comp design principles (general) laura roach
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General principles for sales compensation designTRANSCRIPT
Compensation Design Principles
Laura Roach, CCP
512-415-9972
Ongoing Sales Performance Management
Design, Model, and Cost Plan
Communicate and
Implement Plan
Calculate, Administer &
Report
Analyze, Monitor, and
Process
Compensation Design Principles Assessment
• How effective is the current plan?• What evidence is there to support plan changes or modifications?
Design and testing
• What changes could be made to plan mechanics?• Will such changes redirect sales behavior?• Support sales financial data?• Improve results?
Implementation
• Impact and perception from Sales force• Maximum motivation• Transparency to results
Monitoring
• What actions are taken to confirm sales received and understand plans
Common Design Flaws Executing Plans out of sequence
• Modifying incentive formula without modeling impact• Understanding new business objectives and alignment to new metrics
Limiting Design Work to single function
• Leverage multi-function team for best sales design (Finance, HR, Sales, Sales Operations, Marketing, IT)
Misunderstanding how long the design process will take
• Too Little / Too Much
Design Errors
• Salary/incentive ration inappropriate for particular sales role (Leverage)• Performance Measures that can not be influenced or accurately tracked/credited• Sales Quotas (goals) that do not reflect sales potential / territory
Ineffective Implementation and monitoring
• No formal process for communicating plan change• No defined / assigned change accountabilities• Lack of clear leadership message about change• No predefined measures of plan success• No set time period for assessing success• No reports or analytics to assess/monitor performance
Compensation Design Principles
Objectives – Confirm strategic foundation of program Labor Market Comparison Competitive positioning Pay Mix Ratio Factors (Base/Variable) Performance Measures
◦ Incentive Metrics/Measures
• Performance Measure Factors• Job: Reflect accountabilities and influence (Line of Sight)• Business Drivers: Measures should be consistent with financial
measures of success in business plan• Focus: Meaningful payout opportunities for each measure. No
more than 3 measures.• System Capabilities: If it can not be tracked does it belong in a
plan?• Types: Financial, Non-Financial
Plan Design Elements
Financial Measures◦ Sales Revenue: overall, by segment or channel, for specific products◦ Growth: overall, by customer, account, channel, segment◦ Absolute Volume: number of units or transactions◦ Gross Profit: percent, dollars
• Non-Financial Measures• Qualitative: Market share or share of account “taking business”• Activity measures such as number of calls• MBO’s / KSO’s: usually point based or relies on management discretion.
• As a rule of thumb these create an averaging of pay for all participants and thus fails to differentiate top performers
Commissionable dollars taken away from financial success measures reduce the impact of the plan
As a rule of thumb, No more than 3 Measures to avoid plan dilution
Plan Design Elements
Performance Standards◦ Threshold, Target, Excellence◦ Payout Formulas
Sales Crediting◦ Single◦ Multiple◦ Splits◦ Partial
Plan Types◦ Commission or bonus plans◦ Single or flat rate commission◦ Individual commission rate (payout rate)◦ Tiered (or “ramped”) commission structure◦ Adjusted (or “variable”) commission rate◦ Bonus: single/fixed, interpolated, step rate
• Timing Considerations• Plan performance period• Cumulative or Discrete measurements• Payout Frequency
• Modifiers• Linkage• Hurdlers• Matrix• Accelerators• Caps
Type Examples
Flat CommissionsRate x Volume
• 3% x ($x)• $100 / Unit
Individual Commission Rate(Individual Incentive Target divided by Individual Quota)
Rep 1: $100,000 IT / $1,000,000 quota = 10% rate applied to sales volume
Rep 2: $100,000 IT / $1,500,000 quota = 6.7% rate applied to sales volume
Ramped: Rate adjusted based on achievement levels
0-100% of quota 5% rate
100% of quota 7.5% rate
Adjusted: Rate varies based on characteristics other than volume or quota
Product A 5% Base Rate
Products B& C 7.5% rate (base rate * 1.5)
Types of Commissions
Questions to Consider…..
Is everyone on the same plan regardless of role? Do people in similar jobs have the same amount of target pay or different
amounts? Of the target compensation (OTE), how much is at risk? Is it aligned with sales
role? How many components or measures are uses? What percentage of sales plan is on sales volume? Is this quota or absolute
dollars? Other components, is it quota based? Is there a min or max achievement? What type of plan is used to calculate payout? (commission/bonus) What type of components? Are they linked? How frequently is the plan measured and paid?
Step 1: Clarify Business/Strategi
c Objectives
Step 2: Assess Current Plans
Step 3: Define Objectives of
Sales Plan
Step 4: Assess Eligibility of Jobs
Step 5: Establish Compensation
Levels
Step 6: Select Performance Measures and
Weightings
Step 7: Develop the formula
Step 8: Determine Performance Measures and Payout Periods
Step 9: Complete Cost Analysis and
Determine Earnings Impact
Step 10: Finalize and Launch Plan
9
A 10 Step Approach
Goal – Complete by xxx and Paying xxxxx