From WorldatWork’s Sales Compensation Focus, March 15, 2010
Rewarding Behaviors v. Rewarding Results
By Donya Rose, The Cygnal Group
“You get what you pay for.” If you pay for behaviors, you’re very likely to get them; if you pay for results, you will improve the chances of getting the needed results significantly.
To be more specific, your company will be best served if the measures in your sales compensation plans are directly linked to the company’s income statement. The most common measures of this type are sales and gross margin on either revenue or bookings. Other measures that correlate highly with generating profit for the company are volume and cost management type measures.
The necessity for focusing variable pay in sales compensation plans on “hard” financial measures comes from the following key principles of incentive design, which, taken together, all but require it:
- Pay at risk: Pay at risk means that sales people who do not earn the target incentive will not be paid their market value. For example, a typical sales person may earn in base pay only 60% of what she would likely have earned elsewhere doing similar work. This element of risk is one of the keys to maximizing the motivational value of the incentive plan.
- Upside: In addition to at-risk pay, most sales compensation plans also offer “upside” or over-market pay to those who exceed expectations. Without the upside, it would not be sensible for a sales person to seek or accept at-risk pay. Just as when investing, people choose a “risky” stock only if there’s a real chance that it could outperform the more conservative stocks for an exciting upside. Similarly, sales people who are willing to “bet on” their own ability to be successful seek and accept risk in their compensation plan in exchange for the opportunity to earn above their market value if they can outperform expectations. For our example sales person with 60% of her market value delivered as base pay, 40% is delivered in the incentive at target, and if she achieves top performance (90th percentile performance), she could double that 40% so she is earning 140% of her market value.
- Self-funding: In most companies, the budget for the sales team is based on the compensation at target per person. The affordability of that budget is determined based on the annual operating plan for the business, which includes some expectations about the productivity of the sales team (how much they will sell, of what kind of product/services, at what pricing/profitability). It is important to the health of the business that sales compensation costs move in alignment with profitability so that any over-budget payment made to the sales team is funded out of over-plan profits generated by their productivity. In this way, any upside paid to the sales people is clearly “worth it” to the company.
A More Straightforward Approach
A behavior-based sales compensation plan risks inviting manipulation and does not align with the results-based necessities of running a business. In a company with a variable pay plan for sales people in which 50% of the target incentive was a traditional commission on sales and 50% was in a bonus paid at year-end based on behaviors, total compensation was very steady for each sales person over several years in spite of significant fluctuations in performance against quota. Sales leaders were adjusting the behavior-based bonus to offset the sales commissions, paying those with high commissions a lower bonus, and those with low commission earnings a higher bonus.
When asked about this clear pattern in the payouts, sales leaders said, “He didn’t need a big bonus last year since he did so well with his commissions.” And for a different sales person with low commissions and a high bonus the explanation would be, “She worked really hard but the sales just weren’t there, so we’re recognizing all that hard work in her bonus.”
The inclination of many sales managers is to use flexible behavior-based compensation plans or manipulate the objectives or the evaluations to generate the payout they feel is needed. While these sales managers may have been trying to retain the talent they had in place, the design of the compensation plans was not serving the sales people, their leaders or the business well. If it was possible to have an underperforming year and still be a “keeper,” and still possible to have a terrific year but not be worthy of significant upside in the total variable pay delivered, then the pay mix for the role was inappropriately incentive-rich.
To correct this problem, the company moved more of the compensation into the base pay, eliminated the behavior-based bonus, added slightly to the commission at target, and adjusted the payout curve shape to recognize the difficulty in setting accurate quotas. With these changes in place, the results-based incentive plan generated payouts that were generally seen as fair by sales leaders and sales people. The new plans also helped to improve the focus on quota accuracy by the sales leaders, and resulted in a higher percentage of sales people meeting and exceeding quota.
Sales results are why we hire and manage a salesforce, and rewarding sales people for results is the most effective way to ensure that the company’s investment in the sales organization yields the expected return.
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.