There is no doubt, sales compensation plans which come mostly in the form of commissions plans today are very popular and are used extensively in sales organisations. They take various forms and in some cases we see plans that are well designed to meet the sales objectives of the company and those of the sales management.
In many cases different features and characteristics apply to the program to make it work for the benefit of the firm. If management for example wants to strengthen cross sales of additional products, then they may pay cross sales through the compensation plan.
The question though is whether one assesses the system and how often. Are there the right processes and teams responsible to evaluate the system and its effectiveness on a regular basis?
It is obvious the job is not completed unless there is an evaluation process of the current sales compensation plan in place.
But how can we assess it?
Different quantitative and qualitative measures can be used to evaluate the system; however, I would concentrate on three main ones today.
The assessment process should be aligned with the reasons the compensation plan is there in the first place.
What do we really expect from the plan?
What we do need it to reach the results and the objectives that are set by the company. The other one we anticipate, is to see our sales people motivated to sell. And not to just sell, but being motivated to sell a little bit more. And the third one is to make sure the money we pay to sales people through our compensation program pays us back.
Based on the above, we can run numerical and qualitative tests to assess the system in place.
To check whether your plan has a good ROI, check in a diagram the relation between profit margin and compensation money. This should answer the question whether the profit margin you make justifies the dollar money you spend in your variable compensation. If you spend too much money for low profit margin you may have to alter the plan. You can also get useful information if you see how many people are making their targets. You should have the majority of them being around the hundred percent achievement but not most of them above that level.
To see whether people are motivated, it is good to monitor in a distribution graph how realisation of targets compares with the money each person makes. You shouldn’t see huge differences as equal opportunities should earn equal dollar amounts. Check also how each region (or industry – depending how you split regions to sales people) performed in terms of targets and dollar compensation.
The final analysis you can have is the relation between quota realisation and dollar money earned. Although it is always good to relate percentage of realisation to earnings it is also advisable to check the relation of dollar revenue generated to earnings, to make sure that not only the realisation of target is compensated but also the absolute revenue generation.
I have seen many organisations that tried to put a plan in place and well done for them, however I noticed that they don’t make the effort to evaluate the system they created, letting it to stay idle and ineffective.