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Why the Sales Compensation Plan Must Change

By: J. Mark Davis, Managing Principal, Valitus Group, Inc.

Beginning a few years ago, there was a lot of discussion around the need for companies to establish a “total rewards philosophy.” Depending on whose definition you subscribe to, the total rewards philosophy helps articulate a company’s point of view on a whole host of “people programs,” including pay, benefits, the work environment, learning and development, etc. In short, it suggests being intentional about the role of the various reward programs in supporting strategic business objectives and defining organizational culture.

Similarly, the sales compensation philosophy seeks to clarify the role and defining parameters of the sales force reward system. For whatever reason, few companies I’ve encountered have bothered to take a stab at articulating their sales comp philosophy. Those that have understand the benefits of establishing some rules of engagement for how a sales compensation plan is designed and administered. Think of it as defining the playing field. The sales compensation philosophy clarifies the boundary markers. It doesn’t call the plays; it simply defines the boundaries within which the play must occur. Within a sound sales comp philosophy exists the flexibility to creatively design sales compensation plans that align with macro business objectives as well as with the nature of the various roles in the organization.

Twenty-Three Key Elements (Give or Take a Few)

There are numerous potential elements that frame a sales compensation philosophy, but not all will be meaningful or relevant to all companies. In other words, there is no finite list of elements that define one. How some of the elements are defined will be universal across the organization, while others may differ relative to a specific business, role, or geography. The following is a laundry list of potential sales comp philosophy elements, many of which reflect issues I've seen companies struggle with on a reactive basis. I've segmented the list on the basis of those pertaining to plan design versus ongoing plan administration. None of these suggest a right or wrong answer - only that they comprise some of the important considerations in helping an organization frame the sales compensation playing field.

• Business objectives - Changes in a company's business objectives will often set in motion a series of subsequent changes in how the sales force is organized, deployed, and rewarded.
  Case example: Several years ago I consulted for a client that had recently changed its business strategy. They were shifting away from their historic core business of selling telecommunications equipment (with declining margins) to providing telecommunications software (with much higher margins) to run on that old equipment. Did the sales compensation plan need to change to reflect their new product mix, channels, roles, and method of accounting for services revenue instead of product revenue? Absolutely!
  
  
• Go-to-market strategy - Even without a change in business objectives, the go-to-market strategy may change. By go-to-market strategy, I'm talking about the means by which a company takes its offering to market. It entails the definition of the target market segments as well as the approach by which a company will most effectively reach those markets (e.g., the channels of distribution, sales organization structure, deployment model, and the definition of sales and sales support roles).
  Case example: A business services client needed to improve the effectiveness of its sales organization. The fundamental business objectives hadn’t changed, but they realized that the old way of going to market through separate vertical market sales organizations meant they were leaving money on the table. The silo sales force approach failed to capitalize on the synergies of their various sales resources who were selling many of the same products, through a similar sales process, to similar functional buyers. In this case, organization structure and role definition were the real upstream change drivers. However, once those issues were resolved, the sales compensation plan had to fall in line.
  
  
• Customer buying preferences - When customers change the way they prefer to buy from you, assuming it's a reasonable and/or unavoidable change, always ask if the current selling roles and the way they're rewarded support that new customer buying process.
  Case example: I once worked with a consumer electronics company that sold into the retail channel. A number of their largest key accounts indicated that the vendor's account managers were spending too much time on merchandising ("fluff and buff") activities and not enough time on things they really valued, such as training the retail floor sales staff and developing co-marketing strategies to grow the retailers' (and vendor's) business. As a result, the vendor created a new merchandising specialist role to focus on the "fluff and buff". This allowed the account managers to spend more time on higher value-adding (in their customers' eyes) activities, further cementing their dominant position in the market. In this case, the sales compensation plan changed to reflect the account managers' more strategic role in growing key account relationships.
  
  
• Role definition - How (and whether) roles are defined is one of the most critical enablers of sales compensation effectiveness. It’s only when a selling role is clearly defined that a truly compelling and targeted sales incentive plan can be constructed. And, to the extent any of the aforementioned drivers have changed how you define your selling roles, the sales compensation plan will likely need to change too.
  Case example: In pursuing a new and attractive retail channel, a consumer products company had departed from its roots that had enabled it to grow to international prominence as a trusted brand. With management’s new focus on their retail aspirations, the account managers dedicated to the core business became complacent in managing their existing account base. Management realized in hindsight that they needed to get back to basics by more aggressively defending and growing their core channel. This meant a diligent new business development effort that looked considerably different from the maintenance/order taking selling role into which most account managers had lapsed. Compounding the complacence of the sales force, the old incentive plan didn’t require new account selling, nor did it differentiate between revenue from existing versus new accounts. As a result, the new business development imperative had to become very prominent in the new sales compensation plan.
  
  
• Supporting systems/infrastructure - Occasionally, supporting IT systems prevent a company from measuring performance in ways that are most directly aligned with its business objectives. IT's performance measurement capabilities (or lack thereof) often surface as a stumbling block in the sales compensation design process, which is why a stakeholder from IT often participates in the incentive plan design effort.
  Case example: The sales executives of a transportation services company had long talked about the profitability of each account they served as well as the margins on each shipment they made. However, the IT systems historically hadn't allowed them to measure profitability below an aggregate team level. When upgrades to their IT capabilities enabled them to more accurately measure profitability for an individual sales person, the sales compensation plan was changed to reflect the profit imperative that had long been part of their culture and day-to-day sales efforts.
  
  
• The old plan is no longer working - For any number of reasons and absent the aforementioned issues, sometimes the old tried and true sales compensation plan ceases to work effectively. This is yet another reason that continued monitoring of performance results relative to sales force and sales compensation plan objectives is so important (see my two-part article on evaluating incentive plan performance, entitled: Are You Getting the Most out of Your Sales Compensation Plan?).
  Case example: A computer peripherals client had become addicted to sales contests. The problem was so pervasive that salespeople would coast at the beginning of the month until a few days later, as expected, that month’s contest was announced. The core sales compensation plan had been supplanted by the contest du jour. To fix the problem, the sales compensation plan had to be redesigned to focus on what the contests were trying to incent in the first place: sales volume, product mix, and price realization. With that done, they began the long change management process of weaning the sales force off of an over-reliance on contests.
  
  

Take a Good, Hard Look

Do you see your organization in any of these case examples? Are you resisting the notion that the sales compensation plan is a dynamic tool that must change to remain current with your evolving business? You might be wondering, "How often should the sales compensation plan change?" You should evaluate the need to change the plan on an annual basis. With a sound sales compensation plan in place and without a significant environmental change, it will often need only a tweak as opposed to a major overhaul. At the same time, however, avoid mid-year plan changes unless it's so broken that the business or employee morale is suffering as a result.

Also, maintain a healthy perspective on the role of sales compensation. Don't expect the sales compensation plan to define your business strategy. At the same time, however, don't wait too long after some of these upstream changes take effect to evaluate needed changes in the sales comp plan. In my experience, changes to the sales compensation plan often lag too far behind changes in these areas, creating a real disconnect. Remember, sales compensation is the caboose that needs to follow the strategic engine driving your business.