The sales compensation plan document serves as a standard reference for sales reps, sales managers, and those who calculate the incentive payouts. Typically, the plan document includes an overview of the plan structure often with a statement of the company’s pay philosophy, a detailed description of the plan’s components with brief payout examples, the terms and conditions of the plan, and an acknowledgement page for the sales rep and managers to sign. It is a best practice to have the plan in the hands of the sales reps no less than 30 days before the effective date, which normally is the beginning of the fiscal year (in some jurisdictions, Works Councils and laws may require an earlier plan announcement and acceptance process).
A value-creating plan document includes the following sections:
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.
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 1st to December 31st,
- 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.
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.
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.