Monthly Archives: June 2012

The Three Phases of Sales Compensation Development


There are many possible pitfalls that can occur if a disciplined approach is not followed when making changes to or developing a new sales compensation program. These pitfalls include incorrect assumptions about the causes of historical performance and the impact of these assumptions on a new program, late or inaccurate sales force paychecks and a lack of understanding by the sales force on how to “win” under the new plan. Many organizations unknowingly skip an assessment of the current plan and move straight to changing the measures, the mechanics or formulas. Another common problem is that companies develop a great new or updated program but then run into issues due to poor systems or limited communications. By following a three phase process of  assessing, designing and implementing plans, a better outcome is assured. Within these phases, you can vary the scope of the process based on your needs and situations. Below is a description of the three phases and each of their steps.

The purpose of ASSESSMENT is to understand the impact of the current compensation plan and to develop the strategy and requirements for the new plan:

  1. Internal: understanding the perceptions of the current program and analyze pay and performance data to determine costs and criteria for Return on Investment going forward
  2. External: completing a competitive compensation assessment of market data
  3. Sales Strategy: articulating the sales strategy
  4. Sales Compensation Requirements: identifying the requirements of a new compensation program based on the internal, external and sales strategy assessment

The purpose of DESIGN is to design the plan, including financial modeling and obtaining approval:

  1. Purpose and Objectives: determining the purpose and objectives of the plan
  2. Sales Roles: identifying and describing the characteristics of each sales job
  3. Total Compensation Opportunity: determining appropriate total compensation below/at/above quota by job and the mix of incentive and base salary
  4. Performance Measures: identifying no more than three performance measures by job
  5. Mechanisms: determining how incentives are paid out – commission and bonus types – the “formulas”
  6. Plan Costing: determining costs of the plan below/at/above quota and adjusting mechanisms and formulas
  7. Terms and Conditions: identifying how sales are credited, shared and commissions treated upon termination/leave of absence
  8. Recognition and SPIFFS: establishing a budget and criteria for regular and annual recognition

In order to IMPLEMENT the program, communications, plan documents and systems help the sales force understand the sales strategy, the new sales compensation plan and the expectations for each job and person:

  1. Overall Communications: developing a communications plan and materials to communicate to managers and employees for understanding of the process, purpose and key elements of the plan
  2. Individual Plans: developing compensation plans and incentive statements by job and person
  3. Systems: implementing a system that ensures accuracy, integrity and credibility of incentive payments and can accommodate territory reorganizations, quota adjustments and plan changes