1. Does the sales person meaningfully influence online sales results through the fulfillment of the primary accountabilities and responsibilities of their role?
2. Can the individual sales person’s impact on online sales results be tracked and reported with adequate accuracy and timeliness?

The first criterion addresses the issue of alignment to role (and presumably to business strategy, if the role has been well defined).  Does providing sales credit for online sales increase motivation by recognizing and rewarding the results of sales effort, or does it cloud line of sight by introducing a metric that is not meaningfully controllable by the sales person? In some cases the answer is clear, in others clear as mud.

The second criterion addresses the issue of feasibility.  Assuming online sales are a desirable metric for the role, are there systems and processes in place to enable effective and efficient reporting and plan administration? Let’s consider a couple of examples.

Example #1: Luxury Goods

Indirect sales representatives for a manufacturer of luxury goods are tasked with maximizing product sales from an assigned geographic region, as well as managing the brand presence and the brand “experience” in the region.  They call on wholesalers and retailers with the goal of introducing new products and increasing sales of existing products by educating clients on the value and positioning of the brand.  They often do “hands-on”
merchandising and product placement, and even provide business strategy advice to smaller clients, either directly or in joint calls with a wholesaler.  They also look for new retail and wholesale clients to expand their portfolio.

The sales incentive plan for this luxury goods indirect sales role may be designed to include credit for online sales from customers in the assigned geographic region.  The sales representative is intended to have a strong influence on brand presence and sales experience in their assigned region, and the majority of online sales for
this brand can be traced back to end customers who have been exposed to the brand’s “experience” in the brick-and-mortar world. In other words, this sales role meets criterion #1.

Evaluating criterion #2 is relatively simple because these indirect sales representatives are dealing with regional clients with little or no overlap across regions. Sales from all channels may be tracked and reported by account.  The sales incentive plan does not provide sales credit for online sales through the company’s own online store.  There is also no credit for sales from national accounts that may have physical locations in the region.

Example #2: Technology Support/Accessories (for example, audio cables or cellular phone chargers.)

Indirect sales representatives for a manufacturer of Technology Support/Accessories are tasked with maximizing product sales from an assigned geographic region.   They call on wholesalers to introduce new products and promotions, and provide advice on product assortment.  They also call on local outlets of large retailers
for merchandising and product placement, and may have some end-customer contact at the retail site.  Promotions, merchandising guidelines and marketing materials are developed by corporate marketing; the focus of this role is on the execution. In general, there is significant price sensitivity and limited brand recognition.

The sales incentive plan for this role ideally would not provide credit for online sales.  The primary reasons for this recommendation are the price sensitivity and limited brand recognition.  While the sales representative’s role in merchandising and product placement may meaningfully impact sales in a physical environment,
this advantage is lost in the world of online sales. An online shopper might have become aware of the product in a brick-and-mortar environment, but price sensitivity and lack of brand recognition mean price comparisons and feature comparisons are likely to drive the online sale. Criterion #1 is not met and criterion #2 becomes irrelevant.

Many companies face more complex or ambiguous decision making situations.  Perhaps the sales representative has the ability to affect online sales for some clients or
some products, but not others.  Should the company try to provide selective credit?  Efforts to ensure sales credit “fairness” are often penny-wise and pound-foolish.  Unless evidence indicates the motivational impact of such sales credit outweighs the administrative burden, it might be best to leave online sales outside of the incentive plan.

Some companies already find themselves managing an incentive plan that does not meet the criteria outlined above, and face the challenge of transitioning to a new incentive plan. What challenges does your company face in managing sales credit for online sales? We welcome your stories and your questions.

Here’s the chain:

1. Business strategy
2. Operating objectives for the coming year
3. Expected contribution of the sales organization to achieving those objectives –> sales goals
4. Sales roles with objectives aligned to achieve overall sales success –> key accountabilities by role
5. Sales compensation plan measures and goals/quotas

• 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.

Most of the time, the amount of the commission at goal (or “quota”) is higher if the quota is higher – so if one sales person has a $1M quota and another has a $1.5M quota, then one has a target commission that is 150% that of the other. Whereas in a “bonus” world, the target incentive is fixed for the role (e.g., $40k per year) and is paid for hitting quota, which may vary from one person to the next.

Some people hear the word “bonus” and mistakenly conclude that the payout outcome will be binary (all or nothing). While that’s possible, it’s rarely advisable. A typical sales compensation bonus plan will include payout rates to pay additional compensation for every increment of additional performance. The most straightforward approach here is to pay 1% of the target payout for every 1% of the quota achieved. So if the target payout is $40,000 and the quota is $1,000,000 then for every $10,000 in sales (1% of $1M), $400 is paid (1% of $40,000). It is also usually advisable to pay at a higher rate once the quota is achieved. So in our example, the payout for every additional 1% of quota over 100% (every $10,000 over $1M) might be 2% of the target incentive ($800).

Of course there are myriad nuances and variations, including the possibility of “personal commission rates” which communicate a “bonus” as if it were a “commission,” etc.

In deciding whether your compensation plan should be quota-based or commission-based, the key question is one of your business’ philosophical starting place about variable pay for sales people.

1. Do you start with a fixed amount you know you can afford to pay to get your offering sold (e.g., 5% of revenue), and design the plan to manage to that value?
2. Do you start with the idea that the sales job has a market value, and that those who meet the goals assigned based on the sales organization and roles you have put together should earn that market value?

If your starting place is #1, a commission is likely a better fit for your business. If your starting place is #2, a bonus type incentive could be a better approach. Commissions are more typical and appropriate in earlier stage businesses, new business roles, product launches, and certain industries; and bonuses are more typical and appropriate in more mature businesses, complex selling organizations, and account management roles.

Of course, both the cost of the sales compensation compared to the sales team’s productivity and the compensation delivered to the sales people as it relates to their job prospects outside the company must both work in order to have a successful business model.

• 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.