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A Very Necessary Evil

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

Not long ago, I had the opportunity to serve as an expert witness on behalf of a company that had been sued over how commissions and bonuses were paid upon the termination of a former sales rep. This company spent a considerable sum of money in legal fees, not to mention my litigation support, at least partly because of a simple failure to properly document the terms and conditions of their sales compensation plan. This company did, in fact, have a plan document that detailed the mechanics of the various incentive components. However, they failed to cover the plan's governing policies and procedures, including such important topics as how incentives are calculated and paid when a participating sales rep terminates employment.

After spending considerable time and effort on designing a compelling sales compensation plan, many organizations fail to invest enough in the all-important implementation process. Let's face it; salespeople expect to be sold on any new sales compensation plan. They need to know why the new plan is good for them and good for the company as a whole.

While there are many different elements that should be part of the strategy to implement a new sales compensation plan, one necessary element is the plan document. The plan document is a detailed, technical write-up that covers all aspects of how the plan works. Its intended audience includes incentive plan participants as well as anyone in the organization who has any involvement in the ongoing administration of the sales compensation plan. This likely includes individual salespeople and sales management staff, as well as key stakeholders from Sales Operations, Human Resources, Finance, and Legal. Because of its technical nature, the plan document is not intended to be the sole or even primary communications vehicle describing the new plan. However, it is intended to be a lasting reference document that can help answer questions about all aspects of the sales compensation plan.

Plan Document Contents - Five Key Sections

In my experience, there are five key sections commonly found in a good sales compensation plan document, as follows:

• Plan Overview - This is an executive summary of the plan that covers such topics as the plan’s objectives, plan eligibility, and highlights of the plan elements, such as the target compensation structure and performance measures.
  
  
• Plan Description - This is the detailed write-up of each of the incentive plan components. For each incentive component, it should define the performance measure(s), sales crediting policies, how performance is measured, and the incentive payout frequency. It should also present the incentive (bonus or commission) schedule and describe how incentive earnings are calculated.
  
  
• Incentive Calculation Example - Using illustrative performance assumptions, this section walks the reader through the process of calculating incentives for each incentive plan component.
  
  
• Administrative Policies and Procedures - This is the section that covers all the terms and conditions that govern the ongoing administration of the sales compensation plan. This section, in particular, should have Legal review before finalizing and distributing the plan document to the field. A sample of the topics often covered in this section include, but is not limited to, the following:
  
  
  • Management's ultimate authority - a statement of management's final authority regarding any and all incentive plan administration issues
  • Plan effective dates - the starting effective date and termination date, if applicable, for the sales incentive plan
  • Employee termination/separation - what a separating employee is eligible for in terms of incentive compensation upon termination
  • Eligibility timing - employee service requirements to be eligible for the sales incentive plan
  • Sales crediting - when a sale is credited for incentive compensation purposes (e.g., at booking versus invoice, versus shipment)
  • Leaves of absence - how quota attainment and incentive compensation is treated during a leave of absence
  • Job/territory transfers - how quota attainment and incentive compensation is treated under a job or territory change
  • Quota or goal adjustments - a statement of management's right to adjust quotas as well as the defined process for requesting a quota adjustment
  • Payment adjustment requests - the defined process and timing for initiating as well as management's process for reviewing an incentive payment adjustment request
  • Bad debt chargebacks - how bad debt chargebacks impact paid commissions or bonuses
  • Statement of confidentiality - a statement that all aspects of the incentive plan are company confidential and proprietary.
    
    
• Plan Agreement - This section confirms an individual's target incentive compensation level and performance goals or quotas for each incentive component. This section also requires that the incentive plan participant provide their signature indicating their acceptance of stated performance expectations as well as their agreement to abide by all the terms and conditions of the plan.

An Ounce of Prevention.

Developing a plan document as outlined here can be a time-consuming endeavor. This is particularly true if you have multiple distinct sales incentive plans covering the various roles in your sales force, with each unique plan requiring its own plan document. However, remember that the purpose of the plan document is to serve as a helpful reference guide by clearly defining all of the provisions of the sales compensation plan. Just as important, the plan document will serve to protect the interests of the company by providing clear guidance for any potential dispute that may arise regarding incentive plan administration. Don't leave yourself exposed to unnecessary conflicts - or worse yet, lawsuits - because of a poorly documented sales compensation plan. As my recent litigation support client would attest to, an ounce of prevention is worth a pound of cure!