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7 Ways to Design a Better Compensation Plan

Cabrera_newToday's blog post is by Christopher Cabrera, CEO of Xactly Corporation, the industry leader in sales compensation automation.

 

Do you have a devil of a time designing an incentive-compensation plan that motivates your employees and boosts your bottom line? Or maybe the plan is overly complex or isn’t clear enough to convey company priorities to the sales team.

It could be that you’re committing one of the seven deadly sins of incentive compensation.

Michael DeLeonardis, Xactly’s Vice President of Insights and Benchmarking, has examined eight years’ worth of sales-performance data to uncover the comp-plan demons that can damage profit and put your business at risk. Here’s the list he shared in a Selling Power Webinar earlier this month. 

  1. Poor alignment with business objectives. Misalignment usually creeps in with the details of a comp plan. Ramping up sales quotas is one example. It’s a fairly common practice to have lower quotas at the beginning of a sales period, when the emphasis for reps is on building pipeline. Over the course of the sales period, quotas increase. The problem crops up in companies that already struggle with “hockey stick” sales, when the majority of transactions come at the back end of the sales period. Ramping quotas in that scenario further encourages the sales organization to push deals later into the period when quotas are at their highest.

  2. Lack of traceability. To design an optimal incentive-compensation plan, businesses need to be able to pull in data from various systems (such as CRM). Without traceability, they hamper their own ability to directly tie sales reps’ behavior to their payments, measure company and individual success, and thoroughly audit payments.

  3. Not developing benchmarks. It’s critical for companies to effectively measure incentive compensation and sales performance, and benchmarking is a great way to get valuable insight. Organizations can decide which type of benchmarking is right for them: benchmarking against an aggregate group or industry standards or self-benchmarking against goals established at the beginning of the year. With the right data, companies can identify variations from region to region, product to product, and sales rep to sales rep.

  4. Excessive plan components. Xactly research confirms the rule of thumb that three is the ideal number of measures in a compensation plan. Six and seven components indicate an organization that, in effect, is using its plan as another sales manager to compensate for weak leadership.

  5. Excessive credit assignment. About 75 percent of companies credit five or fewer people for each deal. For businesses with complex sales cycles, that number can reasonably go as high as 30. Some outliers, however, credit 161(!) people for a single deal. They may not have the data to credit individuals accurately (remember number 2, lack of traceability), so they move to a team-based model and credit an entire region. In such situations, it’s impossible to tie sales behavior to results.

  6. Compensation plans that don’t motivate. Holds and releases are demotivating because, by the time sales reps get paid, months may have passed and they’ve lost the connection between behavior and reward. A better approach is to break the plan into components: pay a portion of the commission on booking, for example, and the rest upon invoicing or collection.

    Capping commissions is another demotivating practice, and it can prevent sales reps from achieving to their full potential. A recent AMA study tested the theory and found that salespeople performed 24 percent better when they were switched from a fixed bonus plan to an uncapped commission plan.

  7. Eroding profitability through accelerators. Accelerators absolutely motivate salespeople to sell more, but too many unexpected payouts can cut into profit. To help avoid that risk, try modeling three scenarios in your plan-design phase: what you expect sales performance to be, what would happen if a few high-performing reps carry the company and earn far more than expected, and what your financial exposure would be if a large percentage of reps outperform the plan. From there, you can plan for the financial downside or adjust your plan to avoid the exposure.

Listen to the Webinar recording here: The Seven Deadly Sins of Incentive Compensation.

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