June 6th, 2017 | By: Lee Bartlett | Tags: Sales
The first article in this 3-part series (How to Design a Killer Sales Compensation Model) introduced the concept of behavioural theory and how it affects sales compensation design. This second article discusses how compensation packages suit different stages of company and product evolution.
The main challenge with designing a sales compensation program is the primary sales role constantly evolves as the company grows and the market matures. The following diagram, courtesy of The Alexander Group, explains the four phases of growth and how this impacts the business.
In the Startup phase, brand awareness is low, and companies strive for a foothold in the market. The salesperson must have an entrepreneurial drive and mindset to open doors and sell the vision. In the early stages, it is difficult for the company to forecast sales performance and set realistic quotas. Companies apply a cost of sales approach to paying the sales person, i.e., a high commission rate, and this ideally matches the “hunter” nature of the first sales hires.
Compensation typically follows a simple, commission-based model with a fixed percentage of deal value. Sometimes, the plan contains scalable tiers linked to sales performance.
Market traction brings exciting times for the business as it pushes for rapid growth. An experienced sales leader is typically sought to add head-count, carve out territories, and instil processes, such as formal onboarding and training. The company adapts its strategy to approach the market in silos, separating SMB from Enterprise targets. The primary sales role is similar to Phase 1, with two exceptions:
From a leadership perspective, this brings the ability to forecast sales performance and set realistic targets.
Introducing ‘quotas’ or ‘targets’ allows the company to forecast growth and build more appropriate compensation models that incentivise above quota performance.
The maturing business strives for continued growth, while facing several additional challenges. An increase in market saturation and competition for revenue forces the company to innovate and expand. Some companies invest heavily in R&D and launch new offerings, while others acquire complimentary businesses to strengthen their offering. The sales force changes dramatically. The continued growth in customer base requires greater account management, and the primary sales strategy can shift to selling more to existing customers. Once again, the sales profile changes as the company begins to specialise through customer segment, product, and buying process focus, adding complexity, and a need for sales compensation plans with a more specialised focus required for each selling role.
It isn’t uncommon to over-complicate compensation models in Phase 3 as the leadership attempts to drive a focus on specific products, customers, buying stages, and margin. However, keeping the plans simple and role specific is the most effect way to drive the desired behaviours. This is called the “Re-evaluation Phase”, because hard decisions are made on which markets, customers, products, and opportunities to focus-on.
Companies make it this far because of good leadership. The corporate entity is now operating across all four phases. Some areas of the business reflect Phase 1, for example, a new product release or acquisition, while other divisions are in Phases 2 or 3.
The company has a full spectrum of compensation plans to reflect the needs of each role, while abiding a set of global principles, guidelines, and standards.
MANY things can go wrong with sales compensation design, and here are some of the most common challenges I’ve seen:
1. Not matching the role and compensation plan to the personality profile of the salesperson
Rewarding a “Hunter” with a “Team” bonus is a poor strategy, as this doesn’t align with their primary motivational driver (see article 1). Likewise, incentivising an “Account Manager” in the same way as a “New Business Salesperson” puts them out of their comfort zone and destroys their drive to succeed.
2. Not adapting the compensation model to the evolving business strategy
An outdated compensation plan doesn’t drive the desired behavior or reflect the changing needs of the business. This is clear from the above process of product and company evolution. Great leaders review and adjust the sales compensation program each year to match the changing strategy, business goals, and roles of the evolving business.
3. Using the sales compensation plan to manage “behaviors” over “results”
Phase 1 and 2 leaders accustomed to using sales compensation as the main driver of behavior often find themselves in Phase 3, tying incentives to a wide range of activities, such as CRM and sales-expense compliance. Incentive pay is precious and should be focused entirely on results, not development or compliance activities.
4. Overcomplicating compensation plans
Companies transitioning from Phase 2 to Phase 3 often make the mistake of using the compensation plan to drive a widening range of sales goals. Product marketing may push to have product specific goals. Finance may push to add a margin measure, or worse, the dreaded “cap”. Sales leadership continually “tweaks” the plan by adding thresholds, accelerators, gates, or multipliers. These things obscure transparency and earning potential, negatively affecting the motivation of the sales reps. Plans should have a maximum of three measures.
5. Late and/or poorly communicated plans
The best plans are ineffective if misunderstood or not presented promptly. Sales leadership (not HR, not Finance, not Sales Operations) should communicate the sales plans, in person, at the start of the new performance period. This is a unique moment when you have each seller’s full attention.
Compensation modelling is not a static, one-time process. It must be continually adapted to align with company objectives, motivate the teams, drive the desired behaviour, attract and retain the best talent, and be transparent and simple to understand. This was best summarised by my friend Paul Vinogradov in the following statement: