Sales Compensation Plans, Step 8: Define Structure Details
Guest Article written for the EcSELL Institute by Bob Malandruccolo
The eighth step in compensation plan design is defining the Structure Details of the plan including threshold and excellence levels and the payout curve. This step describes how you get paid depending on performance.
Picture a payout curve. The y-axis is payout as a percentage of target incentive. The x-axis is quota achievement. For example, there is no payout for this specific measure until achieving at least 75% of quota. The term used is a threshold. Below threshold, there is no payout. At or above threshold, incentives are earned. In this example, if I achieve 75% of quota, I'm paid at 50% of my target incentive. This is an example of a decelerator since the payout percentage (50%) is lower than the quota achievement percentage (75%). The next important data point is target which is pretty clear. When I hit my quota, I earn 100% of my target incentive. The next important data point is the excellence level. For example, the excellence level of quota achievement is 150% and the payout would be at 300% of target incentive. This is an example of an accelerator since the payout percentage (300%) is higher than the quota achievement percentage (150%).
For this payout curve example, the payout curve does not stop. My perspective is to strive to uncap the incentive plan since this is about overachievement, motivation and paying high performers. Caps tend to create unneeded friction between the field and senior management even though the cap might never be surpassed. The reason to use a cap is if the quota setting process may be highly variable. We want to make sure that bluebirds, meaning accounts that are earned with little or no effort, are addressed appropriately. This is also known as a windfall. And if you do use a cap, consider a soft cap which means management could lift the cap if there are no unusual instances in goal setting or windfalls.
Once again, picture a payout curve, but it is based on a commission structure. The y-axis is now based on a commission percentage instead of target incentive. But the x-axis is exactly the same. If you use a commission plan, could you introduce a quota? Could you select an excellence level? I recommend my clients that have commission plans to incorporate a quota and excellence levels if they can. And I always ask, if management has goals, why not the sales force? And if it is difficult to set goals at the sales rep level, you could lower the threshold to 50% or lower. For example of a commission based payout curve, a commission rate could be 2% between threshold and target, 3% between target and excellence and 1% above excellence. Depending on the sales process and historical data, the above excellence commission could stay at 3% or it could increase to 4% or more. That is where cost modeling comes into play.
Let me demonstrate what I call the "Culture of Winning". Picture a distribution chart, a bell curve. The y-axis is the number of sales reps per achievement group. The x-axis is quota achievement broken out into quota achievement groups. For example, the threshold is 75%, and the bottom 10% performers would not earn an incentive. By looking at historical data, you could determine the threshold level based on the bottom 10% performers. The next quota achievement group is the group of sales reps who achieved between 75% and 100% quota. In this example, 35% of the sales force achieved less than quota. The next quota achievement group is the group of sales reps who earned between quota and excellence levels. For example, 55% of sales reps fell into that group. Next is the group above excellence, the highest performers. They represent the top 10% and as I discussed, should be paid at the top 10% in the market. I call this the "Culture of Winning" because the bell curve is shifted to the right. If the bell curve was normal, 50% of sales reps would be below quota and 50% of sales reps would be above quota. Isn't that the ideal? It could be, but that means that half of the sales reps didn't hit their goals.
One of my recent clients hired me because they had unwanted sales force turnover. After reviewing their historical data, I noticed that 2 years ago, the distribution chart was exactly the same as the one on this page. Morale was outstanding for a majority of the sales force. Unfortunately, financial leaders decided to increase goals above what was expected. The following year, the distribution curve shifted left so it was normal, 50% reps below quota and 50% above quota. Once again, financial leaders increased goals higher than expected. The following year, the distribution curve shifted again toward the left so only 35% of the sales reps were above quota. The distribution charts were very telling, and immediately changes were made in sales rep goals.
The takeaway here is to understand where the sales force lies on this distribution chart and modify threshold, target and excellence levels when designing sales compensation plans.
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.
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.
Compensation Plan design is being featured at our upcoming 6 Pillars of Sales Productivity Workshop in Memphis, TN on October 13, 2010. We still have registrations coming in so it isn't too late for you. SIGN UP TODAY and join fellow sales management professionals at this impactful sales training event.
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).