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Secrets to a Successful Comp Plan
March 28, 2008
It's people, not numbers, that carry the most weight
By Maureen Hrehocik
A good compensation plan doesn't start with cold, hard figures, says Dave Stein, the CEO of ES Research in West Tisbury, Mass. Rather, it all starts with having—and then keeping—the right people.
According to Stein, if you have the right people selling your product, other factors integrated into the mix will put you well on your way to reaching revenue goals and retaining exceptional talent. "It's very difficult to get compensation packages right," he says. "You can't compensate a person who is not suited for the job."
ES Research has determined that as many as 30% of employees are not suited for their jobs because they lack critical behavioral traits such as self-motivation, intelligence, persuasiveness, resilience and curiosity. "These people are never going to succeed," Stein says.
That leaves the other 70%, who are suited or could be suited to the job. Many of these people are motivated by money, the power to influence and chart their own course, and/or by recognition. "Money does have a bearing on most salespeople," Stein says. "However, even if you overhaul your comp plan, it still will not affect the non-performers or those not motivated by money."
Here are six compensation pitfalls Stein says he sees far too often, along with ways to avoid them:
1. Excessively high base salaries. "Too high of a base salary is detrimental," Stein says. "The employees may meet their quota, but they won't make those extra calls to exceed it." He cautions that too low a base salary is also bad, because the salesperson may not have enough cash flow before that first sale and become demotivated as a result.
2. Comp plans that aren't aligned with company goals. Sales managers fall into this trap when they pay on any business, rather than new business or business from new territories. "It's human nature to want to call on people you know and have a good relationship with," Stein says, "but that may not be enough to reach company revenue goals." The comp plan should include goals in which the quota can be reached only by contacting new business or from different territories.
3. Comp plans that aren't supported at the executive level. Maybe you don't like paying people more than you make. Some managers may even go so far as rewriting comp plans midstream to align them more in the company's favor. Get over it!
"You can't limit the salesperson's ability to hit grand slam home runs," Stein cautions. "Be willing to write a $1 million commission check if that person brings in the corresponding business." Management also needs to support salespeople to help them reach quota by having marketing campaigns, sales call support, research and training brochures.
4. Comp plans that are too complicated. Remember the old adage: "Salespeople will do what you pay them to do, not what you tell them to do." Comp plans need to be written clearly with the business goals clearly stated and understood by the salesperson.
"Tell them what you'll pay them to do," Stein says. "Don't clutter the horizon with weekly spiffs or contests. There will be resistance if they don't understand what they're supposed to be doing."
Steve Grossman, leader of the sales effectiveness business in the Americas for Mercer, agrees that trying to make a comp plan perfect is unattainable. "You have to have the flexibility to accommodate differences in the product mix. But don't try Band-Aid fixes to accommodate salespeople and the bean counters."
Just ask Carl Peterson, the former vice president for North American retail sales and marketing for a major manufacturer of water-related pumps and filtration. Peterson was confronted with the problem of customer consolidation, a human resource-driven compensation plan and no easy way to reward superstar salespeople without skirting the HR-driven compensation parameters. "It's an industry-wide issue," he says. "How do you take care of your superstars and stay within legal, ethical and non-discriminatory practices?"
At the time, Peterson oversaw six national sales directors, 15 regional sales managers and 150 sales reps generating $260 million in revenue. His division also had 75% market share. Ultimately for Peterson, the compensation solution was a "team approach."
Because "big box" stores like Home Depot and Lowe's had decimated secondary accounts, the focus of Peterson's sales force was narrowed to a few major retailers. The challenge was to provide enough incentive to the salespeople from this reduced pool of possible business. "What if there were floods in the Western sales region and nowhere else?" he says. "Those reps would sell more water pumps that quarter to customers than would reps in the East."
His company's compensation plan was multi-pronged: "A certain percentage was paid on sales, a certain percentage on group net operating profit, a certain percentage on a three-division profit goal, and a certain percentage on discretionary goals that I had for the salesperson." What Peterson did, with the blessing of the human resources department, was increase the discretionary percentage of his superstars' compensation plans, thereby giving him latitude to reward exceptional performance.
"I was able to keep my star performers happy while staying within the company's non-discriminatory parameters," Peterson explains. "I had to make my case to the human resources people, and they were onboard with what I wanted to do." He adds that emphasizing the discretionary portion of a comp package can give a manager more leeway if the company's salary structure is graded with minimum, mid and maximum levels.
5. Capping earnings potential. Back in 1962, H. Ross Perot was selling computers for IBM. He reached his yearly quota the first three weeks of January. Perot then asked management what was next, only to be told he wouldn't be earning any more commission since he hit his quota. Perot quit and started Electronic Data Systems. The rest, as they say, is history.
Stein relates the story of a senior manager who turned his back on $250,000 in stock options for staying with a company until those options matured. Why? Because, after over-delivering in every quarter and over-achieving in every metric, his CEO told him that if total company revenue didn't increase by 50%, he wouldn't receive his bonus.
"An impossible goal totally demoralizes an employee," Stein says. "It's the quickest way to lose good people."
6. The past doesn't equal the future. Stein says comp plans should be re-evaluated at least yearly. "In general, every salesperson with substantially the same job should have the same comp plan," he says. "However, in the real world, that doesn't always happen." Salespeople talk; word will get out if one is making more than another with seemingly the same experience.
One of his clients saw the majority of their business come in the month of December. The CEO could tell his normally hard-working sales force was exhausted from ruthless competition and demoralized because they knew there was no way to make their numbers with the comp plan that was currently in place.
Stein suggested to the CEO that he adjust the quotas down, but still make them a stretch. The CEO agreed, and sweetened the pot by offering a $3,000 bonus to any rep who reached quota.
"When we unveiled the new plan, it was like Christmas for three-year-olds," Stein relates. He worked with each rep before they went on calls to ensure they had all the resources they needed to succeed. They all made quota.
Both Stein and Grossman agree that key salespeople should be involved in formulating the comp plan. "Management should provide and explain a 'straw model' of the plan to a key group of salespeople—then let them tear it apart and put it back together," Grossman says. "Sales should be allowed to challenge the design. If you allow this to happen, you will have a happier, more engaged group of salespeople."
Stein suggests inviting your best salesperson and the one most respected by his or her peers to review the plan. Once you have a workable comp plan, you need to have quarterly or even monthly monitoring of the plan to make sure your salespeople have the proper support and are maximizing their potential.
"Management needs to admit when it isn't doing enough to support the salesperson," Stein says, "and be willing to make them whole by giving them the resources they need, or even paying double commissions for a quarter, until you have a new sales mechanism in place.
On the flip side of that, Grossman says that managers should not be reluctant to make changes mid-year if business requires it. "Employees will understand if they are told why the changes need to be made," he explains. "They won't like it, but they'll understand if that manager has built up credibility with his sales force over time."
Lastly, if a company's goals change from volume to profitability, the comp plans will have to reflect that. "The salesperson has to understand the connection between the company's goals and their comp plan," Grossman says. "The care you take to roll the plan out well, so that everyone understands why the changes are being made, is paramount."
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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