Editor's Note: This guest post from Bob Malandruccolo has been updated for accuracy and comprehensiveness on June 16, 2020.
The sixth step in designing a Sales Compensation Plan is selecting weights and measures that are linked to incentives for the plan. Many believe that this is the most important step in the sales compensation design process. It is important, that is for sure. Here are some common principles concerning selecting measures and weightings.
Ensure that the measures are reliable, accurate and are based on results. This seems simple but I have seen companies that want to use measures that have not been tracked or reported. For example, one of my client's Steering Committee wanted margin as a measure in the sales compensation plan. So, I asked for historical data at the account level and the sales rep level and I found out that it could not be measured at that level. In fact, margin could only be measured at the regional level. We'll talk about regional measures in a moment. The next common principle is alignment with company goals. Oftentimes the challenge is to select the right measure at the sales rep level.
The next common principle is "line of sight". For a sales rep, the line of sight is their specific assignment and accounts. For a sales manager, it would be his or her direct reports. A regional manager's line of sight would be regional measures, and so on. So would a regional measure be appropriate for a sales rep? Well, it would fail the line of sight principle. But once again, in a moment we'll talk about if a regional measure could be appropriate.
The next common principle is no more than 3 measures in the sales compensation plan. The reason for this principle is to focus on the role and not dilute incentive dollars across multiple measures. One of my clients had 17 different measures and quotas in the sales compensation plan. I called that sliver measures. Several of the measures paid out less that 1% of the total target incentive. Do you believe that the sales reps spent very much time on those measures? No way. Well, I can tell you that less than 1% of the total target incentive is not motivational either. I was able to get my client to reduce 17 measures into 3.
The last common principle is if you have 2 or 3 measures, weight the measures based on importance. Once again, that is intuitive. So going back to needing a margin measure but it's only tracked at the regional level. Well, you could use a regional measure for the sales force, but weight it at a smaller percentage such as 15% compared to individual measures. However, my perspective is to use individual measures and adhere to the line of sight principle.
The following is a list of common measures: sales, margin, product mix, new accounts, line of business expansion and sales process milestones for long sales cycles. What do you think is the most common measure for sales compensation plans? Yes, it is sales. It is easy to measure sales since companies are already billing clients anyway. From my perspective, try to get margin at the account level. Product mix adds complexity into plans and could violate the simple philosophy plank. New accounts could run into gaming.
What is the definition of a new account? What about a new division in the same account, etc.? Sales process milestones could violate the principle of a results measure, but for long sales cycles, this type of measure could augment the challenge of long sales results.
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 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. Find more about this topic in this blog.
Step 6 is selecting Weights & Measures that are linked to incentives for the plan. You read about this step in this blog!
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). Article Source: http://EzineArticles.com/?expert=Bob_Malandruccolo