Creating an Effective Sales Compensation Program

Posted: 10/1999

The Bottom Line

Creating an Effective Sales Compensation Program
By Mark A. Stiffler

In today’s competitive marketplace, you face many challenges retaining qualified
salespeople. One of the biggest challenges is creating a sales compensation plan that
motivates and properly rewards your company’s best people.

Many company executives believe having a good sales compensation plan is primarily a
matter of designing a system that embodies their sales strategy and drives people to
change their behaviors.

Simple, right?

The reality is even the most well-designed plans often fail to motivate people, result
in high turnover and create additional costs. However, there are ways to address these
issues and improve your company’s bottom line.

Planning Before Rollout

The opportunities to improve your bottom line begin before the plan is rolled out to
your sales force. Here’s what you should do to:

Anticipate behavior problems. The problem of unanticipated behaviors is often
hard to avoid, but can be minimized by:

* Explicitly defining the desired behaviors prior to starting the design of the plan;

* Devoting sufficient time to the discussion of anticipated behaviors after a
conceptual plan is designed, but before it is rolled out; and

* Adjusting the final plan design to account for any gaps between the desired behaviors
and the anti-cipated behaviors.

Make sure your plan can be implemented. There are many reasons why a plan,
although conceptually sound, cannot be implemented. The most common is the required data
to measure performance is not available. If it is available, acquiring it is a complex
process prone to errors and delays, such as when data is coming from several different
distributors, each with varying degrees of technical proficiency.

When a plan cannot be implemented, reworking of the plan–and more importantly, the
delay in rolling out your plan–can directly lead to turnover and failure to implement
your sales strategy.

Run scenario tests. In real-world conditions, running the plan can produce
unexpected financial results. To avoid the problem, model a proposed plan design and test
a wide range of scenarios. Make sure the model includes the costs of both sales
compensation payments and the costs of employee turnover when payments are too low.

For example, what happens to your sales compensation payments when you sell five times
as much as you planned, such as during a new product launch? What happens if you sell half
as much, such as when a hot new competitor leaves you spinning your wheels in the dirt?
What are the effects on employee turnover and the costs associated with turnover if this

Ensure salespeople understand the plan. The key to salespeople understanding the
compensation plan begins when the plan first is rolled out. Success depends on making sure
there is time to implement an effective communications strategy. Some techniques for
communicating the plan include:

* Making sure people understand your strategy and how the plan relates to your

* Focusing on behaviors that will lead to individual success;

* E-mailing teasers about different components of the plan;

* Using the Internet to both communicate the plan and allow people to do "what
ifs" in a learning environment; and

* Preparing report mock-ups showing how results will be communicated when the plan is
rolled out.

Implementing and Managing the Plan

A good plan does not guarantee it will drive the behaviors needed to implement your
sales strategy. There are three options available to companies when it comes to
implementing and managing sales compensation plans:

* Build, maintain and operate a homegrown system;

* Buy, customize and run packaged software; or

* Outsource.

Homegrown systems. Most companies use internal information technology (IT)
resources or an outside software development house to implement their plans and a group of
analysts or administrators to manage the plans internally.

Although very common, homegrown systems are typically hard-coded and inflexible, and
operating the systems is an expensive, manual process prone to errors and delays.
According to the Aberdeen Group Inc., Boston, the costs to build, maintain and operate
such homegrown systems can run $1,500 per plan participant annually.

Packaged software. Recently, several companies have begun offering packaged
sales compensation software. Corporations can buy this software, have a third party
customize and implement it, and then run it to facilitate the management of their plan.

Buying packaged software provides cost savings in the form of reduced overpayments,
decreased IT spending and lower administrative costs.

However, a packaged software solution still leaves money on the table. That’s because
the management of sales compensation plans is really a process problem, not a software
problem. Companies realize additional cost savings when they redesign processes to change
the way they are managing their plans.

Outsourcing. For many years, Fortune 500 companies have realized
additional cost savings by outsourcing the implementation and management of their sales
compensation plans.

Relative to homegrown systems and packaged software, outsourcing offers the greatest
costs savings–both in terms of the up-front costs of implementing plans and the ongoing
costs of managing plans. The implementation savings may be as much as $1,000 per plan
participant vs. homegrown systems or packaged software.

Other costs savings associated with outsourcing include:

* Eliminating the investment in and maintenance of hardware and software;

* Converting fixed costs of headcount and infrastructure into variable costs;

* Further reducing IT and administrative support;

* Being able to quickly implement–and change–the plan; and

* Using the best practices to avoid problems proactively.

Improving Communication

The biggest potential cost of even a well-designed, implemented and managed sales
compensation plan comes from not effectively communicating the results and using these
communications to reinforce how the plan works.

Good communication means frequently providing incentive compensation reports that are
understandable, accurate and timely.

Test reports for clarity. The key to understanding rests in the content of the
report and how it is used to explain how much the person is making and how that was
determined. There are three good tests for comprehension.

* Test 1: From a report showing an individual’s sales compensation results, can a
person who is not familiar with your plan explain to you how your plan works? If they
cannot explain it from the report alone, then you are missing an opportunity to reinforce
how the plan works and to change people’s behaviors.

* Test 2: Do your reports pass the calculator test? If anyone has to use a calculator
to determine their payment or figure out how it was calculated, your report flunks the
calculator test and reduces its effectiveness.

* Test 3: Are your sales compensation reports consistent with and supported by your
sales reports? If there are discrepancies in the data or inconsistencies in the measures
used on the various reports provided to your people, the credibility and clarity of the
plan will be diminished.

Make accuracy the top priority. How you manage the plan directly impacts the
accuracy of the communications and the credibility of the plan itself. A heavy emphasis
should be placed on data validation and quality assurance processes. To do this, check
every piece of data–both inputs and outputs–against a set of business rules to generate
exception reports that can be used to uncover problems.

Improve timeliness by using technology. To be timely, sales compensation results
should reach people within one to five days after the data is available. Technology can
speed the delivery of this information. For instance, you can:

* Develop an automated mechanism to send an individual’s report as an attachment to a
personal e-mail message;

* Use the file distribution technology within your sales force automation system to
create a seamless integration of sales compensation reports within the system; and

* Implement an intranet to allow people to access their personal sales compensation

Frequently reinforce how the plan works. The last piece of effective
communication is frequency. If the content of your reports passes the three comprehension
tests, frequent communications will reinforce how the plan works, improve
understandability and change people’s behaviors–before they get their next paycheck.

A good benchmark is to provide intermediate tracking reports monthly, or at least twice
during each payment period. For instance, if you make payments annually or quarterly,
tracking reports should be provided each month. If you make payments monthly, a tracking
report should be provided each week along with a payment report at the end of the month.

Keeping a watchful eye on your sales compensation plan is an opportunity to improve
your bottom line–whether directly through lower implementation and management costs, or
indirectly as a result of the improved effectiveness of your salespeople and lower
turnover in your sales force.

Mark A. Stiffler Mark A. Stiffler is founder, president and CEO of Synygy Inc., the Incentive
Compensation Company, which designs, implements and manages incentive compensation plans.
He can be reached at +1 609 396 0946, ext. 47.

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