where do quotas come from?

Ideally, the quota setting process starts with the company’s annual operating plan (AOP). This sometimes start with the development of a forecast of the coming year from the sales team’s perspective, and sometimes it starts with market information. Often it starts with the needs of the business in order to meet profitability and growth targets set by the board, the owners, and/or senior management.

How are quotas allocated?

Once a sales leader has been assigned the quota for their team of individual contributors, there are a few basic methods they could use to allocate that quota to individuals:

1. Increase vs. historical sales. In this method, a “clean” baseline is established by taking out unusual (non-run-rate) deals or accounts from the prior year results, adding in known/expected sales. Then each person may be assigned the same value in increase (dollar, euros, units), or the same percent increase over the prior year.
2. Account planning. For businesses with a relatively small number of large accounts, the quota is allocated more to accounts and opportunities than to individuals. The individual quota is then the sum of the quotas of the accounts to which they are assigned. Each account quota is assigned based on the particular expectations and opportunities in that account.
3. Market based. In some businesses there is good market data about expected changes in opportunity by geographic area, customer type, degree of penetration, or other method of segmentation. In this case, the quota (or quota increase vs. history) may be higher for certain market types and lower for others.

Most businesses blend a combination of these approaches to determine quotas.

In addition to these considerations, it should be noted that some sales managers also consider the earnings requirements of the people on their team and try to balance quotas so that they have the best chance of retaining key contributors. This may mean making the quotas for key contributors somewhat less challenging than those for other sales people. This practice is very common, though rarely openly acknowledged.

How much quota to allocate

100% of the quota allocated: A fully allocated quota indicates that the sum of all individual contributor quotas is equal to the sales expectation in the annual operating plan. Many companies require that the quota be fully allocated in order to ensure alignment of the sales plans with the annual operating plan. However, in many businesses the quota is over-allocated.

>100% of the quota allocated: This means that the sum of the individual quotas is greater than the sales expectation in the annual operating plan. This is a reasonable practice in order to ensure that the quota is, in fact, fully allocated given the likelihood that there will be vacant positions and people new to the role in the organization at any one time. An over-allocation of about 5% of the annual operating plan is generally a healthy practice. However, if over-allocation goes much beyond 10%, businesses may experience an uncomfortable situation in which the overall results are reported as on-target while the individual sales people are generally not earning their at-target pay. Quotas are sometimes materially over-allocated as a sort of “insurance, just to be sure we make our number.” This is rarely an effective practice. When quotas are seen as unattainable by the sales people, the motivational traction that the compensation plan should be providing is undermined and results may suffer.

<100% of the quota allocated: This generally happens when a business unit accepts a sales target that is greater than what they believe will be achieved by the sales team, and the management chooses to leave some portion of the quota unallocated, and hope for a “bluebird” (unexpected, substantial sale) to make up the difference. This is not an ideal choice, but may actually result in better overall performance of the sales team than could have been realized if the quotas were seen as unattainable by most.