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Seven Myths and Realities of Sales Compensation

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

Companies often try to do too much through sales compensation. One of the most common infractions is building in too many measures, believing, as Myth #3 below describes, that the reps won't pay any attention to "it" if "it" isn't rewarded in the incentive plan. A frequent unintended consequence of this belief is an unhealthy reliance on compensation as a surrogate to good sales management, often resulting in an entitlement mentality in the field. Beyond overloading the plan, I find that there are other ways in which "conventional wisdom" regarding the design, administration, and ongoing influence of sales compensation often steers companies in the wrong direction in terms of corrective action.

Myths and Realities

The following seven sales compensation myths do not comprise an exhaustive list, but reflect some of the more common cases of conventional wisdom-gone-bad I’ve experienced in my career.

• Myth #1: “Turnover is high because of the sales comp plan.“
  Reality: As several research studies have shown, pay is rarely the most important factor in an employee’s decision to leave. In a 1999 Hay Group study of over 500,000 employees from 300 companies, pay was rated the least important of 50 retention factors. Instead, there are likely other factors that more frequently contribute to turnover, including:
  
  • Dissatisfaction with supervisors or co-workers
  • Lack of professional development
  • Insufficient career advancement opportunities.


• Myth #2: “All we have to do is adopt the industry leader’s sales compensation plan.”
  Reality: Sales compensation plans are situational. They’re construct is driven by a company’s business objectives, go-to-market strategy, and selling role definition. Unless your company’s strategy and approach to the market is identical to that business competitor you’re targeting, then their approach to sales compensation likely won’t serve your company well.
• Myth #3: “Sales reps won’t do it if it’s not incented in the plan.”
  Reality: There are other means by which performance is driven, including performance management systems, peer or team member pressure, non-cash recognition, and good, old-fashioned management supervision. Let’s not forget, too, that good salespeople are often very competitive and self-directed. They want to win; they expect to win; and they find winning very gratifying. Of course, the core elements of a compelling sales compensation plan must be in place. However, it’s a mistake to think you need to reward every desired activity or business result.
• Myth #4: “Your compensation cost of sales should be no more than x%.”
  Reality: I know from experience that even within a narrowly-defined industry segment, it’s difficult, if not impossible, to define a meaningful standard or benchmark for the compensation cost of sales. There are simply too many variables at play, from differences in accounting practices to varying sales deployment models, to reasonably compare the cost of sales compensation from one company to the next. Determine the optimal go-to-market approach, understand what the sales force can control, establish goals and metrics, and measure and reward the sales force accordingly.
• Myth #5: “Survey data provides the final word on establishing competitive pay levels.”
  Reality: The output from a pay survey is but one data point in establishing a competitive cash compensation structure. Even the best surveys typically provide very limited survey job descriptions, making the task of matching a company’s jobs to the survey platform jobs quite difficult. Without a solid job match, even the best survey data is suspect. Other factors to consider include historical pay norms, recruiting insights from field managers and recent hires, and information gleaned from exit interviews.
• Myth #6: “Any good sales comp plan must be uncapped.”
  Reality: While it is true that salespeople typically dislike any cap on upside earnings potential, not all selling situations warrant an uncapped plan. Whether a plan is capped is primarily driven by the prominence of the sales role (i.e., the role’s ability to influence the closing of the sale). There is simply less of a compelling need to uncap an incentive plan for a low-prominence role. Other factors, such as plan economics or affordability also come into play. It is fairly common that the same organization will have an uncapped upside for certain high-prominence sales roles and a capped upside for other low-prominence roles (e.g., management or sales support).
• Myth #7: “Sales reps have to be involved in the design process or they won’t accept the plan.”
  Reality: The sales compensation design process always presents a trade-off between involvement and efficiency. A greater level of sales rep involvement may contribute to more buy-in from the field. However, it is also likely to come at the cost of efficiency in getting to the appropriate design solution. I typically advocate having sales reps participate on the front-end of a design effort vis-à-vis interviews or focus groups focused on understanding their role and their perspectives on the sales compensation plan. However, I usually advise against having front-line sales reps sit on a “design team” charged with designing the new plan. Why? Because the design of a sales compensation plan is a management decision that requires effectively balancing two potentially conflicting perspectives: supporting the company’s overall business objectives versus supporting the constituents in the field. I have found that the lower in the organizational hierarchy you go, the more difficult it is for those individuals to balance these two perspectives.

Don’t be a Victim

Don’t fall prey to conventional wisdom that takes aim at the sales compensation plan as either influencing too much or being the cause of all sales force effectiveness ills. Let’s face it, the sales compensation plan is an easy target. The fact is, however, that sales compensation is but one of many management tools for directing the sales force. To be effective, the sales compensation plan must work in concert with, not in isolation from, the other tools to deliver the desired results.