Leaders agree…
Over the years we have interviewed hundreds of senior business leaders about their need for better sales compensation plans, and 100% of them have listed plan simplicity as a key characteristic of a better plan. If it’s a top priority for everyone, why is it so elusive? What are the best approaches to move to simpler plans? And is it possible to go too far?
Why is it so hard to design a simple sales comp plan?
Sales compensation is role-based compensation, which means that the plan must align with the key accountabilities of the role. To be effective the plan must depend on measurable results that reflect the financial value created by that one sales person. Creating value in a complex business requires the balancing of multiple priorities, and that’s where the complexity shows up. It’s not usually enough to just sell volume – it needs to be the right offering or mix of offerings, at the right price/margin, to the most important customer categories, at the right time, with the right deal terms, etc. There are ways to enforce many of these “right ____” imperatives outside the compensation plan, but the temptation is to write them into the plan to make sure no one is paid well for business that’s not “just right.” And by the time they are all reflected in the plan rules, the plan document reads like a litany of all the ways the sales person can’t earn, not like an exciting invitation to do great things and earn really well.
Besides these well-intended efforts to capture everything in the comp plan, there are other business needs that contribute to plan complexity, and that complexity has the potential to do real damage.
Sources of plan complexity
- Efforts to direct sales effort (elaborated above)
- A requirement to measure sales results using a metric that is not easily found in existing business systems
- Concerns with the possibility that customers may not follow through with their commitments resulting in reversals of bookings
- Interest in retaining sales talent by paying for results over a long period of time aligned with company value realization from the account
Complex plans lead to...
- Plan documents that are hard to write, hard to explain, and hard to maintain
- Increased administrative costs and calculation errors
- Difficulty in modeling and forecasting the cost of compensation
- Reduced motivation for sales people since the connection between what they sell and what they earn is not straightforward
How to move towards simplicity
- Enlist leadership. The first key to making this difficult change is to have leadership support that is engaged and practical. Someone’s “cheese” will be moved, and it will be important the have a clear vision of why the change is needed, as well as a small team of people prepared to be creative and sensible in looking for better answers.
- Start at the beginning. You have a compensation plan already, so this may seem like a waste of good thinking. But if you want to really change to a simpler plan it will be a great benefit to work through the design process from the beginning and see where you come out. Of course, your choices will be informed by your history, as they should be. But that blank page is likely to inspire some fresh thinking. A succinct explanation of the process from role definition through plan documentation is here: https://cygnalgroup.com/9-steps-shiny-new-comp-plan/.
- Use processes and policies. Remember that you don’t have to put everything in the comp plan. For example, a common source of complexity is around deal terms, which can often be handled as well or better through a documented and well executed deal review process.
Can a plan be too simple?
It’s rare, but it happens. There are sales compensation plans out there that just pay for volume or ignore the importance of market development activities that take sales capacity but do not generate in-year financial results. If sales people have substantial risk and upside in their plans, and if their plan measures and mechanics don’t reward them for bringing in the best quality business or for appropriate strategic focus (if that’s in their role), then the plans aren’t supporting the full picture of what the business needs. All plans need a sales volume measure, most plans need a sales quality measure, and a few plans need either a measure to reward collaboration (team results) or a measure to reward future-focused efforts.
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.