Sales Compensation Plans, Step 6: Weights & Measures
Guest Article written for the EcSELL Institute by Bob Malandruccolo
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.
The first step is defining the Sales Compensation Philosophy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process.
Step 2 is determining which Eligible Roles are included for sales compensation treatment.
Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance.
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.
Step 5 is choosing the amount of Upside of incentive pay for high performers.
Step 6 is selecting Weights & Measures that are linked to incentives for the plan.
Watch upcoming blog posts for Steps 7-10!
Step 7 is determining whether the plan should be based on Commission or Bonus or both.
Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve.
Step 9 is choosing the Frequency of Payouts for each measure.
And finally, Step 10 is determining the Administrative Details included in the plan.
We just held a powerful webinar on the topic of sales compensation plan design. We shared sample compensation plans. CLICK HERE to download actual samples and guides for:
Flat rate (constant slope linear payout curve)
Variable rate (variable slope linear payout curve)
Individualized commission rate (constant or variable slope linear payout curve — quota based)
Binary bonus (single rate — on/off payout)
Step bonus (variable rate — stair-stepped payout curve)
Bonus formula (single rate or variable rate — linear payout curve)
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).