All posts by Susan Malanowski

How to Document Your Sales Compensation Plan


We are often involved in reviewing a client’s sales compensation plan document for clarity and completeness. What we find when we read this document is that it appears to have been “written by attorneys for attorneys.” If your plan document is the primary means by which you communicate the sales compensation to your sales people, read it from their point of view. Does it engage and inspire them? Does it make clear how they can earn significant income for doing things that truly benefit the company? Do they see themselves in alignment with the company’s goals?

Many times, the definitions and terms of conditions appear at the beginning of the document, and not until you get considerably into the Appendices or Attachments do you see how the plan works. It is important that the plan document doesn’t indirectly or inappropriately communicate the message that “We really don’t want to pay you, but if you do these things, I guess we’ll have to!”

To optimize understanding and engagement while providing legal protections, there are three guiding principles to consider:

  1. The plan description is primarily a reference document, usually in pdf format. Make it easy to find what the seller needs to know.
  2. Don’t describe every possible situation in the terms and conditions section of the document. Describe the most prevalent and develop a governance process and authorized management for sellers to find out the answer to other issues.
  3. Emphasize the awesome compensation opportunity your company is providing when the seller performs. Move the terms and conditions towards the end of the document, start with the sales strategy, compensation and quota and account assignment practices.

Below are specific guidelines for reordering and reorganizing the content of your company’s sales compensation plan description for clarity and meaning.

Cover Page

Create an inviting cover page and consider creating a tagline for your sales compensation program that ties to your strategy, e.g., “Growing. Winning. Collaborating”.

Table of Contents

Make the content a seller needs to reference easy to find with the beginning of each section and subsections identified with a page number. As a pdf, create links from the table of contents.

Introduction

Describe the purpose of the document and include any legal references or terms, such as names that go in quotations, like the “Plan” or “Participant”. For example, “the purpose of this Sales Compensation Plan (“SCP”) is to communicate the philosophy, description and the most prevalent terms and conditions by which sales incentive compensation is calculated and paid at BestCompany, Inc. (“Company”).”

Plan Purpose, Effective Date and Eligibility

The reason for sales compensation is to achieve the sales strategy. The compensation plan is also meant to drive certain sales behaviors and the fulfillment of key responsibilities. The purpose of the plan should integrate the annual sales strategy and desired sales behaviors/responsibilities of the role. For example, “the purpose of the plan is to reward sellers for increasing the number of products in existing accounts, achieving or exceeding product xyz’s quota and ensuring accounts renew their contracts.”

Components of the Sales Compensation Plan

This section describes each of the components of total cash compensation, including any salary, commission, bonus and draws. Begin the section with a sentence describing the essence of the compensation, e.g., “your total compensation is designed to deliver more compensation with the achievement of higher levels of quota and from the sale of product xyz”. Equity awards are usually described in a separate document but can also be included as appropriate. Recognition programs or SPIFFS can also be described in this section.

Illustrative Example of Commission and Bonus Calculations

Examples are provided in this section to show how formulas, such as commission accelerators, work. It will require developing a sample of a realistic attainment level of quota or related targets and showing how it is calculated and paid. Then add in the annual base salary to reinforce their total potential earnings at year end. Illustrative tables and graphs help reinforce understanding. Some organizations put these illustrations at the end of the document in an appendix if there is a need to show many examples or if the plan has been in place for many years.

Territory, Account and Quota Assignments

The sales compensation plan components are not believable to sellers until they understand how accounts are assigned, what that means for quota and under what circumstances they might be reset. The tone of this section should communicate both fairness and performance in describing how quotas are assigned.

Sales Compensation Payout Timing or When Sales Incentives are Earned
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Market Competitive Executive Compensation


Companies conduct competitive compensation assessments in order to maintain market competitive pay ranges. Due to the variation in the compensation elements, surveys and internal audience, executive compensation assessments are conducted separately from the other jobs. Many organizations utilize the services of compensation consultants to ensure the independence that an outside consultant can bring in working with executives concerning their own compensation.

Sources of data for an executive compensation assessment can consist of:

  • Public company peer group data: data from public company documents (DEF 14A or 10-K) filed with the SEC provide executive philosophy, data by compensation component and the design of the short and long-term incentive programs for the top five named executive officers
  • Nonprofit company peer group data: provided W-2 cash compensation, deferred compensation, other compensation and non-taxable benefits for officers and other highly compensated employees
  • Published salary surveys by industry or general industry or compensation databases, with executive data broken down by size of company, such as revenue, assets or number of full-time employees. Some sources, such as Towers Watson or Mercer provide regression information to “predict” compensation for various company scope levels.

When there is more than one source of data for an executive role, it increases data reliability even though the data may be different. For example, a peer group and one or two survey sources is ideal. Unfortunately, many surveys that contain both executive and non-executive jobs do not report the long-term incentive data. Where there is long-term data, the data tends to be dominated by companies with larger scopes at $500M or above.

So, what’s a mid-size, for-profit, company supposed to do? As executive compensation consultants, we can either suggest a practice or we use a methodology to best replicate the value of long-term data granted to executives in order to arrive at target total direct compensation or prevalence data on executive benefits and perks.

How important is it to have a data source that surveyed just private companies and covers all elements of executive compensation? Although a private company may compete with public or larger companies for talent, solid private company data will provide important insights that can significantly impact a company’s design of its incentives and benefits/perks. Then the differences and similarities in the information can be weighed to help solidify the executive compensation philosophy and target total compensation.

You have an opportunity to have this hard to come by data: private company, mid-market compensation and benefit information covering executive base salaries, annual bonuses, long-term incentives, and key executive benefits. We have partnered with D.G. McDermott and Vivient Consulting to conduct a survey that will provide participants with current information and insights on executive compensation. The cost for the survey report is $1,500 (US) – a smart investment considering the strategic value of the customized data and insights you will receive.

When you participate and purchase the survey you will receive:

  • Easy to read, dashboard data that highlights pertinent results and top-line analysis
  • A comparison of YOUR Company’s data to other respondents by position, then by geographic area, revenue size, industry and ownership type
  • Detailed total compensation information on each of the positions that you matched to one of the 14 positions included in the survey

Learn More and Register for Survey here