Designing an incentive plan that gets balance right in terms of cost versus performance can be a difficult task . The challenge being to create a structure that includes sufficient attainable rewards to motivate the team while at the same time creates enough challenge and fail safes that the company doesn’t end up paying over the top for performance.

Get it right and you end up with a highly motivated sales team, high levels of performance and sustainable growth and costs. Get it wrong on the other hand and you end up with a demotivated team, disjointed performance levels and unpredictable growth with high costs.

An analogy might be a high performance vehicle such as a F1 car. This is type of car is finely tuned to deliver maximum levels of performance but if the mechanics get one piece wrong, it may not even start. The point being the difference between getting the vehicle to go at 150 MPH or 15 MPH might be very small.

In the sales world this difficulty is often confounded by the fact that designing commission or bonus structures is something we rarely do, so very few could consider themselves to be expert. Throw in that there seems to be little available advice and guidance in Ireland and you start to appreciate the scale of the task and unfortunately why so many companies get it wrong.

Common Pitfalls in Sales Compensation Design is a post from the blog of Julien Dionne called Compensation Expert. Julien is a seasoned consultant with extensive experience in planning and implementing incentive and compensation management systems.

Prior to posting Julien had attended a webinar featuring guest speaker Donya Rose, Founding Partner of the Cygnal Group, a sales compensation consulting company and in this post he identifies the major pitfalls around designing incentive plans after hearing Donya’s insights. They are:

From the post

Pitfall 1: Sales Credit Wars

Symptom: Time is spent fighting over who is supposed to get credit

Cause: Lack of documentation, rules not formalized

Cost: Lost sales, management distraction, potentially double crediting, morale issues

Solution: Document the policies and credit-sharing criteria

My comment: Another cost which must be considered is the waste of time for the comp team trying to resolve issues and conflicts. In large organizations this can be a huge time burden. However it is generally fairly easy to minimize this situation by having well established rules.

Pitfall 2: Too many Measures

Symptom: Sales people ignore some of the required results and only focus on what makes them earn the biggest commission

Cause: Too many measures…

Cost: Lack of focus, compensation hard relate to actual results

Solution: Only use a few measures.

My Comment: This is a topic I addressed a few times on this blog. Consultants generally agree that there should be no more than 3 independent measures.

Pitfall 3: Commissions Rates only go up

Symptom: Sales people can earn too much money compared to the value they bring

Cause: Commission rates are related to the level of sales even if those sales are attributable to windfalls.

Cost: Comp cost is not in line with sales contribution

Solution: The commission rate should diminish passed a certain performance level

My Comment: A “regressive” commission can protect against an unexpected windfall, but can also avoid an excessive payout caused by a quota set too low.

I often see different rules, formulas and quotas used for orders exceeding a certain mount to avoid a windfall scenario.

Pitfall 4: Extraordinary Performance is Over-Rewarded

Symptom: Dependence on over-achiever sales people

Cause: Over-performance is too attractive to sales people

Cost: Sales people developed entitlement and demanding attitude, more risks

Solution: Use appropriate deceleration in commission rates

My Comment: Deceleration does not necessarily needs to be applied as soon as the initial target is reached. I have often seen cases where the rate increased once the target was reached, and decelerated after another performance level was attained.

Pitfall 5: Unattainable Goals

Symptom: Sales people give-up because goals are too high

Cause: Goal setting issue

Cost: Lack of motivation and engagement, results below expectations

Solution: Set goals appropriately

My Comment: Goal setting should be based on historical data if possible to be “just right”. Making goals too easy to attain can lead to other problems such as a lack of motivation to exceed goals if rate decreases after, or an excessive commission payout.

Pitfall 6: “Phantom Base”

Symptom: Sales People whose salary largely depends on commissions act like they are salaried and under-achieve.

Cause: Compensation plans that pay too much for prior-year sales

Cost: Sub-optimal level of performance, losing account acquisition and penetration skills

Solution: Pay more for new business and less for prior-year sales

Pitfall 7: First Dollar Commission + Base

Symptom: Sales people are too comfortable with below-target earnings

Cause: Sales people are paid a significant base salary and earn commission on sales from first dollar

Cost: Income+Commission too high for actual productivity

Solution: Only pay commission after a threshold level of sales is achieved

My Comment: Other alternatives are possible to fix this situation. The entire compensation mix could be re-evaluated and the base salary could be lowered. It would also be possible to adjust the commission rate before a threshold to minimize the impact of removing commission completely before a certain threshold.

We generally recommend that rates decrease at a very high level of performance, well above goal. And the decrease should continue to hold the rate above the “base rate” (immediately below goal rate).

I agree that this is not always appropriate, but should be considered when:
1. The plans are goal-based and goal setting is “loose” so that some people achieve, for example 200% of the goal. In this case, the high level of achievement could be due to a bad goal.
2. The sales people sell very large deals, which could tend to make performance “lumpy.” Oftentimes these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it’s probably not twice as hard (and it may not be worth twice as much to the company).
3. The company has a history of capped plans. Deceleration is always much preferable to caps.

The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it’s great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing unaffordable windfalls in comp.

- Donya Rose
Managing Principal, The Cygnal Group
www.cygnalgroup.com

And Julien’s response was equally clear and conclusive

Hi Niall, Donya,

Thanks for the great comment and answer. Very good webinar also…

I think Donya captured the principles very well in her answer. I have seen a lot of plans not including caps or restricting the commission potential… And that can work until the company gets burned and have to tweak their plans and add caps mid-year to avoid exceeding their forecasted compensation budget. Obviously this is something sale reps really don’t appreciate!

A company should really think about adjusting their incentives if competitors/market offer bigger rewards for the same level of performance. If for some reason the reward can’t be matched, there should be other perks and benefits available to retain and attract employees.

Julien

So a big thank you to Julien Dionne from compensationexpert.blogspot.com and Donya Rose of the Cygnal Group for their knowledge and I hope their insights and answers can help you to design a commissions or bonus plan to get the very best performance levels from your sales teams.

Posted by Niall

Tags: Building Teams, Manging Teams, Sales Commission, Sales Teams, sales training

This entry was posted on Wednesday, May 21st, 2008 at 12:11 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.