Editor's Note: This guest post from Bob Malandruccolo has been updated for accuracy and comprehensiveness on June 5, 2020.
The first step in designing sales compensation plans is documenting the Sales Compensation Philosophy. A Steering Committee, consisting of a group of delegated stakeholders, should determine what the sales compensation philosophy should be. These are the most common topics that I have experienced:
- Company Goal Alignment -- Of course the sales compensation plan should be aligned with company goals. And of course I have seen plans that are not aligned.
- Profitable growth is a common philosophy that addresses specific measures.
- Pay for performance suggests a goal-based plan.
- Performance Standards & Thresholds -- Minimum sales performance standards lead to thresholds. A threshold is a performance level where the first incentive dollar is earned after passing the threshold performance level.
- Standardization is another topic. I have seen sales compensation plans that had multiple plans for the same role, typically because of acquisitions.
- Realistic goals are oftentimes the feedback from the Design Team and can be included in the philosophy upon approval from the Steering Committee.You can imagine that this topic is included because previous goals were not realistic. I have a client who has not hit their revenue goals for the past 10 years. I would think that over time, some things would need to change. As I think about their change, it was a different head of sales every other year.
- Simplification. What I have seen is that some companies have baked-in a new measure if they want the sales force to change their behavior. Others would call that type of sales force "coin-operated." They can only get the sales force to act unless they get paid. If you have a coin-operated sales force, I wonder what sales managers do.
How do you determine the sales compensation philosophy? The answer is simple. You have to ask. During interviews with the Steering Committee, you need to ask them about their philosophy on sales compensation. All of their answers can be aggregated and submitted during the first Steering Committee session.
During that time, the Steering Committee can vet the answers and agree on the philosophy that will guide the Design Team. Another one of my clients had their project manager send an email to the Steering Committee members asking about their philosophy on sales compensation. Once again, their answers were served up during the Steering Committee session and agreed upon.
Here are the 10 Sales Compensation Plan Steps:
Step 1 is defining the Sales Compensation Philosophy or Strategy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process. Read about this step here.
Step 2 is determining which Eligible Roles are included for sales compensation treatment. Learn more about this step here.
Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance. Read more about this step here.
Step 4 is determining what the Pay Mix should be for each sales role. Pay mix is the ratio between base salary and incentive pay at target performance. You read about this step in this blog.
Step 5 is choosing the amount of Upside of incentive pay for high performers. Read more about this step here.
Step 6 is selecting Weights & Measures that are linked to incentives for the plan. Learn more about this step here.
Step 7 is determining whether the plan should be based on Commission or Bonus or both. Read more about this step here.
Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve. Learn more about this step here.
Step 9 is choosing the Frequency of Payouts for each measure. Read more about this step here.
And finally, Step 10 is determining the Administrative Details included in the plan. Learn more about this step here.
Bob Malandruccolo is the founder and principal owner of Sales Force Effectiveness Consulting. With over twenty-five years of practical business, management and consulting experience in sales and marketing, Bob has worked with a broad range of clients from Fortune 100 corporations to small, closely-held firms with special emphasis on sales and marketing process implementation. He has worked closely with his clients through hundreds of successful engagements and implementations across multiple industries (manufacturing, engineering, distribution, software, healthcare insurance, medical products, healthcare, automotive, telecommunications, retail, information handling, media).