Sales

A helpful guide for changing sales comp. plans

Alexander Green
April 12, 2021

"If you do not change direction, you might end up where you are heading." Lao Tzu

This ancient Chinese philosophical quote still rings true for Sales teams today. An underperforming sales compensation plan is every Sales Manager's worst nightmare. So how do you know when you should review your compensation plan to ensure you don't end up somewhere you didn't intend to be?

Get the Fundamentals Right

Before you can accurately assess if you need to revamp an old sales comp plan or completely start from scratch, you first need to ensure you have the fundamentals in place with your sales team.

Base / Variable Structure

If you are not already using the Base / Variable structure with your sales team, this is important to implement and introduce to your sales staff right away. Ensure they understand their OTE (On-target Earnings), which includes their variable at-risk figure. We go through this in much more depth in a recent blog: Why founders should care about OTE. Implementing this structure with your team makes it easier to understand exactly what they will receive as a base. Although the components to achieve their total OTE may vary, they will have a level of certainty about what they will earn as a minimum.

Quotas/Targets

Next, ensure that you've set achievable quotas for your sales team. A sales quota or target is simply defined as the number of products or services you need to sell to make the desired profit in a specific amount of time. Reliable sales targets help you track your sales progress within each period, and adjust your sales tactics to meet the revenue goals that have been set for your team. You can read more about setting effective sales targets here.

What is important to note is that setting an unrealistic quota can be detrimental to an individual's performance and the overall performance of the team. Staff with an unattainable quota will quickly become demotivated and look to move on to another company where they have a chance of making quota and their OTE.

📢 Never rush to change quota, it can have a detrimental impact on your teams motivation and performance. Ensure you have considered all the factors and consequences before you make a change.

When to change?

Typically, the optimal amount of time to review your sales comp plan and change quotas is once per year. You should carefully consider the consequences if you're looking change quotas more than this.  However, if you have your fundamentals in place but you still feel like your comp plan is not performing as it should be, it may be time to do a full review. There are also certain events that will trigger a plan review or are good opportunities to fully understand the health of your current comp plan. These include:

  • Change in market conditions - A change in market conditions could be anything from a global health pandemic, changes in local laws, to a recession. The things that you commonly experience during a negative downturn are spikes in unemployment, a decrease in sales, and tightened budgets. These factors can make meeting sales targets tough and decrease overall motivation in your team. Although no one likes to decrease quotas, taking this action will ensure your sales team understands that the company is taking market conditions into account and not just blindly following a plan. This will help to ensure your team comes out the other side, still intact and ready to take advantage of the market returning.

    There are also positive changes in market conditions that may require a change in your comp plan. There could be a change to an existing law or a new development in technology that opens up a new opportunity that previously didn't exist. Having the ability to pivot and change your team's focus and quota could mean the difference between taking advantage of a new opportunity or being left behind in your competitor's dust.
  • Financial Year End - Reviewing your comp plan at the end of each financial year will help you to set your team up for the year ahead. Consider this an essential task to allow you to refocus on your goals and priorities, assess whether your strategies are working, adapt to any changes in your environment and take advantage of any new market opportunities.
  • Product changes - A major product development or new product launch can trigger a shift in strategy for your sales compensation plan. This change in product could mean an increase in the addressable market, a new revenue stream/increased subscription rates, or an increase in your close rate. This is one situation when you could comfortably consider increasing a quota to suit the new shift in focus.
  • New Head of Sales - Most new Heads of Sales or Sales Managers will come in with fresh eyes and want to review and assess the performance of the Sales organisation. Whilst it is not advisable to come in and immediately change everything, every leader will have their own preferred way of doing things and bring with them their own experience and knowledge. This is an ideal time to leverage a fresh perspective and either revamp or fine-tune the compensation plan.
  • Under performance - If you are using a legacy plan and seeing a consistent trend of under performance, don't wait for the end of the financial year or some other trigger to adjust your plan otherwise the damage compounds every month. Alternatively, if you have rolled out a new plan and it is not working, don't drag your feet in rolling it back or changing it completely as you risk damaging your credibility and demotivating your team.

    If you are seeing a trend of over-performance, don't rush to change your plan and increase quotas, as this can also be demotivating for your sales reps and sure fire way to lose your sales reps. If possible, wait for the usual end trigger point (end of the year or end of the Financial year) before you make a change. Then, still be careful not to ratchet quotas to something unattainable (more on ratcheting below).

What to change

Quota: When making changes to your comp plan you should review your Sales quotas. They should be based upon previous performance so if your data shows consistent overachievement or consistent underachievement you can adjust your quota to balance this. Approximately 70%+ of your sales team should be achieving quota, yet 67% do not achieve this. This is the industry standard but can vary slightly depending on the vertical you sell in.

Components: The components you choose to compensate for should be based upon your organisational objectives. If these change then so should your components. We discuss components further here but some examples of components would be targets for new business, upselling or recurring business. For example, if your organisational objectives around new business were to change  (eg. profitable growth vs hyper growth at all costs), then you would need to change your sales team's component mix and ensure they are being compensated to put their focus into the right areas.

How to communicate change

Changing a compensation plan can be stressful and challenging for a sales team and no less, the Sales Manager that has to deliver it. More often than not, a new plan may include increased workload for the same commission or increased quotas in a shorter time-frame. Understandably this may not always be well-received news. However, there are some key ways to deliver the news to receive a more favourable response:

  1. Consider the human element of changing a salesperson's targets. Before you discuss the new plan, consider that this is a very serious discussion to have and preparation is key. Go in with all the facts and information and tell the whole sales organisation together at the same time (if possible). This gives everyone the same information and the opportunity to ask questions so that everyone is on the same page. Ensure you are ready for their questions and have practiced explaining both the plan and any anticipated questions or concerns.  Harvard Business Review states that you should however, be explicit that the commission plan design is not a democratic process. 'It is critical that salespeople do not confuse transparency and involvement with an invitation to selfishly design the plan around their own needs.'
  2. Explain in detail, why the business is making these changes. Lindenberger Group states that 'there is often a great deal of mistrust among employees about compensation discussions.' So anticipating that your sales team will want to not only understand the reasons for the change, but how this ties into the wider company goals and how this will benefit them personally.
  3. If changing the plan design, or components, demonstrate before (current sales comp.) and after (new sales comp.) with real data. You should be able to show a demonstrable improvement to their payouts or at the very least a fairness with the old plan to avoid demotivation.
  4. Provide your team with a way to track and measure their new quotas and sales commissions in real-time. Being able to track exactly how close you are to attainment and what you are earning will keep motivation levels high. The motiveOS real-time commission app does exactly this and more!

Other Considerations

Should your Finance Department create the comp plan?

Sales and Finance do not always have an easy relationship, and there is often a tug of war between fiscal responsibility and a generous comp plan that will motivate. Finance has a wealth of expertise when it comes to operational analytics, reporting and compliance and therefore need to have a seat at the table when planning compensation. But it can be a fatal mistake to let them take the wheel and drive as this is often the most common reason for demotivating sales staff or employee attrition.

Think of the Head of Sales as the designer, and the Finance team as the controller - they need predictability and some semblance of control. All else should be down to the Head of Sales (or CEO) who is in the trenches with the sales team. LevelEleven suggests that the Finance department is 'usually well-intentioned, but they don’t have the same understanding of the marketing opportunity that you do.'

Beware of ratcheting quotas

Ratcheting quotas (raising a salesperson’s annual quota if he/she exceeded it the previous year) based upon over-performance should often not be considered unless you get the targets really wrong. Studies have shown that it can lead to demotivation and Harvard Business Review argue that 'setting and adjusting quotas is a very sensitive piece of the sales compensation formula' and 'the practice of “ratcheting” quotas may hurt long-term results.' Constantly raising quotas can make a top-performing rep feel like they are being punished for being good at their job. They want to be rewarded for over-performance so may start to purposely slow down a sale if the opposite is happening.

If you are undecided about restructuring a sales compensation plan or are wanting to develop a completely new plan, motiveOS will help you design a best-practice sales plan based on the latest research and the most successful comp. plans used by the fastest growing tech companies. Get in touch today.

CEO at motiveOS, a realtime commission app that provides accuracy and visibility to the sales, finance and management teams, whilst automating the entire process for our customers. Our vision is to help growing businesses build world-class revenue teams. Previously the Co-Founder and CEO for HANDS HQ, a profitable prop. tech. startup in London. I studied Building and Construction Project Management and led the refurbishment teams of many global head offices in London.