Sales is often described as the easiest low-paying and the hardest high-paying job in the world, depending on your attitude, the level of motivation, and the design of compensation plans or incentive schemes.. In this article we examine some of the many reasons for changing the compensation plan, and how often these changes should be implemented.
What is a compensation plan and its main principles
A compensation plan is a system of rewarding sales people for achieving specified targets to encourage their best performance. As a management tool it has been used for decades by the majority of organizations employing a sales force.
For any company, the focus of a compensation plan is on achieving the best possible revenue goals in terms of dollar values, by offering incentives to keep the sales team motivated and encouraged during the good and bad days experienced in the sales field.
Variations in a compensation plan can arise within a company where objectives for sales people can be different, such as landing a new important customer or selling to specific customers in a new region.
The payment mechanisms vary between different organizations. One company may pay sales people a percentage of the revenues as commissions, where others pay a bonus or a flat amount irrespective to the value of a contract.
When is there a need for a change? Let’s have a look at two situations:
1. After seeing the success of an active competitor, GrabitKwik recently launched a new product specifically designed to capture a region they had not previously entered, so the company allocated some of their sales team to focus on this new project.
2. GettumKwikCompany became concerned by the increasing number of their sales people leaving to take new positions with two new competitors in the field, raising questions about how and why they were losing these skilled employees.
“Losing good sales people is not an option,” said GettumKwikCEO, in one of their management meetings, and put an objective to the relevant departments to decrease staff turnover that year.
The importance of a Compensation Scheme
For either company to move forward, one critical area to examine is the compensation scheme.
The compensation scheme is a dynamic and live element of the sales organization. It is a procedure that needs a constant maintenance and revision, finely balancing the performance of the sales team in comparison to the overal success and profitability of the company.
How often should you revise the Compensation Scheme
After assessing sales performances over the past three years, GettumKwikCompany realized that a considerable number of the sales team deteriorated in sales performance. Even their best sales people were slipping, triggering an alert in the company to review the sales department.
GettumKwikmanagement discovered the sales manager had made considerable changes to the compensation plan four times in the previous year alone, following constant changes before that time.
It’s a challenge for any team player to be satisfied when the goal posts are always changing, and for sales people it’s no different. They need simplicity. They need to easily understand how the compensation plan works, prefering a constant environment so they can plan their sales in their territory for the year ahead.
A company that is not growing, is dying. Each year, as a company changes, the compensation scheme requires fine tuning to reflect those changes.
As in the case of GettumKwik,when a new product is launched, or there’s a new target to sell the service to a new vertical industry, these factors must be mirrored with revisions in the compensation plan.
Fine-tuning of the compansation plan is highly recommended each year, with careful consideration of:
- What does the company mean by fine-tuning, and
- How often will this fine tuning be needed, and
- Under which circumstances does fine-tuning mean a bigger change
The compensation planhas two main technical areas to design.
The first focus is to decided the payment structure. Some companies pay commission only, others offer a basic salary with commision incentives.
Once that decision is made by the company, the next step is to determine the level of the total payment, the mix between the fixed salary and the variable commission payment plans.
Other features such as the measures (objectives) the company uses to incentivize sales people (for example new sales, new names) can be changed during the fine tuning process.
When GettumKwik launched their new product, they chose to offer it initially to their existing customers around the globe. Was a change in motivation system required?
Regardless of the effort of their management to push them to sell the new product to their existing clients, sales people will focus on doing what they used to. This, more often than not. comes down to how much money they personally stand to gain as a result of their efforts. . By offering a new incentive with an additional clause motivating the sales team to promote the new product, they now have personal incentives to make more money by getting out of their comfort zone, promotibg the new product, as well as selling what they know well.
If GettumKwikwants to give an extra push to this new product, they can revise (fine-tune) the system to incorporate the new change, such as:
- If the company is using a commission plan they can pay certain commissions for revenues coming from the new product.
- Another idea is to link the sales of two products together. If a sales person sells the new product on top of another one he’ll get a multiplier to his commissions.
On the other hand, you could argue that by launching a new product independently, adds another product to the portfolio. This then gives an opportunity for the sales person to make even more sales, upselling to existing customers, reaching new customers,and increasing their personal income. A win for the company, a win for the customer and a win for the sales person.
What Internal and external factors necessitate a change?
The need to make changes to the compensation plan are driven by decisions within the company, and external market factors, as outlined below:
- Market strategy
Each year the company may change strategy, such as to sell differently, shift to target other industries or companies, or even launching new products.
- Salespeople skills development
As the salesforce in an organization evolves the sales people’s abilities and skills are also changing. The personalities may drive the sales culture in one direction but maybe the company wants a shift. This is where a change in the compensation motivation plan can help to alter the mindset and behaviors of the sales people.
- New targets and territories assignment
As the market and the company is dynamic, territory responsibilities and drivers of each sales person may change, requiring fine tuning of the sales compensation scheme.
- Sales Organization
When the structure of a sales team changes. For example a new group of pre-sales people, such as lead-generation call centres, are added to support the existing sales people, this restructuring requires a new sales incentive program and fine-tuning of the compensation plan.
- New type of customers
This is related to the competitive nature and Go-to-market strategy of the firm. If the company is looking to attract fresh clients and penetrate a new industry type then the motivation plan can be amended to motivate sales people to this direction.
One sales company I worked for was paying an extra $1000 for every new customer in the insurance company we were signing, with a new contract and on boarded in our platform.
- Competitors go in and out of business
This corresponds to the market share analysis and objectives of the company. How much market share the company has and where do they want to go? Do they want to see themselves as leaders in 5 years? Such a strategy needs to be mirrored in the motivation scheme and a fine tune will be needed.
- New customer needs
As the market changes, so do the needs of clients, both in product choice and payment arrangements. One of the common arguments today is that customers expect sales people not only sell them their product, but to educate them in those products.
With the use of technology and other means, customers are well educated, and expect the sales person to give them something unique, like an idea or a vision. This different way of selling requires a compensation plan to mirror that sales is becoming more challenging.
- Economic environment
In times of global finacial crises where a company’s main risk is retaining existing customers, the acquisition of new clients would no longer be top priority. Instead, retention of the existing clients is of greater importance in the compensation plan.
Such examples show that the compensation scheme must follow the economic environment of the current era.
- Customer buying habits
Corporate customers are changing the way they buy, where they are investing, and are much better educated than in previous times. Such customers have established procurement departments that are constantly looking to buy the best products in the market for the best price.
How does this affect the compensation plan and why a fine tuning is needed?
When GrabitKwikwants to capture a new industry they’ve never sold to before, their sales people lack knowledge in this industry and have no prior experience.
Breaking into the new market will be hard for the sales team initially, winning over customers who might challenge the sales people during the sales process.
At that stage of the negotiation, the salesperson is on their own, if the process is too tough, they may be tempted to quit in favour of an easier sales position with another company.
One way to overcome this hurdle is to offer a bigger commission for selling to this industry. If for example the sales people are working with a typical 7% commission then selling to this industry can get a multiplier and achieve a 12% sales credit.
Another way to treat that is by applying a linkage which technically means that for every sale the sales person makes to the new industry, more money will be given to her for any sales she does.
The need for a bigger change. Changing the core system
Changing the main framework of the compensation plan system is not recommended at least on a frequent basis.
Now you understand the core system and fine-tuning, let’s look at cases where new startegies require big changes to the compensation plan:
- Changing from commission only, to implement a bonus system instead.
- Changing from rewarding individuals only, to concentrate and pay the group effort.
- Changing from commission for every sale, to pay on profitable sales only.
- The introduction of sales support people highly involved in a sales effort and contribute a lot to make this deal happening that need to get compensated. This new role needs to be incorporated in the sales compensation system.
Making such impacting changes require a delicate and well-planned transition to smoothen negative consequences of such abrupt changes.
Here are some other reasons why changing the core system is necessary and inevitable:
- The company’s phase and maturity. Ten years after a start-up, a mature company and industry leader would not have the same aggressive system as it had in the beginning.
- An abrupt and big change in the market and the economic environment.
- A change in the long term strategy of the company. To make sure the sales is aligned with long term strategy a change needs to happen proactively.
- Natural evolution that has transformed from an individaul sales person to a team of sales consultants requires change in the compensation plan, with new dynamics and the core incentives scheme must reflect this.
Key advice when changing the system
Even in situations that small changes take place, or when bigger changes are needed there are steps to follow after the implementation:
- Communicate to the sales people clearly the change and the reason behind.
- Make sure that all operational and administrative process is updated as well as the compensation plan policy.
- Make sure that all new changes can be calculated by the appropriate department so that payment can be done smoothly.
- Take feedback from the sales force in regards to the new changes.
Key steps to decide what to change in the system
One question that remains unanswered is this:
What if the compensation plan is not working, and is shown to be inadequate, bringing poor results?
If, for example, sales people consistently underperform targets, there is a need for change. However, before you follow GettumKwikCompany and lose your staff because of changing the compensation plan too often, you need to consider a carefully monitored assessment period.
And you certainly don’t have to wait for a change in the market to change the system.
Changing the system requires two basic things:
- A qualitative and quantitative assessment to confirm that the system needs change. If the system works fine and results are there, why change the system? (If it ain’t broke, don’t fix it).
- Which part of the system needs to be adopted to the new situation?
Once we realize that for any reason (internal or external) a sales compensation plan needs revision, one needs to establish which part requires change.
As the system comes with many different features it is important to change only those parts that are absolutely necessary. For example:
- If the market starts paying more for sales roles that require a new skill set then the company needs to adjust accordingly the TTCC (total target cash compensation) with no need possibly to adjust anything else.
- If there is a new product launched in the company that needs to get a certain market share during the next 3 years then one can adjust the measures that incentivizes (payment for reaching certain targets and objectives) or introduce a linkage between selling the new product and the other products of the company.
- A company that started 10 years ago was rewarding sales people based on a commission plan system. Now the company has acquired other firms and has a greater portfolio of products.
- References between sales people and team work is very important. In that case the company can introduce a team bonus to drive behaviors accordingly.
A compensation plan is a dynamic and live tool for the sales management team. Although it requires a constant assessment and change when required, one needs to be careful when and how changes apply to ensure a happy sales team and healthy company profits.