When creating a sales compensation plan, first consider its purpose. For instance, is it to build out the logic for paying variable compensation to a class of employees in your company? Or is it simply to ensure that employees are compensated fairly?
The answer is often more complex. In short, a great sales compensation program motivates behavior that leads to results most beneficial to the organization. Desired results can vary from company to company, based on their revenue model, budget, and even the seasons. So, before building (or revamping) a program, it is best to consider company-specific needs.
With these priorities in mind, we can build the plans that best reward an individual’s behavior. Obviously, the appropriate plan depends upon the role of sales representative, but they all should have 3 things in common.
1. Sales compensation plans that align with your business model
In all cases, employees should be able to clearly understand the linkage between their day-to-day activities and their commissions. If built correctly, the sales compensation plans ensure that what is best (i.e., more commission money) for the employee is in alignment with what is best for the company. It should never force the person to decide on an action/effort that is best for themselves versus what is best for the company.
2. Calculating and displaying deal-level commission payouts
Likewise, employees should be able to see how much commission was earned by each deal they closed. At the end of the day, employees should know exactly why their commission check was the amount it was. Identifying which deal puts them into a different tier where accelerators kick in, as well as all subsequent deals with accelerated payouts, would be extremely helpful. In addition, they should know exactly what commissions have been earned but not yet paid out, in the event the payouts are triggered by customer payments or some other additional criteria.
3. Providing real-time visibility of commissions earned to-date
We can demonstrate the business value of improved visibility for sales people, both in terms of what happened and what might in the future, in the context of a common analytics visualization shown here:
This shows four levels of analytics capability with increasing business value. These four are:
- Descriptive Analytics – Provides a description of past activities and outcomes. This is useful hindsight, but provides minimal business value.
- Diagnostic Analytics – Enable better visibility into what happened and why. This can start to provide valuable insights, but is not yet actionable.
- Predictive Analytics – Provides insights into what might happen in the future. A common quote is that “predictive analytics turns data into valuable, actionable information.” At this point we’re moving up the business value ladder.
- Prescriptive Analytics – Shows which actions will provide the most business benefit. When a business gets to this point, they are now leveraging information to not only predict but to shape what happens in the future.
Analyzing the visibility of a sales compensation plan
Let’s apply questions from the chart above to a sales compensation plan.
- What happened? – Many sales payout statements let employees know that “you earned x commission during this period” based on summarized information. Very little detail or explanation is provided. Organizations typically operate at this level.
- Why did it happen? – Ideally every employee knows exactly how much commission was earned versus held for each deal. This would include all applicable commission rates, accelerators, SPIFFS, extra kickers, caps, and floors (find more cool sales commission terms here). This level is good “hindsight”, yet is rarely achieved.
- What will happen? – Wouldn’t it be nice if employees could see their current commissions earned to-date, along with a future projection based on their sales pipeline? For example, including their latest pipeline along with win probabilities, etc., with potential payouts for each of these deals can enable this. At this point they are able to see up-to-date information that they can use to decide where their time is best spent for the remainder of the current pay period and beyond. These are actionable insights and can directly affect positive behavior.
- How can we make it happen? – What if an employee could not only see their potential commissions from the current pipeline, but could also run various what-ifs to see the impact of one outcome versus another in terms of commissions earned? This is the Holy Grail that allows the reps to make fully informed decisions and take actions that will be most beneficial to them, and by extension, to the company.
Putting it all together
Now, we can use the added context to determine why/where organizations are falling short from a sales compensation perspective.
Most organizations struggle with just the first level. It can often be a quarterly or even monthly burden to perform the calculations and provide statements to everyone on a compensation plan. As a result, the thought of providing a much more insightful compensation statement, or better yet, real time visibility into potential payouts within the current pay period, is beyond their consideration.
Once an organization achieves the top two levels of insight and foresight, they are best equipped to make day-to-day decisions that maximize their return. This will lead to:
- Higher sales rep attainment/business performance
- Higher rep satisfaction, which will reduce turnover rates
- Greater sales revenue
- Higher organizational efficiencies, leading to higher profits
Where does your company operate within this spectrum? Want to see an example of this in action? Register for our webinar today.