How to get sales compensation right?

Marketing honchos and sales managers often have to grapple with designing, launching and managing effective sales compensation plans. Far too many companies have had their bottomlines hit simply because they failed to get their sales compensation plan right. This article takes a look at the possible problems and how you can fix them based on the views of Mark Stiffler – the founder, president and CEO of “Synygy, Inc.”: – the world’s largest provider of solutions for managing sales compensation.

Mark has won numerous awards for his success in growing Synygy from a concept in 1991 to a global organization with 450+ employees. In a recent interview to “The Sales Performance Journal,”: Mark talked at length about many aspects of designing, launching and managing effective sales compensation plans. Here is a summary of the key points that sales managers need to know.

Speaking from experience Mark has pointed out three major problems that appear most frequently when analyzing sales compensation plans of companies. These three problems are:
*Errors in results:*
This involves failure of an organization to identify and fix upstream data problems, measure the performance of each salesperson, and to accurately process sales commissions. There are organizations out there with sales compensation plans that may be sound, but people don’t trust the results because of errors, says Mark. Consequently, salespeople are not effectively motivated. The problem is large. Mark pointed out that according to Gartner 8 percent of sales commission payments are inaccurate on average.
*Poor understanding of sales compensation plans:*
Synygy has found that a surprising number of sales leaders, sales managers and salespeople simply don’t understand how their sales compensation plans work. It’s not enough just to send salespeople an email that describes their sales compensation plan. You’ve got to make sense of it and communicate its meaning—and the desired behaviors—across the organization, says Mark. Then, you’ve got to reinforce how the plan works through the effective communication of plan results and why people earned what they did.
*Strategic misalignment:*
This means a disconnect between strategic objectives and salespeople’s behavior. This can happen due to a number of reasons. A lot of organizations use an Excel spreadsheet to track sales and calculate commissions. Depending on the organization’s size, that may work just fine. But as a business grows, the quality of a spreadsheet-based program may drop. So, depending on a company’s size, and the complexity of its sales and other factors, aligning what salespeople do with an overall strategy may be a lot harder than people think, Mark says. Take a large organization, for example. Say a plan has always paid on revenues, but all of a sudden senior leadership decides it wants to pay on gross margin. What many sales executives may not realize is that it can take IT six months to a year or more to reconfigure its systems to the new comp plan. It’s trickier than a lot of people think. During that months-long delay, there’s strategic misalignment because salespeople’s behavior will not be aligned with management’s strategy. This can cost an organization lost profits that may be many times the cost of sales commissions.

So how can organizations overcome these three challenges grow profitable sales? The answer is not so easy, Mark points out. For example, there are other challenges as well – problems like a limited ability to model plans, or an inability to adapt to a new plan or plan changes, or a process that inconsistently produces accurate and timely results. And in most cases there’s an overlap among these problems.

Synygy’s experience shows that in many organizations internal plan implementation efforts take up to three years – and still they do not get it right! So, obviously, one way to keep sales profitable is to find an outside organization that lives it and breathes it, whose sole job is to design, launch and manage sales compensation plans. It takes more than just implementation; someone has to monitor the plan, manage it and – most importantly – know how to talk with the sales force about it.

Communication is a big part of the picture. It often comes as a surprise to executives when salespeople don’t clearly understand why they got paid what they got paid. Salespeople want to know that their commission statements are timely and accurate. Big organizations need to create automated processes that are aligned with strategy – and have the expertise, experience, and time to do day-in-day-out management – to make that happen.

So the first thing that organizations must do to address these problems is try to understand the cost of not solving the problem. Sometimes, it may not be a big enough problem to address. So an organization needs to conduct an analysis. Six categories of cost can be associated with these problems. One of the largest is overpayments and errors. This could include overpayments of commissions or the cost of non-compliance with government regulations. It could even include the cost of a publicly-traded company’s stock dropping as a result of a sales compensation plan that isn’t working.

Another large cost is the cost of a poorly motivated sales force. Are salespeople targeting the right customers? Are they discounting haphazardly and unnecessarily? Are they selling the right products and services? And if not, the cost of missed opportunities once calculated can be mind-boggling. The third large cost is the cost of lost selling time: How much time does a sales manager spend resolving disputes instead of growing sales?

The fourth category of cost is associated with high sales turnover. You cannot retain good salespeople if you aren’t paying adequate compensation. Then of course there are administrative costs such as the cost of maintaining the current system: What does it cost you to handle disputes, keep records and respond to inquiries?

Finally, there’s the cost of keeping the current system going from an IT perspective: How much do your inaccuracies cost you? What do you pay your IT people who manage the current system?

Once this part of the exercise is over, the organization next has to review all their current processes for plan management and find out what they want to see change. You must look at everything. The organization must break it all down and identify what needs to change. Once an organization knows what needs to change, it can make those changes itself – or, like many organizations, choose an outside vendor to put requirements together, and design and automate new plan management processes that address the seven problems and cut the six categories of costs.

Although all this sounds simple, in practice organizations face many hurdles when it tries to make a change. First, people resist change, especially those who are simply accustomed to doing things one way – and are now being asked to take another approach. Some people may even lose their jobs in a process such as this where previously manual functions will be automated. This may introduce fear into the situation. And when people are acting emotionally – out of fear – their judgment may be impaired.

However, once an effective sales compensation plan and plan management processes are implemented, and when salespeople, sales managers and leaders really understand the comp plan, salespeople’s behavior will align with strategy. When a salesperson can go to a Web portal where he or she can see payout information, commission reports and special announcements, and where they can wrap their heads around their objectives, these are the salespeople who get engaged and take aim at the right sales targets.

You can almost immediately see certain changes. First, there are fewer promotions, contests and spiffs – because they’re no longer needed. There’ll be fewer exceptions, fewer disputes and a lot fewer disconnects such as commissions rising faster than revenues. Organizations that implement and manage really good sales compensation plans see rising revenues, more time to sell and better retention.

The key issue, thus, is: sales leaders must line up strategic objectives with compensation, and sales managers must know how to reinforce behaviors that help grow profits.