This is the time of year where many organizations are finalizing changes to their 2012 compensation plan for the sales force.  While it can be a tricky time (as we must always be careful to avoid misunderstandings from the sales rep community around the new plans) – it really doesn’t have to be…

When it comes to structuring an effective compensation plan, the first thing to know is that communication can be even more important than the design of the plan itself.

The compensation plan will not be effective if reps do not believe that it is fair, and communication matters nearly twice as much as plan design in driving perceptions of fairness.  In fact, in our research we found that Sales employees who believe pay processes are fair exhibit 60% more effort than those who do not.

(SEC Members, read more about the two key components of comp plan fairness, which your communications efforts should strive to emphasize.)

It’s also worthwhile to keep in mind that communications from the frontline sales manager community are two times as likely to positively impact sales employees’ belief in the fairness of pay processes than communication from the compensation function.

That said, from time to time, we still need to drive communications from the organization around compensations plans.  So, here are five rules we see the best companies follow when looking to maximize sales force buy-in to the comp plan: Read More »

In the Sales world, the start of a new year often brings with it a fervent roll out of new compensation plans. It’s the one activity that garners the most interest from all quarters of the sales force. After all, a good compensation plan can drive the right behaviors, and retain and attract top talent.

The compensation plan design process itself is anything but simple though. Its scope overlaps with the domain of multiple functions—Sales Ops, HR, Finance, and Legal being the most vocal participants and stakeholders. Each, with often competing interests, claims ownership of sales compensation design. It’s no wonder we see compensation plans often stray away from the broader business goals of the organization.

Who then is best suited to own sales compensation? Read More »

Note: This posting was written by Matt Dixon & Brent Adamson for the Harvard Business Review.

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Every leader knows that the compensation plan plays an important role in recruiting and retaining the best talent. But what these executives often don’t realize is that how they communicate about pay can be as important as the plan itself.

We saw dramatic evidence of this in a study conducted by our sister program, CLC Compensation, which looked at sales comp. The perceived fairness of the pay (that is, whether it was determined equitably, consistently, and predictably) had a 20% greater positive impact on reps’ commitment to their job than their satisfaction with the pay amount itself. A fair payment scheme, it turned out, was a more powerful motivator than a generous pay scheme.

When it comes to using compensation to boost performance, then, sales executives should focus less on the payouts themselves and much more on improving reps’ belief in the fairness of the process used to determine those payouts. But how?

Read the rest of this post on HBR.

Every couple of months, we get a call from a member who’s in the sticky situation of needing to make mid-quarter adjustments to quotas or compensation plans. There’s a variety of reasons why companies land in these situations. Sometimes a new product launch isn’t as well received by customers as hoped.  In other cases, the sales force lands upon an unanticipated spike in customer demand.  And sometimes an average performer unexpectedly becomes a superstar.

But regardless of the causes, goals and pay plans that are out of sync with rep performance can create big problems.  If adjustments aren’t made, someone’s bank account will be broken – either the rep’s or the company’s.  The adjustments may be messy, but the alternative is far worse.

But contrary to common belief, quota and comp plan adjustment don’t always have to be jarring. We’ve seen a number of companies navigate the process with minimal disruption. The key, they tell us, is to always focus on communicating two things to the sales force: Read More »

Compensation is the number one reason why sales talent joins – and, in many cases, leaves – your organization. But with most companies revamping comp plans every year, it’s tough to ensure that your plan isn’t falling behind the pack.

To help you keep your compensation plan competitive in 2011, we’ve developed a list of the 5 keys to effective sales compensation plan design.

Here are the highlights:

1) Set Challenging, Yet Achievable Goals: Aim to have roughly 50% of the sales force hit goal. Goal achievement levels beyond this benchmark signal that goals are too easy, but less than 50% damages rep morale and leads to turnover.

2) Prioritize a Few Key Metrics: Include no more than 3-4 metrics in any compensation plan, and be sure that one of these is either gross revenue, profitability, or sales of specific products. Companies with more than 3-4 metrics in their plans find that reps become confused about how to spend their time.

3) Stay in the Variable Pay “Sweet Spot”: Set variable pay at 20-40% of total target compensation. Reps underperform when less than 20% of their pay is at risk, but they also become dissatisfied with the plan beyond the 40% variable mark.

4) Reward Your Star: Star performers should receive 2x-3x the pay of an on target performer. Pay leverage at this level is enough to satisfy stars without demoralizing core performers.

5) Over-Invest in Compensation Plan Communication: Ultimately, effective communication from line managers on how pay is determined and how fairness is ensured is more important to reps than plan design.

For more guidelines on compensation plan design, please see our 20 Principles for Designing and Maintaining Sales Compensation Plans.

By Andrew Kent

The Major League Baseball All-Star Game is upon us, which means my Fantasy Baseball team gets a few days off—and my mouse-clicking finger gets some much-needed rest.  Turns out, this wonkish fantasy “sport” has a lot to teach us about compensating a sales force.

For the uninitiated, the goal of Fantasy Baseball is to assemble a team of players that will maximize performance across a range of statistics.  Traditionally, Fantasy Baseball leagues track five key statistics each for batters and pitchers. 

But some fantasy league managers like to achieve a more granular view of a player’s performance.  Just check out this league I’m in this year – it tracks 12 stats per player:

Now somebody please tell me: with all those statistical categories and numbers on the screen, how am I supposed to decide how valuable a player is to my team?  Maybe a player gets a lot of RBIs, runs, and home runs, but how many doubles and triples should I sacrifice?  It’s overwhelming—and in fact, research suggests that our brains cannot process more than 3-5 variables when making a decision.

But while the Fantasy Baseball example seems obvious, many of us do the same thing to our sales reps with overly complicated compensation plans.  In the same way that measuring baseball players on too many statistics cripples my fantasy team decision-making ability, including too many metrics in the comp plan makes it impossible for reps to figure out what they’re being paid to do.    Read More »

By Andrew Kent

Sales leaders often assume that a detailed compensation plan can optimize “coin-operated” rep behavior.  This, however, is the wrong way to think about sales comp.

Simply put, there is no such thing as a perfect comp plan—no matter which structure you go with or how much analytical rigor you put into your plan design, you’re going to incent some undesirable behaviors and upset a portion of the sales force. 

When you over-think comp plan design, moreover, you’re overestimating the rationality of human behavior and your ability to control it.  Human beings are unpredictable creatures, and incentives are as likely to distort behavior in ways you don’t intend as they are to influence behavior in the right direction.

In other words, compensation is about psychology, not economics.   

With that in mind, we’ve developed a list of 20 principles of sales compensation we’ve dubbed “The Truth about Sales Compensation.” Here are two of my favorites from the list:

Principle #2: Compensation cannot do everything.

Sales leaders tend to over-rely on compensation as a management tool, when other levers would more effectively solve the root causes of problems.     Read More »