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Unfortunately, in many companies – large and small – the oversight of the program is not well understood, articulated, or documented. In some firms, it’s almost as if the understanding of who “owns” various parts of the sales compensation program is passed down from employee to employee like so much folklore.
Here are some questions to help guide the development of your sales compensation governance plan:
Who is responsible for designing the plan?
Every company is different, but developing a shared understanding of which organizations play a role in the design process is central to the governance plan. Which organizations have decision-making authority and which are in an advisory capacity? What role does the sales organization play? Do the people who administer the plan have a seat at the table? Does any person or group have veto authority?
What is the process for making changes to sales compensation plans?
Sales compensation plans need to be flexible enough to adapt to shifting internal priorities as well as changes in the competitive marketplace, so there will be times when the program has to be modified. Is there is a documented change management process for modifying elements of the sales compensation program? Who has final sign-off authority?
Are the policies governing the sales compensation program documented and up-to-date?
As sales compensation plans are evolve and new leadership is introduced, policies are often changed with little corresponding documentation. Even if an attempt is made to update the policy manual periodically, is there an agreed-upon and articulated process for keeping the documents up to date with current policies?
How are disputes handled with sales people?
Is there a published step-by-step process that sales people follow when they question a policy or believe there is an error in their calculations? Is there a clearly understood escalation and appeals process, with timelines and approval authorities? Where does the “court of last resort” reside? Is binding arbitration a consideration?
What about “Sarbanes-Oxley” and “Dodd-Frank”?
Sarbanes-Oxley was enacted ten years ago in response to massive corporate malfeasance in the telecommunications, energy, and financial services sectors. Because it addresses such topics as separation of duties and conflicts of interest, and it be considered when building a sales compensation governance plan. The compensation provisions in the more recently-enacted Dodd-Frank act have more to do with executive compensation.
Developing a sales compensation governance plan does not have to be a complicated drawn-out process. Often, it is simply a matter of documenting the shared understandings that are already in place. Other times, a series of meetings need to be facilitated with senior executives and key stakeholders to forge agreements, confirm understandings, and articulate the key elements of the plan.
We’re now into the second quarter, and despite everyone’s best efforts, your new sales compensation plans still haven’t been rolled out yet. You did everything right last year: the development process started early, the design team had all the right stakeholders, weekly meetings were held, and senior executives were briefed at the appropriate times. Yet, after months of analysis, vetting, consensus-building, and decision-making, sales people still don’t know how they are being paid this year.
Why is it so hard to get this right?
It is so close to your customers and prospects:
The sales compensation plan is the most important thing to your primary interface with your customers and prospects – your salespeople. Sales compensation plans drive behavior, and if the plan is designed incorrectly, The Law of Unintended Consequences can have disastrous results.
There are so many stakeholders:
The sales compensation program is often central to the enterprise, so people from all over the company are invested in it:
v Finance/Business: A key driver of the revenue plan
v Marketing: An integral part of their go-to-market strategies
v Human Resources: A primary tool for recruiting and retaining top sales talent
v Sales: The key motivation for your best sales people
It’s a big expense:
For many companies with a direct sales force, the sales compensation line item is one of the largest expenses, often second only to salaries.
The governance is often not clear:
Is it often not clear who ultimately owns the sales compensation program, which can lead to unproductive disputes and conflicts later in the process.
It’s difficult to tell if the comp plans are effective:
Because the sales compensation program is so interconnected with so many parts of the company, it is often difficult to measure its effectiveness. Do you have the wrong sales compensation plan in place, or are your sales goals unrealistic? Does a lack of attrition among your sales force mean that your compensation plans are effectively motivating them, or are you just over-paying them?
Praxis Sales Compensation Consulting has years of experience helping companies of all sizes successfully navigate through the process for an effective implementation. Give us a call for a free assessment!
Business challenges need objective solutions supported by empirical analysis. Given the current economic climate, it is more important than ever to understand the return on your investment when making any kind of change. However, when it comes to designing and implementing successful sales compensation plans, it is very easy to under-estimate the qualitative, non-empirical factors.
There is definitely a “science of sales compensation”: quantitative analysis and statistical modeling are critical. Likewise, tracking your CCOS (Compensation Cost of Sale) over time can be an essential diagnostic tool in evaluating the effectiveness of your program.
However, there is as much “art” as there is science in the design process, and one of the most common mistakes is to take an overly formula-driven approach. After all, a successful sales compensation program not only has to be aligned with your corporate objectives and resonate with your sales people, it also has to seamless merge into the "corporate culture" that it both reflects and shapes.
I don't know of any way to measure culture, but how an organization views its sales force – and selling in general – can be indicative of the culture of a company. Do any of these statements sound familiar?
v “Successful sales people should be the highest paid in the company because they are the revenue-producers.”
v “Of course sales people are motivated by money, but they need to be business people first.”
v “All sales people are ‘coin-operated’.”
v "If the company is not meeting our financial goals, why should any sales person be paid more than their target commission?"
v “The sales compensation program is primarily a way of controlling the sales force.”
v “Why do we need sales people anyway?”
There is no scientific formula for determining which sales compensation plan is best for your company. A plan design that works well in one company can fail badly in another, simply because of the qualitative intangibles embedded in the culture of the enterprise.
The key to developing and implementing effective sales compensation plans is to balance the "science" of sales compensation with the “art” of understanding the culture, the unstated rules, and the "personality" of the company.