A sales compensation program depends a lot on its terms and conditions. Its effectiveness depends on how one designs it. There is a specific way and certain guideline how to tackle all the different areas of the program. Some indicative examples are: One needs to decide which sales roles are eligible to be part of the program or find how much in cash that role shall be getting for doing the job, the total cash compensation split between a fixed and a variable part.
All these steps need a decision making process and if one doesn’t think this through, the program might be in jeopardy.
On the other hand and beyond any mistakes in the design process, sometimes there are external factors that create extra risks to the program, most of the times unintentionally.
Let’s see five of them:
- Ownership of the program. Many departments are involved in the process of assessing the system and designing one. Human resources are responsible for the compensation of sales, the product team is also accountable and wants to see its product selling, the sales team has a budget to bring. The CFO has a limitation in the budget and the CEO has the overall responsibility. Too many people are keen to be involved and lead the effort but this may lead to distortion of the system.
- Sales people frequently have their objections to the system. The program is considered to include the territory assignment and the quota distribution. Sales people want to make the most of it, reach and bring results beyond their quota. They are experienced people. They know whether this will happen. They know how to “play” the system this is why when things do not look lucrative to them they are against it.
- Where does the P/L belong to? It is most often that the product team, the team that is responsible for the product line carries the P/L of the product. They can manage the cost of it but without the power to control sales, it is difficult to control the revenues side. They want their product to sell and the problem also begins when there are more than one product line sold by the company. All product teams want to see a success of their product, this however creates problems when they try to put their hands in the compensation plan.
- A strong program means strong operations. Companies tend to forget that the success of a program is not just the design of its terms. The program extends before and after the decision on of the main terms, for example its operations and its administration. These are also important parts; such as assessing the system, calculating payouts, decide the calculation system to use, communication of changes, policies, etc. are all part of it.
- Set the right objectives for everyone. Every person has its own objectives from the sales compensation system. The head of sales wants to get something different as a result from what the human resources or the CFO wants. The sales managers want to achieve also something different. How can all of them be aligned to a common objective? Can an incentives and reward program fulfil the needs and the goals for each person?
We have seen many cases where situations like the ones described above can disrupt the smooth operations of the sales compensation program. It is important that these need to be avoided and one way is by having distinctive policies and responsibilities.