Sales Compensation: Creating Performance Clarity
A prospective client called several days ago and asked: "What
should I pay a great performer and what should I pay a
salesperson who doesn't meet expectations?"
Assessing sales compensation effectiveness from the perspective
of expected market pay levels is far too limiting. Sales
compensation should be evaluated within the context of the
entire performance and pay range for the job performed and
results delivered. Furthermore, sales compensation plans and pay
levels should be created or critiqued in the same way that one
assesses any other investment geared toward making money or
improving future business.
Companies expect a substantial revenue and profit return on
their investment in sales compensation. For example: 1. A
company that pays a 10% commission invests $1.00 to net $9.00 -
a 9:1 return on its commission investment. 2. A company that
provides a $25,000 bonus opportunity to a field sales
representative for generating $2,500,000 in revenue does so in
the expectation that it will receive $100 for each dollar of
bonus paid.
So how do you increase the odds of getting a substantial return
on sales compensation and achieve a reasonable compensation cost
of sales? First, you build a clear understanding of how sales
resources influence the sale so that your sales force is
precisely focused on factors that matter. Supporting the sales
effort through astute organizational definition and
performance-driven pay creates the link between sales effort and
delivered results.
Every bit as important as incorporating the drivers of
performance into the sales incentive plan is the creation of an
effective connection between pay and results. This means you
need to make sure total pay is incentive-weighted and variable
compensation is leveraged - configured to produce market-leading
payouts for high performance. Low performers must be paid
meaningfully below market, creating significant
performance-based incentive payout differentiation. Aligning
your incentive payout profile with the marketplace doesn't
adequately pay "winners" like winners and "losers" like losers.
You can reveal the amount of incentive payout differentiation in
your sales incentive plan by examining your incentive payout
multiples. Compare your payouts for high performance to the
awards paid for low performance. The high performance payout
divided by the low performance payout is your incentive
multiple. The multiples across your performance distribution
(e.g., "target" vs. "minimum acceptable," "excellent" vs.
"target," and "outstanding" vs. "excellent") should accelerate,
recognizing the value of achieving increasingly difficult
performance levels. You can test your incentive payout
differentiation against the market by comparing your multiples
to the market's 50th vs. 25th, 75th vs. 50th and 90th vs. 75th
percentile incentive payouts.
Best-practice companies have high performance sales cultures.
Their strategies for acquiring and retaining business are
aggressive. Losing profitable revenue growth that was hard won
isn't acceptable. Goals at the salesperson level are stretched.
High performing companies are intolerant of, and pay stingily
for, below goal performance. Rewards for high performance are
significant. Their incentive payout at "outstanding" performance
is at least four times the award at "target" performance and as
much as twenty-five times the payout at "minimum acceptable"
performance. But, they also know that sales compensation alone
won't drive high performance. And so they employ an integrated
approach toward performance management, emphasizing sales
leadership, training, sales focus, communication, performance
measurement and pride of achievement.