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?
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.
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.
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:
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.
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:
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.