You know that the best and highest use of your sales compensation spend is to focus your sales people on the most important sales. The “most important sales” are defined in your business by your top priorities, and may include sales from new customers, sales of strategically important products or services, contracts closed with preferred terms, or sales with higher margins. But we all know that simplicity in plan design is vital to motivational value, straightforward prediction of compensation costs, and administrative effectiveness. So… how to balance the need to direct and focus sales effort with the imperative for straightforward plans?
The traditional approach is to pick a few (ideally three or fewer) measures, and assign weights based on where we want sales people to focus. Then we set goals for each measure and design an incentive payout table for each. We may include some linkages to make sure sales people can’t over-earn by focusing on one opportunity at the expense of others. And in many cases, this is a great answer and yields a solid compensation plan.
However, situations in which the big message is “make your number,” with a close second of “…and be sure to include this sort of sale in your results,” there’s a better way. And that better way is based on a new plan construct we’re calling a Relative Rate plan. In this construct, we don’t start with weights. We start with the idea that sales in a preferred category should pay out at a high commission rate than “vanilla” sales, and we directly manage the relative values of the commission rates rather than the weight for each stand-alone component.
With a little clever algebra, the relative rate plan guarantees the same zero-sum funding of the incentive at target by assigning commission rates to different types of sales based on the goal and intended relative value for each.
- This approach has proven to be very powerful in a number of tricky situations, including:
- Paying for on-premise licensed software and subscriptions in the same plan
- Paying an appropriate uplift on new customers or products
- Rewarding for preferred deal terms
- Emphasizing acquisition of customers in a new market segment
- Adding compensation for the most profitable sales.
This presentation was first made at the 2017 WorldatWork Sales Compensation Spotlight conference, then captured as a webinar hosted by Xactly. View the webinar for…
- A discussion of the basic idea
- The big reveal of the actual algebra that makes it work
- An array of specific cases where the approach has saved the day.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.