Compensation can be one of the hardest things to tune and get right in a Sales organization. I’ve seen a wide variety of compensation schemes through my career, and have sat on a compensation committee in a larger company that I worked for (where we did a very comprehensive survey of the way things were done elsewhere in the industry). There are far too many variants to even being to elaborate on them all here, but I will try to touch on a few key things from my perspective.
Sales teams will be motivated and behave as they interpret guidance from the compensation plan - it is the defining message that a company delivers to them each year (or whatever frequency is selected for quota/plan distribution/refresh). Even what you may view as only a minor tweak to Sales Compensation can either demoralize your Sales team, or highly inspire it to over-perform. And it can set them down an intended course, or down a behavioural course that has serious consequences to the organization and/or its customers. And it can attract new recruits, or start the exit turnstile spinning.
A guiding principle of all Sales compensation plans has to be fairness. As soon as a plan skews itself to an individual, or a segment of the Sales team, major unrest will transpire. And moreover if management or the VP Sales make a ruling with respect to Sales compensation that favours a particular individual, the same unrest will result. Sales teams will freely and openly discuss compensation schemes and decisions with each other. To the extent that it is possible, the plan needs to be fair to everyone on the team by giving each of them the opportunity to reach their target compensation and/or over-achieve (taking international and regional deviations into consideration). My strong suggestion is to run as many scenarios as possible through a compensation plan model, and graphically represent the various scenarios as a quick way to do cross comparisons.
While giving passing attention to how they reach their target compensation level, the best Sales people hone in on over-quota achievement and how they maximize their income through accelerators on plan. As such, as much focus and attention needs to be put towards building and shaping the plan over quota as it does to compensation below quota. This is where the VP Sales must put on their fiduciary responsibility hat. While it is very easy to design a plan that pays Sales people handsomely to over-achieve, it is a much harder problem to build team inspiring plans that don’t break the bank (and have the CEO and CFO pulling you in for a beating when they have to make an extreme payout to a highly over-achieving member of the team). This is why it is a necessity that at least a couple of the data points used in the scenarios (that you run through the model) need to represent extreme over-achievement. In my experience the best mechanism to keep the proper balance is to determine a commission rate cap point that makes sense to the business (and not an income cap which is typically viewed negatively within a Sales team and will force someone to stop selling at some point in time - not a desirable outcome). Understand what the corporate budget is for Sales commissions at plan, and agree with the CEO and CFO on philosophies on Sales over-achievement. Inspire the team to over-achieve and get to accelerators, but don’t let the commission rates reach the extreme.
The other key guiding principle in my experience is simplicity. I have been amazed at the over-engineered plans I have seen, particularly in engineering driven organizations, oft times where the CEO was/is still an engineer. I’ve seen it take several pages (or a complex spreadsheet) to document these plans for the Sales team. The Finance department can never figure out how to pay the team and confusion reigns supreme. The Sales team throws up their hands and surrenders, is less than motivated to go out and sell, and massive amounts of time are wasted in discussions trying to figure it out. And amazingly enough some of the authors of such plans can’t even figure them out. If it can’t be explained in a few short minutes with a small handful of parameters to the management team, Finance team and most importantly the Sales team, then the plan is too complex.
A few specific comments:
Commission Rate - flat commission rates across the team reward individuals with large territory potential or mature territories and penalize those that are in developing territories. Use the quota to guide the commission rate so that everyone earns their target income at 100% of quota. Each person’s commission rate should be different and calculated based on variable income divided by quota. This means that getting the quotas set right becomes even more important.
Varying Rates by Revenue Type - this can get really messy and have some very negative behavioural impact. If you’re going to pay lower commission rates for software support renewals for example, then be prepared for your Sales team to abandon (or reduce) management of their existing accounts. Similarly if professional services are key to the successful rollout of your products to customers, then paying lower rates to your Sales team for selling services will only result in them giving them away, or worse yet not pitching them at all. You will feel the pain in far higher costs downstream when your customers don’t succeed.
International Variance - geography should be king in determining base/variable splits in target compensation and target compensation levels (as well as in determining benefits). However in my experience it ends there and all other plan parameters can be universally applied to everyone.
Special Incentives - organizations need to be really careful with these because they have high potential to backfire. In my experience they can be useful in conjunction with new product launches (assuming the entire Sales team starts on an equal playing field). However more often than not, I’ve seen these break the fairness principle as one person inevitably has a head start on everyone else in winning the Special Incentive race to the finish.
And my final closing remark is to be timely in delivering compensation plans to the Sales team. If it’s an annual plan, deliver it at the start of the fiscal year, not half way into the 2 nd quarter. It is amazing how many companies are well into their fiscal years before their Sales people understand how they will be paid. Given Sales directly impact the top line of every company, this is just plain negligent, and in itself sends a very clear message to a Sales team…