Show Me the Money: Designing Sales Comp Plans That Drive Results

The Art of Compensation: Balancing Simplicity, Transparency, and Adaptability

AVOIDING UNINTENDED CONSEQUENCES

Companies with well-structured compensation plans can see 20%+ increases in sales performance. A well-constructed compensation plan isn't just about boosting numbers; it's also about fostering a motivated, aligned, and high-performing sales force that drives the entire organization toward its strategic goals.

In the past month, I've spoken with three companies about building effective B2B compensation plans. Each company faced different challenges.

The first company was maturing and had reached a size where it had to build a new compensation plan because it was hiring its first external senior sales leader. It wanted to make sure that it was choosing the right metrics to allow the latest executive to be successful and align their success with critical company goals. 

At the second company, the plan paid out too many people on each deal, and the amounts paid were misaligned with the company's objectives. Sales expenses were growing faster than the revenue generated by the team, and certain groups were getting extremely outsized pay compared to performance.

The third company had a different issue with its compensation plan. This plan was driving extreme dissatisfaction across all of its different commercial teams. The dissatisfaction was created by a change in the model, where too much of an individual's ability to achieve OTE was out of an individual's control (they were dependent on other team members' success).

THE THREE LAWS OF DESIGNING COMPENSATION PLANS

There are different philosophies around the mechanics of compensation plans (e.g., how much is linked to individual versus group performance, whether base and commission or a base and bonus plan and what percent of compensation should be at risk for a different role).  I'm not going to go into the design of specific plans in this article (e.g., account executives versus customer success versus sales engineer versus channel account manager). Instead, I will focus on the three laws underpinning the designing of all good compensation plans.

LAW #1: ALIGN COMPENSATION WITH BUSINESS GOALS AND STRATEGIES

What are the strategic and financial goals for the company?  Is it increasing market share in an existing market?  Do you have new competitors entering the market, and are you focused on protecting market share at the expense of profitability?  Do you want to shift to higher-margin products to increase profitability? Are you launching a new product line or expanding internationally? Being clear on your objectives will help you set a compensation plan across your teams that will give you the best chance of hitting your goals.

When sales compensation plans are closely tied to specific business goals, they motivate sales representatives. This strategic alignment not only incentivizes the sales team to focus on activities that yield the highest value for the company but also fosters a sense of shared purpose and direction.

Implementing this alignment begins with defining key performance indicators (KPIs) that reflect the company's strategic priorities. For instance, if a company's primary goal is to expand its market share, the compensation plan might offer higher incentives for acquiring new customers or entering new geographical regions. Conversely, if the goal is to enhance customer loyalty, incentives could be structured around customer retention and upselling existing accounts. By aligning compensation with these specific goals, companies can ensure that their sales force is motivated and strategically directed toward the most impactful activities.

The benefits of aligning compensation with business goals extend beyond just meeting sales targets. It creates a culture of accountability and performance within the sales team, where each member understands how their contributions fit into the larger picture. This alignment also facilitates better resource allocation and strategic planning at the management level, as it provides clear metrics to measure success and areas for improvement. Regularly reviewing and adjusting these KPIs in response to changing business dynamics ensures that the compensation plan remains relevant and practical, helping the company sustain long-term business growth and competitiveness.

LAW #2: KEEP IT SIMPLE AND TRANSPARENT

Simplicity and transparency in compensation plans are essential for driving motivation and performance. When sales representatives can easily understand how their efforts translate into earnings, they are more likely to remain engaged and motivated. Complicated compensation structures, on the other hand, can lead to confusion, frustration, and ultimately disengagement. Keeping the plan straightforward ensures that every sales rep knows exactly what is expected of them and how they can achieve their targets, leading to a more focused and productive sales force.

A simple and transparent compensation plan builds trust between the company and its sales team. When sales reps fully understand how their compensation is calculated and what factors influence their earnings, it fosters a sense of fairness and openness. This transparency can also reduce disputes and misunderstandings, allowing the sales team to concentrate on selling rather than second-guessing their compensation. Regular communication about the plan and clear documentation help reinforce this transparency, ensuring all team members are on the same page.​

A simple and transparent compensation plan can significantly enhance the company's ability to attract and retain top talent. High-performing sales professionals are often drawn to organizations where they feel their efforts will be rewarded and understand the pathway to success. By eliminating complexity and ensuring that compensation structures are clear and easy to grasp, companies can create a compelling value proposition for current and prospective employees. This approach boosts morale and productivity and strengthens the company's competitive position in the market.

LAW #3: REVIEW AND ADAPT

Regularly reviewing and adapting compensation plans is essential to maintain their effectiveness and relevance. Business environments are continually evolving, influenced by factors such as market conditions, competitive pressures, and internal changes within the company. Regularly scheduled reviews allow companies to assess the performance of their compensation plans, identify any misalignments with current business goals, and make necessary adjustments. This proactive approach ensures that the compensation plans remain powerful for driving desired sales behaviors and achieving strategic objectives.

One of the key benefits of regular reviews is the ability to respond quickly to market shifts and competitive dynamics. For instance, if a new competitor enters the market or economic conditions change, the company can adjust its compensation plan to motivate the sales force better and protect market share. This flexibility allows companies to stay agile and responsive, ensuring their sales teams always align with the most current business priorities. Additionally, these reviews provide an opportunity to gather feedback from the sales team, helping to identify pain points and areas for improvement that might not be immediately apparent to management.

Adapting compensation plans based on regular reviews can significantly enhance employee satisfaction and retention. Sales representatives are more likely to stay motivated and engaged when they see that their compensation structure is fair, achievable, and reflects the current business environment. By periodically adjusting targets, incentives, and other compensation plan elements, companies can address any issues that might lead to frustration or disengagement among their sales force. This ongoing refinement process helps ensure that the compensation plan continues to drive high performance, align with business goals, and support the company's long-term success.

CONCLUSION

Avoiding unintended consequences in compensation plans requires a thoughtful and dynamic approach. The three companies discussed faced unique challenges, but the common thread was the need for alignment between compensation and strategic goals, simplicity and transparency in plan design, and regular review and adaptation. These principles ensure that compensation plans drive performance, satisfaction, and alignment within the sales force.

Companies can create a motivated and strategically focused sales team by aligning compensation with business goals. Clear KPIs that reflect company priorities help ensure that sales efforts are directed towards the most impactful activities, fostering a sense of shared purpose and direction. Simplicity and transparency in compensation structures enhance motivation and trust, making it easier for sales representatives to understand their earning potential and what is required to achieve their targets. Regular reviews and adaptations of the compensation plan ensure it remains relevant and effective, allowing companies to respond swiftly to market changes and internal dynamics.

Incorporating these principles into compensation plan design boosts sales performance and strengthens the overall organizational culture. A well-designed compensation plan can drive accountability, engagement, and long-term success, positioning the company for sustained growth and competitiveness in a dynamic business environment. Embracing these best practices ensures that compensation plans remain a powerful tool for achieving strategic objectives while fostering a motivated and high-performing sales force.

A VERY PERSONAL AND SAD NOTE TO END THIS POST

I know many of you love reading about my adventures with Ollie and seeing the pictures I put at the end of each article. Ollie has been my best friend and companion for the past six years, and I'm incredibly sad to report that he passed away on May 18th.  We noticed that he had started to slow down and was acting a bit off in early May, and we took him to the vet.  Ollie was diagnosed with Lymphoma, and even though we started cancer treatments right away, he passed 12 days after the initial diagnosis.  He had a highly aggressive form of Lymphoma that just couldn't be stopped with the chemo treatments (it was so fast it even shocked the oncologists working with us).  To say that our hearts are broken doesn't begin to describe the depths of feeling we have at his passing.

Ollie brought incredible amounts of love and joy to my life every single day for six years.  I will continue posting pictures of him that make me smile because so many of you have said they make you smile as well, and I think it's essential that we have joy in our world.