• 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:

• 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.

Effective compensation starts with effective plan design. With the right kind of compensation plans, companies can reward desired behaviors to produce desired results and achieve transformational revenue goals—each month, every quarter, and every year.

It’s safe to say your company’s success next year hinges on what sales compensation plans you develop today, so discover the importance of proper plan design. Learn how you can successfully balance the most critical components of world-class compensation plans, from pay mix to performance metrics.

Presenters: Beth Carroll and Donya Rose

Recorded October 2011

Length: 56 mi

View the Webinar (registration with Xactly required): Essential Sales Compensation Design Tips

Compliments of Xactly

An in-depth discussion of common business problems and their sales compensation design solutions.

Learn firsthand about key design concepts and tips that will:

•   create plans that are strategically aligned and easily understood
• promote the right risk and reward balance
• establish fair yet attainable sales performance goals
• ensure collaboration between salespeople and sales management.

Presenter: Donya Rose

Recorded September 2011

Length: 1 hour 15 min

View the Webinar (registration with Synygy required): Avoiding Sales Compensation Pitfalls through Effective Plan Design

Compliments of Synygy

To be clear, this law would apply only to true commission plans, so sales incentives paid as a goal-based incentive would not be subject to it. For more on the difference between these two, see What is the difference between a commission and a bonus? (Note that a goal-based incentive is officially called a “bonus” by WorldatWork, the accepted keepers of the “Sales Compensation Body of Knowledge.”)

It is always a best practice to provide great plan documentation, and we generally recommend it take at least two forms, possibly three:

1. The rollout presentation. This is often a PowerPoint document which provides an overview of the plan design, explains what is new for the updated plans, and makes it clear what focus, behaviors and results are needed to earn well under the new plans.
2. The plan document. This explains the plan in further detail, ideally with good examples included. It is not general across all sales people, but specific to the person who receives it, and includes documentation of their own target compensation and sales goals. It also includes a section covering a range of contingencies (shared sales credit, crediting rules in case of transfers, provisions for leaves of absence and termination, management discretion clause, etc.). It needs to be technically correct in terms of the mechanics of the compensation plan, but also needs to be reviewed by legal counsel in all jurisdictions in which eligible employees live and work.
3. The earnings estimation calculator. This is either built in to  the compensation administration system as a feature, or provided as a stand-alone spreadsheet, often in Excel. It allows the incentive-eligible employee to enter sales goals and target compensation, and also possible sales results, and see the resulting compensation. (We love it when a comp plan is so simple that a calculator would be overkill, so occasionally we can recommend NOT providing a calculator. But for most businesses, a calculator can be a great tool to speed understanding of a new plan.)

These three communication tools are so vital to plan success that they are standard deliverables in all Cygnal Group Full Service plan design engagements.

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.