“Sales incentive plans are more of an art than a science,” used to say a former boss. He was pretty much spot on. Plans need to be scientific enough to allow a unique interpretation, achievements should be easily measured, and commissions should be straightforward to calculate. At the same time, they have to be built considering facts and expectations, internal and external, and here’s where art come into play. They must keep the sales force motivated and the financial director satisfied, and consider different elements such as the seasonality of sales, the launch of new products, the regulatory framework in each country regarding variable compensation, mergers between large clients, M&A activities in our own company, the different commercial models associated with the products, even the landing of new competitors in the market, to name a few factors that I had to deal with while leading commercial teams and their incentives.
To date I have not seen a perfect compensation plan, understanding by perfection the state in which all parties affected by the plan are 100% satisfied. Even those plans that may seem fair and sensible will be put to the test by unforeseen circumstances, and someone will not consider them acceptable anymore. One example that comes to my mind: by mid year one salesperson leaves, and since the company is in hire freeze mode, the position cannot be backfilled. How do you manage the impact of this situation on the objectives, and therefore commissions, of the sales chain of command of the person leaving? Do you adjust targets to lower levels, or do they stay the same? Is it managed differently if the person leaving had 40% of the company’s turnover on their shoulders, or only 5%? Good sense, good judgment, and unwritten rules come into play, as it is impossible to anticipate all scenarios.
Once it is assumed that the perfect plan does not exist, the goal is to develop a good incentive plan. Regardless of the product or service offered, the size of the company, and the business model, there are some basic factors common to any good plan. In the first place, the objectives that are defined, beyond the absolute values, must be aligned with the corporate objectives of the company. This is essential, and unfortunately many companies ignore it. An illustrative case of this dichotomy is the one in which the CEO commits to investors to expand the business into new vertical markets, and the salesperson’s commissions depend 100% on the top revenues, regardless of the clients that generate them. Frustration is almost guaranteed. As a second condition, Human Resources, Finance, and Sales must be involved in the design of the plan. Surely any one of these three departments with enough experience can put together a plan on their own, but all three need to work together to ensure compensation is competitive in the labor market while in line with other functions in the company, that it is flexible enough to adapt to different roles and objectives, and of course that it can be afforded by the results sheet. Finally, in line with the flexibility mentioned above, the compensation plan must be made up of several objectives which weight can be adjusted to the particular role of each salesperson. A hunter is incentivized to sign up new customers, while a farmer is incentivized to protect and increase existing revenue via cross-selling and up-selling. Likewise, specific incentives can be applied, either as multipliers or as SPIF programs, to strategic objectives such as the sale of a particular product or long-term contracts. In short, a common framework for all vendors, but with the ability to assign different weights to each objective.
In technology companies, and in the SaaS segment in particular, variable compensation, or commissions, can represent between 30% and 50% of the total income of sales people. As such, the sales compensation plan can help attract and retain talent, or on the contrary, it can scare it away…
FMA Consilium 