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Balancing Plan Relevance and Simplicity in Sales Compensation Design

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

Staying true to the often competing imperatives of plan relevance and plan simplicity is an ever present challenge in the sales compensation design process. Above all, a sales incentive plan must be relevant to the various sales roles it serves and reflective of the company's business objectives and go-to-market strategy. If, however, a sales incentive plan is perceived as overly complex, its desired motivational impact will be lost as salespeople begin to tune out.

A Case of Over-Complexity

To err on the side of over-complexity in an effort to fine tune an incentive plan is far more common than erring on the side of simplicity. Particularly if one is familiar with the various advanced sales incentive design techniques, it's a slippery slope to over-complexity. Here are two case examples I've encountered in my career of extreme plan complexity:

• Calculus, anyone? This high tech company had a sales compensation plan that followed many best practice norms, including using a reasonable number of results-oriented performance measures. However, the complexity for this company’s plans was in the incentive formula which used logarithmic functions to calculate incentive earnings. Given that the sales force was largely comprised of engineers, they generally understood how the plan worked. However, the incentive formula complexities resulted in an inordinate amount of selling time being spent projecting incentive earnings and validating monthly incentive statements.
• Get out your shopping list. This organization over engineered their sales compensation plan in the number of performance measures used. For a given sales role, the incentive plan had as many as 12 different performance measures, all of which were unlinked. The result was that most of the performance measures were so diluted from a monetary value standpoint that participants engaged in “shop the plan” behavior; i.e., certain measures were ignored at the discretion of the sales reps because there were plenty of other opportunities to earn incentives from other measures farther down the performance measure aisle.

Both of these cases illustrate some of the unintended consequences of becoming overly prescriptive with a sales compensation plan.

A Case of Over-Simplification

While less common than falling to the opposite end of the spectrum, there are cases where companies err on the side of over-simplifying the sales compensation plan. These choices are frequently driven by systems tracking and measurement limitations more so than an honest evaluation of the sales roles and the type of incentive plan required to appropriately reward them. Here is one such case:

• A one-size-fits-all approach. This company employed a single component incentive plan: a flat-rate commission on revenue that paid from the first dollar sold. The commission rate was uniform across all geographies and selling role levels. Yes, the plan was very simple and transparent, and the sales rep could easily calculate how much commission was earned from any transaction. However, the lack of an explicit performance expectation resulted in salespeople selling to their own comfort level which was often incongruent with management’s expectations. To compound that, the lack of acceleration for higher levels of performance did little to motivate incremental selling efforts. The uniform commission rate also magnified differences in territory sales potential, with territory size inequities driving significant commission earnings differences. As a result, the largest commission earners were the ones with the largest territories; however, they were not necessarily the best sellers.

It's easy to see how either over-engineering or over-simplifying a sales compensation plan can result in sub-optimal results. From a complexity standpoint, the use of any so called "advanced" incentive technique (e.g., multipliers, matrices, and other special situation incentives) is likely to increase the complexity of a sales compensation plan. The question is whether the nature of the sales role and the context of the selling environment warrant or even require the added complexity.

Survey Says...

Recent primary research conducted by WorldatWork confirms the importance of the balancing plan relevance and simplicity, specifically pointing to the desire to avoid overly complex plans. In October 2006, I co-authored a WorldatWork survey of its member base on sales incentive compensation practices. When asked about the reason for changing the sales incentive plan heading into the 2007 plan year, 22.3% of the survey respondents indicated the primary reason for change was to reduce incentive plan complexity. The only answer option which garnered a larger percentage of the responses was one of changing the plan to improve alignment with the business strategy.¹

Clearly, achieving the desired balance in a sales compensation plan between relevance to the sales role and simplicity is not an easy task. In fact, it may take a number of design iterations to get it right. However, this challenge reinforces the need to have the right cross-functional design team involved in the sales compensation design process in order to generate the variety of perspectives that will result in considered and appropriate design decisions. Will that take more time? Sure it will. But who said achieving balance was easy?

¹WorldatWork October 2006 Survey of Sales Compensation Practices as reported in Workspan, April 2007 in conjunction with J. Mark Davis and Jerome A. Colletti