Designing High Performing Incentive Compensation Plans: Webinar Recap
OpenSymmetry and SMA recently hosted a webinar detailing the tips, tricks, and best practices for world-class incentive compensation plan design. In this blog, we’ll recap some of the main speaking topics as well as live poll results.
To kick off the webinar, hosts Jon Clark and David Johnston of OpenSymmetry asked: what is the top challenge in your upcoming plan design process? The results were as below:
- Target-setting – 36%
- Reducing complexity – 34%
- Ensuring customer centricity in design – 14%
- Determining measures – 8%
- Ensuring plan flexibility/agility – 8%
Target-setting and reducing complexity in incentive compensation plan design were the top two contenders for top challenges in the plan design process for participants, which can be addressed by having a mindful approach to incentive plan design. This entails making sure that both design and targets are clear, understandable, and part of the same consideration.
Key Questions for Effective Incentive Compensation Plan Design
David Johnston suggests these key questions to ask during the design process in order to ensure a mindful approach to plan design:
- Who is eligible for incentive compensation plans? Consider your audience. Do incentive compensation plans apply just to salespeople with personal quotas, or do they include sales support, management, or implementation teams? The recent trend is that there are a reduced number of roles on compensation plans for just those involved in sales delivery, not support roles, in order to keep plan design simple.
- Is the target total compensation competitive? Analyze market data in order to attract and retain top talent. If the total compensation is not competitive, consider potential changes to the base salary, pay mix, bonuses, commissions, contests, recognitions, or reimbursement programs. We’ll address motivational upsides further in this blog.
- Should pay mix remain the same? The pay mix should match business goals. If the main objective for the season is new customer acquisition, pay mix should leverage higher commission rates, but if the focus is customer retention, base salary should make up a greater part of the pay mix than commission.
- What is the scale of leverage in the plan? If a salesperson overachieves his or her target, what is the upside? To motivate salespeople to reach past their goals, consider how much to set the scale of leverage at so that they can gain at a faster rate once they hit their numbers.
- What kind of qualifiers are needed? After considering the scale of leverage, qualifiers may need to be set such as caps and thresholds so that the company doesn’t lose out when situations arise where salespeople land huge, unexpected deals.
- What are the performance metrics and how are they weighted? How a salesperson’s effectiveness is measured will impact the business because metrics will dictate selling behavior. The weighting of these metrics will also show what the business priorities are – new products, upsell, cross-sell, or other goals.
- What is the pay frequency? Consider tying payouts to the sales cycle so you’re reinforcing sales rather than being in-between sales when payouts are made. Look at the amount of pay that’s at risk during those “in-between” times and time pay frequency accordingly, whether weekly, monthly, or quarterly.
This is not a comprehensive list of questions to ask while creating a sales compensation plan – and there are a number of sales compensation design issues to consider – but they do address the basic scope of considerations. After answering these questions, it is important to run your incentive compensation plan through the following guidelines.
Key Design Principles for Effective Incentive Compensation Plan Design
As part of the design process, Jon Clark identified the key guiding design principles that must be established:
- Role specificity. It is important to have clear delineations for each role and how each one is paid. Articulate sales roles as well as sales support and lead generation roles. Establish a clear coverage model, which shows how roles fit together so that there is no overlap. Define handovers so that each person on the team is clear who the decision-makers are and what they are responsible for.
- Performance and reward transparency. Salespeople need to be able to see cause and effect – how their behaviors affect their paychecks. Sales Performance Management (SPM) systems can help establish a clear line of sight through reporting and dashboards with drill-down capabilities.
- Clarity of measures. Each measure of the incentive compensation plan must be clearly defined, including how measures are linked through modifiers or multipliers. These may impact the amount of bonus or commission paid, providing focus on key performance metrics.
- Realistic target setting and payout curve. Consider how targets are set, whether from a historical perspective or basing it on the total addressable market, or a combination of both. For more information, read our blogs on quota setting and mastering the payout curve.
- Motivational upside. One of the key things in sales compensation plans is to identify how to keep salespeople moving once they have achieved their goals. You can use accelerators, where salespeople gain at a payout levels past their goals. Another upside is the use of multipliers, which are rewards for when you want salespeople to achieve more than just one metric, such as revenue and margin. Team achievement upside options may include increasing payouts based on individual contribution percentage or doubling up payouts when the entire team achieves quota. Finally, motivational upsides can include additional awards such as SPIFs, recognitions, and president’s clubs.
- Crediting. A large amount of design time is spent on when sales are credited. Sales will try to bring the crediting forward to the point of sale so that they receive their commissions faster, but finance will want to push it back as far as possible so that they can have cash received before sales gets anything, which reduces risk and the possibility of clawbacks. To read a more comprehensive study of when to credit, read our blog on paying sales reps on booking or cash.
Designing a high performing sales compensation plan is a challenge for all companies, but these key questions and guiding principles can set you on the right trajectory for success.
As part of the cyclical process of design, communication, administration and review of plans, consider how the use of technology can delivery greater speed, accuracy, and buy-in.