Sales compensation program change considerations

3rd quarter is traditionally the time that sales compensation program changes are finalizing for the approaching year. Three key things that your compensation plan design team should keep in mind while going through the process: 1) stick to your design principals, 2) keep it simple, and 3) know how the plans’ performance will be monitored when the changes take effect.

Certain design principals typically drive a compensation plan design. These principals may include guidelines for:
    • the correct base pay to target incentive pay mix for each sales job
    • distribution of actual sales performance above and below target
    • how much incentive upside top performers should be allowed
Whatever your design principals may be, make sure your changes are compatible with them. If the principals themselves are evolving, insure this is intended rather than an adverse side effect of another change.

Effective compensation plans are easy to understand so that they drive behavior without distracting the sales force. If there are a several ways formulaically to implement a compensation component, opt for the simplest approach; make sure you can justify why if you diverge from simple to something more complex.

How the performance of you compensation plans will be monitored is an important consideration when going through the change process. Most companies use analytical reports to assess the performance of their sales compensation program. Examples of analytics reports that may be used for performance monitoring include:
    • achievement versus target per performance measure (aggregation and distribution) – are any measures being neglected or over emphasized?
    • base and incentive pay versus sales volume (aggregation and distribution) – Is greater sales volume properly being rewarded with additional pay?
    • sales personnel turnover by role and distribution of turnover occurrences versus sales performance – What is the retention rate of sales personnel in each role? Are your top performers leaving at a higher percentage than your lower level performers?

Consideration of compensation plan changes should include an evaluation of the monitoring process. Make sure you have answers for the following. 1) Will the existing analytics reports suffice functionally for post change plan monitoring? 2) Will any additional reports be required? 3) Will existing reports require modification to continue to function properly?

Modification of sales compensation plans can be an enterprise affecting process. Stick to your principals, keep it simple, and know how you’re going to keep an eye on the effects of your changes.

-Michael Stus