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Components of Effective Compensation Plans

Guest post by: Greg van der Linde

Article Overview: Executive Summary: A problem arises when sales leaders struggle to measure the effectiveness of the compensation plan in place for their sales reps. Compensation plans, particularly those with a variable component, are designed to illicit desirable behaviors and/or outcomes from reps. Many sales leaders are discovering that they have been paying reps for results that were not the primary objectives for the company. This is simply wasted money. Setting well thoughtout, clearly defined objectives with aligned metrics attached, will ensure that both the company and sales reps reap the benefits of a solid compensation plan.

Components of Effective Compensation Plans

The Building Blocks of Strong Compensation Plans

Compensation plans are not "one size fits all". They are an integral part of a company's unique sales management portfolio. Training, coaching, motivating, rewarding, and incenting must all work together to create a successful sales force.

Although compensation plans must be customized based on the needs and goals of each company, the basic building blocks are always the same. When designing a strategic compensation plan, management must first consider the following:

• Setting Objectives
• Territory and Account Distribution
• Continued Effectiveness

Setting Objectives

Sales leaders must first decide what business objectives the compensation plan will align to and address before any structure can be formed. These objectives are best decided upon by following these steps:

1. Brainstorm a list of both general and specific objectives that need to occur in the company. These objectives could include:

• Specific individual quotas and targets
• Team goals and targets
• Customer satisfaction objectives
• Specific product promotions
• Territory potential and goals

2. Narrow the list down to 5 - 8 of the most important objectives for the company.

3. Assess these objectives from both the sales and marketing perspective for:

• Specificity
• Necessity
• Required time and resources
• The impact it would have on the company

4. Narrow the list down again based on the most necessary, feasible, and realistic objectives to arrive at the top 3. These three identified objectives will now form the basis upon which the compensation plan is designed.

Territory and Account Distribution

Sales reps must be tiered, with equal relative opportunity under any given compensation structure. The design must account for territory:

• Size
• Geography
• Client base (tiered appropriately)
• Strategic accounts
• Account potential
• Sales type (transactional vs. complex)
• Other related characteristics

Sales leaders also need to factor in the size and number of accounts that each rep has. This will ensure that the plan is feasible and fair while maximizing the use of rep time, resources, capabilities, skills, and traits. The efficiency and success of a sales force translates directly to the profitability of the company.

Continued Effectiveness

A very real concern that many sales leaders face is that their reps will become immune to the rewards provided by a compensation plan after a certain period of time. A combination of relatively easy and more challenging targets, with a correspondingly increasing financial incentive, will prevent reps from becoming indifferent after either reaching a certain monetary amount or after being discouraged by failing to hit an adequate amount of targets.

Compensation plans must also be kept as clear and uncomplicated as possible while still incenting the achievement of the desired three objectives. When compensation plans are difficult to both understand and administer, the focus of these plans is lost and there is an increased chance for administrative error. Sales reps who fail to understand how their efforts directly relate to their bottom line income will be less productive and less motivated than those who continually see a clear link.

Bottom Line & Business Impact

Sales leaders that take the time to work through this difficult, yet vital, part of their overall management portfolio will reap the rewards of focused, motivated sales reps and leave valuable time for coaching, which will further drive rep effectiveness.

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Article Tags: compensation plans, compensation structure, driving behavior, incentives, motivation, motivation tactics, sales rep compensation



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