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Designing Sales Compensation Plans for the Long-Haul

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

Why is that sales compensation plans change so frequently? There are many different factors that can ultimately affect the need to change a sales compensation plan. In an earlier article I wrote entitled, "The Myth of Planned Obsolescence," I argued that even the best sales incentive plan will eventually become obsolete. For most businesses, this simply is a reflection of operating in an increasingly dynamic, fluid business environment. Often the need to change sales compensation comes down to changes in business objectives and/or go-to-market strategy. The downstream list of tactical shifts those upstream changes can cause is infinite, including the need to change the sales compensation plan.

In its 2008 Survey of Sales Compensation Practices¹, WorldatWork found that 76% of companies change their plan every year, with adapting to changes in business strategy being the primary reason cited for the change. So it's well established that plan change is a given. However, we also know that plan change can be painful in terms of the time required to design and launch a new plan, as well as the potential disruption to the sales force the new plan is intended to motivate. How then do we design a sales compensation plan with a longer shelf life than just one year? It's not easy and, in many cases, may not be possible. Even so, here are a few tips for extending the "best if used by" date of your sales compensation plans:

• Identify forward-looking business objectives - Ensure that the plan reflects contemporary business objectives and the intended role of the sales force in achieving them.
• Define selling roles that will have a longer shelf life - In addition to reflecting contemporary business objectives, role definition also must anticipate whether your product/service offering or customer requirements are likely to change.
• Ensure the basics of the plan are well-connected to the business strategy - Focus on ensuring the core plan elements (i.e., pay mix, leverage, and performance measures) are sound relative to business objectives and role definition.
• Keep it simple - While clearly-defined and highly specialized roles allow for a more targeted and compelling incentive plan, a greater degree of incentive plan specialization is likely to require change sooner.
• Actively monitor plan performance - Stay on top of the need for minor plan tweaks as you go along as opposed to letting small problems fester and result in the need for change on a larger scale.

The level of plan change makes a difference. Making minor plan adjustments each year is to be expected. These could include adjustments to the leverage multiple, performance measure weighting, and performance range that leave the core plan construct in tact. More significant changes include those to performance measures and incentive formula which, more often than not, fundamentally alter the plan.

Above all, don't let the compensation plan become stale or obsolete. Even though change can be painful, the plan must continue to reflect contemporary business objectives and role definitions. It's a delicate balance that requires proactive management.

¹ WorldatWork 2008 Survey of Sales Compensation Practices in conjunction with J. Mark Davis and Jerome A. Colletti