The 5 principles of great compensation plan design

There are many different ways to create a compensation plan for your sales team. By creating a structured and well-thought-out compensation program, you will remain competitive within your industry and successfully attract and retain top talent. Without it, you will slowly lose the talent game to your competitors.

Compensation programs also allow for consistent and predictable budgeting and planning and of course, assist with reaching your revenue goals. But how do you create the perfect balance of structure, generosity, motivation, transparency and fiscal responsibility into your comp plans? Here are our top five principles that make a great comp plan design:

1. Simplicity

In the quest for a great sales compensation plan, most plans end up being way too complex with both sales managers and sales teams unable to make heads or tails of what it means for them.

Harvard Business Review states ‘if too many variables are included, salespeople may become confused about which behaviours will lead to the largest commission check. They might throw the plan aside and just go sell the way they know best. The opportunity to drive the desired behaviour through the compensation plan is lost. Keep the plan simple. It should be extraordinarily clear which outcomes you are rewarding.’

Selecting the right metrics

One of the most common causes of sales compensation complexity is incorrect performance metrics. This includes too many metrics, the wrong metrics, and immeasurable metrics.

• Too many metrics. Sales compensation plans should have no more than two to three metrics for each person. Additional metrics only dilute and confuse the performance message and sales people can become confused about where the priority lies.
• Wrong metrics. Sales management should select performance metrics that directly align with the overarching sales goal. Misaligning your metrics will result in teams pulling in the wrong direction and a feeling of dislocation in the commercial team. It’s therefore important you’re clear on what behaviour your looking to reward and use the appropriate measures to suit.
• Immeasurable metrics. Make sure you have selected metrics that are clearly defined and easily measured. While it sounds obvious, metrics are often made without ensuring that support resources can calculate the metric, leaving everyone with uncertainty if goals were actually achieved.

Improve role design

A good Sales compensation plan design relies on well-designed sales roles. This is because your compensation programs are designed to measure the objectives you have given each person in your team. Well-designed roles have clarity and focus, but roles that are improperly designed have vague or competing objectives. Therefore if your plan is based on the measurement of competing objectives, you will inevitably produce something complex.

2. Clear causality

Having a sales compensation program that lays out a very clear causality between action and reward is a very simple way to motivate and create a decisive action plan with your sales team.‍

The Harvard Business Review says to make this causality clear with “if then” rewards. This type of reward is important as it makes clear the type of behaviour that the individual salesperson has control over to succeed.

“The effectiveness of motivators varies with the task. In particular, they have discovered that contingent rewards eg: “if then” rewards, as in “If you do this, then you get that” — work well with routine tasks. The promise of a reward, especially cash, excites our attention, and we focus narrowly on getting the job done.”

3. Motivate the cohort (low-mid-high performers)

In any sales team, you will identify 3 groups or cohorts, known as laggards, core performers and stars (AKA rainmakers). According to Harvard Business Review, sales teams will be made up of mostly core performers with a smaller percentage of laggards and stars. The job of your compensation plan is to motivate these three groups and it has been proven that the use of multi-tier accelerators are preferable for technology companies because they do a better job of managing overall compensation spend and motivate and sustain high productivity of your core performers.

‍”Core performers striving to achieve triple-tier targets significantly outsold core performers given only two tiers”.

This is because core performers will put in more effort if given additional tiers and more opportunities to gain compensation. If a simple competition structure is in place, core performers know that the stars will most likely win so will not put in the extra effort required.

However, multi-tier targets do not motivate stars and laggards in the same way.

The stars are unaffected by the level of tiers to the top because they view the top tier as assured so they want to know what comes after the top tier. To therefore motivate your stars, you need to ensure you do not cap commissions and allow them to keep achieving and earning. You can also introduce what is called an over-achievement commission for those that reach and exceed all tiers of the compensation plan.‍

Laggards on the other hand never expect to meet the top tier so are happy to just meet whatever minimum has been set. To motivate this group you will need to use other compensation methods such as pace-setting bonuses and social pressure. Social pressure can come in the form of natural social pressure (seeing others perform) and program-induced social pressure. Approach the latter with caution, as purposely putting too much pressure on your laggards can cause them to become demotivated and demoralised. ‘If done well, it can increase a laggards sense of responsibility to the team and motivate stars to help laggards out.’ (HBR)

4. Transparent and easy to administer

According to Forbes, a sales commission plan needs to be transparent enough that everyone can access and understand it at all times. “If no one knows how much they’re earning or how their performance ties into those earnings, you can’t expect them to be motivated enough to reach their targets.”

Transparency of payments

Transparency in a plan usually results in better causality. When there is a clear “whats in it for me”, then salespeople generally are more motivated to create a more-targeted plan of action to progress pipeline and close deals. If the outcome of a plan is vague, then the actions of your team will follow suit.‍

Payouts

If your sales team doesn’t know how much they are likely to earn in commissions or why there are clawbacks or other adjustments, then besides being frustrated, there will be a sense of mistrust in the business. The ability to easily check commission figures, adjustments and payout dates will ensure a happy and informed team.‍

Easy to administer

Having a transparent and simple plan will make it easy for your Finance Department to run payroll each month. The main benefits here are a much more error-free process and your salespeople will not need to ask so many questions, giving everyone involved back some time in their day and making it a frustration-free process.‍

Timely

A transparent plan that is easy to administer, is a plan where payments can be made accurately and on time! This will further motivate salespeople and promote a culture of trust between them and the business. Anything less than this is highly deleterious to the sales culture leading to demotivated sales staff.‍

5. Default to short term

There are many studies on how our behaviour is influenced by rewards. Our behaviour is reinforced by either positive consequences (like a commission) or negative consequences (not receiving a commission). And when a reward immediately follows a behaviour, the greater the reinforcement of that behaviour.

For some SaaS companies, a sales cycle can take upwards of 9+ months to close. When your sales cycles take this long, you may need to reward staff each quarter — however this can be less effective and staff can lose motivation on the way. Consider splitting up the metrics, in this case rewarding paid pilots on a monthly reward and deal revenue quarterly to keep motivation high and reinforce the sales behaviours that will lead to success.

Variable reward = 70% Paid Pilots + 30% Revenue deals closed

Example of a longer sales cycle, with the reward aligned to short term targets that lead to success‍

By keeping these five principles in mind when designing your compensation plan, you will ensure your plan is easy to understand and administer for every member of your team and has a primary focus that is aligned with your company goals. Get this right and you are well on your way to comp plan success.
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If you’re looking for some advice on creating a best-practice sales plan, get in touch with one of our comp. plan experts, or organise a demo of the motiveOS app today.