There’s nothing basic about compensation, especially when it comes to sales. Compensation is what makes salespeople happy to come to work, it’s how they measure the milestones of success, and it’s the key factor that motivates them to hit and exceed quota. And, most importantly, the impact of sales compensation has a significant impact on your revenue. For this reason, the process of designing sales compensation plans should be a data-driven, iterative process, not just a matter of gut instinct. You need to be able to understand how effective your tracking of sales performance is, how to evaluate the ROI of your compensation programme, and how to make continuous adjustments based on data. In this guide, we’ll expose you to some critical components of the science of sales compensation and help you design programmes that work. In addition to basic concepts about design, we’ll walk you along the process of picking the right metrics, digging into the needs of your sales team, and sharing some best practices on the evaluation of sales compensation plans. We’ll also clarify some of the basics about compensation forms, legal considerations, and accounting for both commission and incentives.
Table of Contents
Part A: Tracking Sales Performance
Part B: Analyzing Compensation ROI
Part 3: Making Data-Driven Adjustments
Frequently Asked Questions:
Q1: How often should organizations review their sales compensation plans?
Q2: How can organizations ensure fairness and transparency in their compensation programs?
Q3: What role does technology play in optimizing sales incentive programs?
Part A: Tracking Sales Performance
Tracking sales performance is the single most important foundation for any sales compensation program you plan to create. Nobody can effectively manage a sales team without knowing how its members are performing. Period. Here’s what you do to control that performance tracking element:
1. Establish clear metrics Measurement is the first step to improvement. Establishing clear metrics is by far the best way to meet performance requirements for organizational goals and deliver superior levels of execution. Metrics must be meaningful, understandable, directed and actionable.
Example: A software company might track indicators such as monthly recurring revenue (MRR), customer acquisition cost (CAC), and churn rate to assess sales and stickiness.
2.Install strong tracking systems: Put robust tracking systems such as customer relationship management (CRM) software or sales analytics platforms in place to track and consolidate sales metrics, including activities, pipeline consistency and customer interactions.
For example, a company that implemented a customer relationship management (CRM) system to record and analyse sales activity from prospect leads to deal closure could identify, say, an order bottleneck and then pre-emptively coach their sales team on an area where they were experiencing a dip in performance.
3. Build a Culture of Accountability. Develop a culture where salespeople are held accountable for performance. Facilitate areas where members of the sales organisation get regular reviews of performance, goals and communication so sales teams stay on track.
For instance: “Company B made identifying key performance measures a monthly performance review process, during which sales reps could gauge where they stand with regards to reaching their individual and team targets. This encouraged reps to be more accountable for their performance to management and to each other.”
Part B: Analyzing Compensation ROI
But those organisations can get on track to measure sales performance. And once they’re doing that, they can start measuring the ROI of its own compensation plan – in other words, how well the incentives are working to drive the right results. Here’s how we measure compensation ROI.
1.Calculate Total Compensation Costs: First, calculate the total cost of sales compensation (which is the sum of base salary, commission, bonus and other incentives). Then, compare that sum to the revenue earned by the sales team to determine the cost-to-revenue ratio.
For instance, one of these companies, Company C, figured out that its total sales compensation costs were 15 per cent of its total annual revenue and calculated the costs per rep and revenue produced on an individual basis, which enabled them to pinpoint specific inefficiencies. With the help of incentive plans, companies put resources into tasks that drove revenue.
2.Measure Sales Performance: Determine if the compensation plans are a good match for the salespeople and the company by evaluating how incentives affect performance metrics such as revenue growth, customer base, sales cycles and company-wide profit and loss. Which customers is the sales organisation serving?
Example: Company D’s compensation plan encouraged sales reps to spend too much time acquiring new customers and not enough time on upselling and cross-selling to existing customers. Shifting the commission structure to favour retention and expansion significantly increased the lifetime value of each customer as well as revenue.
3.Execute Scenario Analysis: Based on historical data with predictive models, organisations should conduct scenario analysis and simulate the behavioural effects of any changes to compensation plans to get an idea of the impact these changes can have.
For instance, Company E ran a scenario analysis around whether a new commission structure – where sales reps on a sliding scale made a greater commission on bigger deals – would work. Through this exercise, they were able to pinpoint exactly what the ROI would look like based on planned staffing levels, and then fully implement the more target-oriented sales growth incentives.
Part 3: Making Data-Driven Adjustments
With performance tracking and compensation ROI data at their fingertips, organisations should be able to use data to shape more effective sales incentive programmes. The following steps can help: 1. Use data for key decisions Just knowing the data and statistics isn’t enough. Managers must translate these numbers into smart actions, decisions and improvements. 2. Use data to distinguish stars from other employees Knowing which of your volunteers is the top performer is important but where you also need to see a separation is between your top performer and the middle of the pack. Individuals making up the middle of the pack might actually be much closer to the bottom than the top.
1. Make pay incentives more strategically aligned: review and adjust compensation plans to align with strategic goals and priorities. For example, modify commission structures, establish incentive-based bonus programmes, or even game the system by instituting sales contests to focus sales teams on specific goals.
Example: Action F adjusted its compensation plan to reward reps selling higher-margin products and services that were critical to the company’s long-term growth. It changed commission rates and provided training to alter reps’ sales efforts to focus on more lucrative opportunities.
2.Provide Ongoing Training and Support Make sure you have a training ecosystem that provides product, process and people support to continually improve your sales team’s individual performance and ability to provide value to customers. Offer training on product features and benefits, sales techniques, leverage of sales tools and technologies, among others.
Example: Company G has a robust training programme that combines classroom training and field coaching. With access to training resources, sales reps are able to enhance their activities and meet their objectives with greater effectiveness.
3.Get Metrics or Feedback and Iterate Quickly: Create a process to monitor sales performance and iterate accordingly whatever feedback you have either from the sales force or from sales data: if people are not working, adjustments can be made on the compensation plan scoped to perfect the result.
For example, the coaching teams of Company H built in a feedback loop such that the sales reps could state what they liked and didn’t like about the compensation plans and then recommend areas for improvement. When feedback was repeatedly elicited and used for iterative change, motivation and productivity went up.
Frequently Asked Questions:
Q1: How often should organizations review their sales compensation plans?
A1: To maximise the chances of a good outcome, I would recommend that such an organisation review its sales compensation plans (at a minimum) once per year, or sooner if there are significant environmental changes in the market or business.
Q2: How can organizations ensure fairness and transparency in their compensation programs?
A2: Building trust and incentives will depend on the sales organisation being both fair and transparent. Organisations can achieve this in different ways, for example by being open about compensation structures, defining objective performance metrics, and communicating performance and earnings on a repetitive basis.
Q3: What role does technology play in optimizing sales incentive programs?
A3: Technology has a significant role to play in a sales incentive optimization program, as it can provide the various tools need, including reports on performance, data analysis and decision making – in other words, the processes can be completed more effectively with improved technology. Some of the technology that companies can use to optimize their sales compensation programme include: (i) customer relationship management (CRM) systems; (ii) sales analytics; (iii) incentive compensation management (ICM) software.
The real work involves calculating where to put these pegs in order to optimise sales compensation programmes by viewing them through a strategic data lens punctuated by a persistent culture of ongoing improvement. The solution lies in tracking your sales performance, assessing compensation ROI, and making data-driven tweaks. Use the power of data. Set incentives that enable the achievement of strategic objectives. Hold your sales team accountable, hold them responsible for winning together.
