Align your compensation program with your corporate strategies—how many times have we heard that? Now Laura Roach CCP offers 10 practical steps for accomplishing this key mission.
Roach, who is General Manager at Varicent Software Incorporated, a provider of incentive compensation and sales performance management (SPM) solutions, offered her suggestions in a recent Varicent white paper.
Surveying the Existing Landscape
Roach’s first two steps involve evaluating current practices to establish a baseline understanding of how sales compensation strategies are working.
Step 1. Clarify Business/Strategic Objectives
Every year companies go through planning exercises to define overarching corporate goals which then trickle down to the associated departmental objectives. To have an effective variable compensation plan, these objectives should be aligned closely with the desired behavior of the sales force.
2. Assess Current Plans
At regular intervals, all variable pay plans should be reviewed, assessed and monitored for effectiveness. A more focused and strategic assessment usually should be conducted when company business objectives are reset for a new year, or sometimes, after a new organizational change. For example, the acquisition or merger of companies. This type of assessment should evaluate how well the existing plans are performing or would perform against the newly defined business objectives.
Define Plan Objectives and Eligibility
Roach’s steps 3, 4, and 5 develop objectives and define eligibility.
3. Define Objectives of Sales Plan
Sales plan objectives should always align strategically with the high level corporate goals. Too often this step is overlooked and results in great compensation plans with poor company performance or great company performance with a disenchanted sales team because the objectives of the plan and the company were misaligned, Roach says.
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4. Assess Eligibility of Jobs
Not all employees and positions should be on a sales compensation plan. It is important for companies to review, at regular intervals, their sales staffing needs, and to take into consideration the objectives of a sale plan. By evaluating human resource needs with a sales plan in mind, companies can make strategic decisions about what roles are required and which will be eligible for variable pay and at what levels.
5. Establish Compensation Levels
Typically, Human Resources and Sales Operations collaborate to establish compensation levels. After roles have been defined, compensation levels can be determined based on a company’s compensation philosophy, associated market pay benchmarking, and internal equity.
The Mechanics of the Plan
Roach’s steps 6, 7, and 8 comprise “the math” behind the plan. These steps are very rule driven and formulaic and the metrics are very tangible.
6. Select Performance Measures and Weightings
“Keep it Simple” may be an overused axiom, but it is critical for an effective compensation plan, Roach says. In sales compensation terms, this means minimizing the number of measures. A rule of thumb is no more than five measures with three measures as an ideal. The more measures, the more likely you dilute the importance of any one element, which ultimately results in an ineffective plan.
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7. Develop the formula(s)
One or many elements can be considered when defining the associated formulas, roach says. However, in developing the formula and adding sophistication, it is still critical that companies keep the plan simple and transparent. Below are some examples of various plan metrics for 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
- Modifiers
- Linkage
- Hurdlers
- Matrix
- Accelerators
- Caps
In tomorrow’s Advisor, Roach’s steps 8 to 10, plus an introduction to a guide especially for smaller or even one-person HR departments.