By Beth Carroll, The Cygnal Group

It’s fall again, the economy appears to have shifted toward the positive in many sectors, and companies are thinking about redesigning their sales compensation plans for 2011. In order to ensure the redesign process and resulting plans will provide a good return, businesses should address six key areas:

1. Planning
2. Involvement
3. Knowledge
4. Modeling
5. Communication
6. Administration.

Planning
Incentive design is a process, not an event. Whether this is your first design effort or you’ve done this more times than you can remember, you should not underestimate the time and effort the project will take, particularly given the recent economic upheavals. You also must allow time to carefully communicate any plan changes. Employees are nervous about adjustments to their compensation in the best of times, but they are especially skittish now. In a tumultuous year, even more time in the design process should be allotted to communication. Keep in mind if you are reading this in September, you may already be running a bit tight on time for a January effective date, although you can still accomplish what you need to if you move quickly but carefully.

Involvement
Too many people involved in a sales compensation design project can be unwieldy; too few can lead to a complete failure of the design if a critical viewpoint was not adequately represented.

Senior leaders must be visibly and vocally supportive, whether or not they are directly involved in the project. Sales leadership, finance, human resources, sales operations and IT must be represented on the design team at fairly high levels, as they are key constituents who have the best knowledge about the organization, the history, the systems, and what is and is not possible with incentives.

The design team should not include anyone whose compensation will be directly affected by the outcome of the process, but a representative sample of sales employees and managers should be interviewed to gain feedback and insights into sales jobs and processes, as well as what has and has not worked in prior compensation plans. Such inclusion will give them a sense of being heard, which can be critical in gaining acceptance once the plan is rolled out.

Knowledge
If there is controversy about the effectiveness of the current plan design, a survey of your salespeople may provide some needed insights to break a logjam. If there is concern regarding the amount being paid relative to market, a market pricing review can provide guidance about the need to raise or lower target pay levels. If management believes the goals that have been set should be attainable, a bell curve graph showing that 80 percent of employees were at 50 percent or less of goal might be what’s needed to show the disconnect between management’s belief and what is realistic. Spend time at the start of the project to build this fact base.

Modeling
Once you have developed your initial recommended plan design, you must model it under different performance scenarios. If you do not take the time to do this important step, you will find an unpleasant unintended consequence the following year; it’s only a matter of when.

What if you are at 80 percent of goal? What about 120 percent? Are the payouts still acceptable as a percentage of revenue or profit? What are the best measures of sales’ contribution to the company? What would you consider a successful outcome for an individual and the company, and based on the modeling, will this plan get you there? Are transition arrangements needed to move people in an orderly fashion into the new plans? All of these questions must be addressed for a successful outcome.

Communication
A simple incentive plan that is well-communicated and understood by the field can be far more effective than the most mathematically perfect design that no one understands. Senior leadership must take the lead in communicating the new plans. Managers should be told about their plans first, as their support is critical to the rest of the communication effort. Examples must be provided showing how different performance results will pay under the new plans.

Plan documents and quota-acknowledgement sheets should be provided in one-on-one meetings between the employee and his/her manager. This meeting should focus on employees’ goals and earnings expectations, their specific strengths and opportunities, and the best ways for them to win under the new plans. Excel-based earnings calculators can be powerful learning and motivational aids, but be careful employees are not so busy estimating their pay that they forget to actually do the work.

Administration
The last key area to address is administration of the plans. Payouts must be on time and accurate in order for salesforce members to trust the plan design and learn to modify their focus to improve their results. As part of the administration process, be sure that regular reports are provided to design team members, so they can assess the plan’s effectiveness as the year progresses, and to employees, so they understand the direct connection between their performance and their pay. It is also a good idea to include a “motivation” section that shows how much additional could have been earned if a hurdle or threshold had been cleared. Often, necessary design changes are only surfaced when it comes time to administer the plans, so test your administrative processes before you actually communicate the new plans to the field.

Conclusion
While there are many right answers for any sales compensation plan, there are perhaps even more wrong answers. A process that addresses each of these six areas will yield a right plan design that will create great value for the company, the salespeople and even your customers.

As far as how much to pay, it’s probably best to start with the total comp needed to attract the right kind of people into the role, and a reasonable number of appointments they should be able to set (that close) per month. If some portion is being paid as base salary, then take the remaining total comp at target per month and divide by the expected number of total appointments that close, and that’s the rate per appointment. Finally, check affordability – is each appointment worth that amount to the company? If not, the sales model doesn’t work and needs a re-think. If so, you’ve got your answer.

The rate per appointment varies wildly from one industry to the next, based on the maturity of the business, the strength of the brand, access to good target buyer lists, etc. But the fundamentals above will guide the comp designer to the right answer.

I have put in links to a couple of “Sales Comp Answers” below that are not specifically about this exact situation, but that do give more detail about the principles that will guide you here.

In general, inbound telesales is one of the lower prominence sales roles, and also generally lower in TCC (Target Cash Compensation) than the outbound rep. So there may be less pay at risk as a percent of total compensation for the inbound rep than for any other member of the sales team (including field roles). And there would also be less upside for over-achievement for these roles. But their base pay level may be higher than that of an outbound telesales rep.

Outbound telesales reps are often one of the highest prominence sales roles, and may even function very close to the level of a field rep with the distinction that they don’t actually visit the customers on-site. Often their plans are relatively aggressive in terms of pay mix (50/50 might be typical, but check on this for your industry), and include some dramatic upside for overperformance. They are usually running shorter sales cycles than the field rep with their total quota made up of a large number of small deals. So they are often paid monthly even when the field rep is paid quarterly.

Outbound renewal-only telesales reps are one more refinement of the above, with responsibility for calling into the existing customer base to secure a renewal for a subscription-type service (e.g., phone service, online data access, SaaS). They may have upsell/cross-sell opportunities as well. For these roles, there is probably a known/expected renewal rate. Ideally their earnings start to be meaningful at some minimum acceptable rate of renewal generation, and go up dramatically if they manage to beat expectations and/or add on services. For example, if 85% of customers renew when prompted, then the performance threshold might be 75% or 80% of customers renewing. And outstanding or “excellence” performance might be set at 90% or 95% of customers renewing. Clearly no more than 100% of customers can renew, resulting in a natural cap if the plan rewards for percent of customers renewing. In order to ensure meaningful earnings throughout the year, this role would most often be paid monthly based on results that month (not cumulatively for year-to-date performance).

Standard direct rep plans, in contrast to the renewal-only telesales plan, would likely have

• More total compensation at target (as field roles generally do, compared to inside roles)
• Wider performance ranges (for example, 50% of quota as the threshold and 150% of quota as excellence performance, or maybe 75% to 125%)
• A core measure (like sales value) augmented by a secondary measure of sale quality (like profitability, new name account, or percent of sales from a strategically important product line).

Practices vary from situation to situation, but these general directional pointers would apply in many businesses with these roles. If you have good ideas to add, please comment below!

1. Pay only for leads that close, not for all appointments/leads. If you pay for all leads, you’ll likely compromise lead quality and end up wasting the time of your sales people who will have to re-qualify them before investing more time.
2. If the Lead Gen person has some ability to know which leads are likely to close as “large” deals/relationships (whatever that means in your world) and which ones could be smaller, then you may want to pay differently based on deal size – less for smaller deals and more for larger ones. If, however, they have little ability to anticipate eventual deal size then you might just pay a flat amount for leads that close.
3. How much to pay for each lead goes back to the basics of how much you need to deliver in total comp, how much in the base vs. the incentive, and how many deals (or how much sales value or margin value) you expect to come out of their efforts. Then you do the math to figure out the rates. And if it’s not affordable, then you’ve got a selling model issue (means this may not work for your company).

Once you’ve established the pay level and pay mix, you’ll need to decide what to measure for the variable portion. Most often this is either the sales value of closed deals, or the margin value of the deals, though other measures are more appropriate in some businesses.

The mechanics of how the performance is linked to pay can be as simple as a straight commission rate (e.g., 3% of sales), or can accelerate as productivity increases, and even possibly decelerate at high levels of attainment. There can be multiple measures, a bonus for quota attainment, etc. As the business matures, the plans typically become a bit more complex to reflect the needs of the business.

The basic principles of plan design apply here as well, but this should provide a few tips to get started.

Any tips for putting together an incentive plan for “inside sales” employees? We are trying to get our employees into a “value-added selling” frame of mind (instead of price-point) and want to provide an incentive.

Answer

What type of inside sales are they doing? Do they qualify for the 7i exemption or are they non exempt employee? These questions must be answered because, if they are non-exempt, any incentive earned must be included in their hourly rate. If they are exempt, it would make it much easier to implement an incentive with less administrative costs. Assuming you conclude they are either exempt, or that the administrative burden if they aren’t is “worth it,” then here are a few tips for designing their incentive plans.

Tips for Inside Sales Plans

1. Incentives are a great way to support an initiative to change behavior, but the rest of the initiative needs to be in place as well. This may include training, systems enhancements, coaching and mentoring, etc.
2. If you really want to use incentives to motivate and excite, they need “carrots and sticks” to be part of them. Over time you will want to migrate base salaries down as a percent of target total compensation so that the target incentive must be earned in order for the employees to maintain market-competitive pay.
3. The amount of pay at risk depends a great deal on the nature of their inside sales roles. Although it can be more complex than this, one simple division is between jobs that are primarily “inbound” and those that involve more aggressive “outbound” calling. If an inside seller mostly reacts to requests from customers and is primarily doing an order management function (perhaps with some ability to cross-sell or up-sell), then a relatively smaller percent of pay at risk (in the incentive) is appropriate. For outbound inside sales people who more strongly influence a prospect’s decision to buy through their own creativity and initiative, more pay at risk (and more associated upside) would be a good idea.
4. Beyond this, the basic principles of role-based incentive design apply, including the following.

Basic principles for role-based plan design success

1. Pick measures that are linked directly to income generation for the company (e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls)
2. Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
3. Design the plans with sales leadership’s involvement so that they introduce them with a message like, “Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . .”
4. Provide great materials to communicate the plans — since the reason you’re doing it is to motivate and excite your inside sales people.
5. As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don’t see a frequent and easily understood connection between their results and their earnings.

What type of inside sales are they doing?

Do they qualify for the 7i exemption or are they non exempt employee?

These questions must be answered because, if they are non-exempt, any incentive earned must be included in their hourly rate. If they are exempt, it would make it much easier to implement an incentive with less administrative costs. Assuming you conclude they are either exempt, or that the administrative burden if they aren’t is “worth it,” then here are a few tips for designing their incentive plans:

1. Incentives are a great way to support an initiative to change behavior, but the rest of the initiative needs to be in place as well. This may include training, systems enhancements, coaching and mentoring, etc.
2. If you really want to use incentives to motivate and excite, then you need “carrots and sticks” to be part of them. Over time you will want to migrate base salaries down as a percent of target total compensation so that the target incentive must be earned in order for the employees to maintain market-competitive pay.
3. The amount of pay at risk depends a great deal on the nature of their inside sales roles. Although it can be more complex than this, one simple division is between jobs that are primarily “inbound” and those that involve more aggressive “outbound” calling. If an inside seller mostly reacts to requests from customers and is primarily doing an order management function (perhaps with some ability to cross-sell or up-sell), then a relatively smaller percent of pay at risk (in the incentive) is appropriate. For outbound inside sales people who more strongly influence a prospect’s decision to buy through their own creativity and initiative, more pay at risk (and more associated upside) would be a good idea.