My Sales Comp Plan is too Complicated
As a salesperson, sales manager, and head of sales, I have been the recipient, as well as an architect of countless sales compensation plans. And just as people have strong feelings about airlines or wireless providers, most salespeople have strong feelings about their sales compensation plan. Even when you generally get it right, the next year you go through the process again – even if just to tweak a mostly functional plan. Invariably, just like when congress passes or changes laws, there can be unintended consequences when creating or changing sales comp plans – which can be drastic in terms of their impact on a business.
This blog about sales compensation plans is primarily written for and from the perspective of a sales executive or business manager. However, if you are a salesperson reading this, hopefully it will provide some perspective on how comp plans are constructed, along with some insights into what to look for in a sales compensation plan when contemplating a new sales job. While it may not appear at times, most sales compensation plans are not just randomly devised over a few beers. In fact, sometimes sales compensation plans are “over engineered” or there are “too many cooks in the kitchen”, which leads to grossly complicated comp plans that are hard to understand by salespeople and challenging to administer by accounting.
A well-designed sales compensation plan should strive to have these three characteristics:
Sales comp plans should be very straightforward to understand and administer. This means that as a sales person, when I look at my comp plan, I should know exactly how to invest my time and energy. Also, I should be able to easily figure out my monthly/quarterly/annual commissions or bonuses. It should be equally straightforward for sales management and accounting to approve and pay them.
Plans should be devised such that whatever you are incenting your salespeople to do, it aligns with the overall objectives of the business, including what is good for your customers, P&L and owners/shareholders. This can be difficult to achieve in some situations, so there will be debate (lots of it in some cases), and perhaps some compromises required to balance these goals.
A company should not change its fundamental comp plan during a fiscal period, meaning that if comp plans are quarterly or annual, they should not change during that time frame. For most B2B businesses, sales cycles are several months or longer, so unless you are in a highly transactional business, or you have a significant unplanned change in the business, sales comp plans should be treated just like a contract with a customer.
KISS, or “keep it simple stupid” is an old saying, but it still holds true today. Whether it’s overly complicated pricing, convoluted marketing messaging, or any number of ways that companies manage to confuse their stakeholders, it never ceases to amaze me how often organizations over engineer business practices and policies. Then they wonder why business is lagging or why employee morale is low.
Sales people have enough of a challenge every day, making sure they know their products and services, thoroughly researching the market to understand their competitors’ products, managing their target accounts and assigned territories, and developing and executing their sales plans. The last thing they need is an overly complicated sales comp plan, that either is too confusing to understand how they earn commissions or includes contradictory sales incentives.
There are cases where salespeople represent dozens of products or product lines with multiple price points, configurations, and margins for each product or solution, in which case the sales comp plan might be challenging to keep short and simple. Excluding those outliers, in most cases a sales comp plan should fit on 2-3 pages, including polices and guidelines, perhaps with an accompanying spreadsheet to outline some examples, i.e., what happens if you are slightly short of target, at target and over target.
Many years ago, I worked for a training company in the early days of multimedia-based courseware. We were engaged by a large telecommunications company for a six-figure project to develop a course to teach their salespeople how to understand their compensation plan. From the outset and throughout the whole project of designing and developing the course, I couldn’t help but think how insane that project was. If a comp plan is so complicated that a company is required to spend over $100,000 on a training course to explain it – maybe there’s a problem with the compensation plan?
It seems intuitively obvious that sales compensation plans should be aligned with the rest of the company’s objectives, and stakeholder interests. However, I have been surprised to see plans where it seems as if the intent or design of the plan was to achieve the exact opposite. Having said that, there are cases where achieving this balance presents legitimate challenges. For instance, it is generally in the best interest of shareholders that companies attempt to maximize profits, since company valuations are based more on profit and cash flow than top line revenue. Of course, in the past decade or so, many tech companies (Tesla and Amazon for example) certainly challenged this notion in their first few years. Similarly, in some cases, especially for early-stage companies, it might be strategically important to “over pay” in the form of higher sales incentives to help launch a new business, a new product line or service, and/or to grab market share quickly. In those particular cases, a sales comp plan, in the short term, may not be perfectly aligned with typical shareholder interests. Hopefully in these cases, shareholders are aware of and support the short-term tactics as part of a longer-term strategy.
Over the years, I’ve seen a number of misaligned compensation plans because they were not purposefully devised. For instance, a company may believe they need to overcompensate for specific product lines or services if sales are lagging or they’re at a competitive disadvantage.In some cases that comes at the expense of sales for more profitable products - which ultimately hurts both top and bottom-line performance. The intent was to boost sales for a poor performing product, but the unintended consequence was to hurt the overall business performance, which in turn negatively affects shareholders and customers. I’m not saying that designing comp plans is easy, and this particular aspect is probably the most challenging to any company, especially larger companies, because of many competing stakeholders. It is incumbent upon senior management to get input from not only sales and accounting, but marketing, product management and even development and manufacturing, in order to have a 360-degree view of how the sales compensation incentives will impact the overall business. Even though sales comp plans seem like a highly tactical and localized element for sales, the impact of a misaligned comp plan can be significant across the organization.
Most businesses execute annual plans. Sales people also develop annual plans, based on how they intend to achieve or exceed their target income for the year. When a company messes with the comp plan during the year, even with good intentions, it can have a significant impact on productivity and morale, and undermine a company’s goodwill and credibility. Unfortunately, there are times when the business landscape changes dramatically and unexpectedly, and for the good of the company and its sales team, tweaks to the comp plan may be unavoidable. However, that should be a rare exception and not a recurring occurrence. I am not including special “SPIFFS”, such as additional incentives for a new product rollout, or to boost a month or quarter that’s lagging, or some other special incentives to generate a short-term bump in sales. These are fine, but should be used strategically, and still should meet the first two objectives of a good comp plan.
Sales compensation plans can be an incredible tool for a company, because when properly tuned, they support one of the most important weapons for any company, an energized sales force. Conversely, when not designed or implemented well, sales compensation plans can become a huge distraction and undermine the company’s ability to truly leverage this critical part of its arsenal.