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5 Questions You Must Answer Before Creating An Effective Sales Compensation Program

by Doug Davidoff | Jul 16, 2020 3:00:00 PM

effective-sales-compensation-programA couple of weeks ago I wrote a post on the most common and costly mistake made with sales compensation. In short, the mistake is the belief that compensation motivates or incentives behaviors. Needless to say, the post got some very, um, interesting feedback.

While I firmly believe (and have the data and research to back this belief up) that compensation is a very poor motivator, this does not mean that I don’t believe that sales compensation is not an important component of your structure.

In my previous post, I shared details on the mistakes made with sales compensation. In this post I’m going to share how to create a strong foundation to an effective sales compensation program.

When designing, or advising, on sales compensation, the first thing I do is ask these five questions, the answers to which should drive the details of the decision you make in developing your compensation approach.

What’s the real problem we’re trying to solve?

The number one mistake made with sales compensation is using the comp system as a replacement for either effective management or process design. To state it simply, a good compensation system doesn’t make up for laziness.

It’s for this reason that you should start by clearly defining the objective of the comp plan. If you’re considering making a change to an existing program, clearly articulate the problem you’ve identified. Then stress test your answer to ensure that compensation is the best way to solve it. (If you do this right, it will reduce 80-90% of the impulse to change compensation.)

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Here are two additional tips to help in answering this question:

  • Realize that compensation is not a particularly effective or efficient means of problem-solving. The most common answers should be about the misalignment of the existing compensation program to key inflection points related to your structure or process.
  • You can’t solve multiple problems with compensation, so if you find your answer includes commas and “ands,” it’s likely that you actually need to adjust your management systems, your structure, or your process.

What is your compensation philosophy?

Establishing a strong culture is important for any business, and your approach to compensation is one of the strongest signals as to whether you put your money where your mouth is.

Here are some things to think about when establishing your compensation philosophy:

  • Do you view compensation as a reward or a punishment?
  • Which is more important for you - protecting your downside (the original reason for commission schemes) or to share the upside? How much more important?
  • What level of variance are you comfortable with?
  • What role do you feel compensation should play for the business? For employees overall? For salespeople?
  • How comfortable do you want people to be?
  • How quickly do you want to reward key outcomes/activities? 

If you’re going to be hiring more than 2-3 people in sales, I encourage you to create a sales compensation philosophy statement and share that as you do with other deliverables associated with establishing your culture.

How would you prioritize rewarding superior performance vs. penalizing poor performance?

I’ll never forget one of my first meetings when I began working at Merrill Lynch. I was sitting with a senior financial advisor who also served as a pseudo-assistant sales manager. 

He leaned over his desk and quietly said, “The most important thing for you to understand about working here is that we utilize poor performers to subsidize top performers. If you’re in the upper quintile, you’re good. You don’t want to not be in the upper quintile.”

He was referring to more than just compensation with that statement, and that statement was clearly reflected in their compensation program. Average and below-average performers were underpaid, so they could overpay top performers. 

What is the one (and only one) behavior you most want to influence?

  • Pursue larger opportunities
  • Increase average deal size
  • Improve win quality (and thus decrease churn)
  • Increase number of wins

These are just some of the objectives I often hear when I’m asked to advise on a company’s sales comp plan. To be clear, they’re all worthy objectives.

While the conversation typically focuses on objectives or goals, the ability to achieve the goals is actually focused on behaviors. Specifically, adjustments to sales behavior.

There are two problems with this approach:

  • The true cause of the gap is rarely compensation- or motivation-related. Far more often there’s a problem with the structure or the management of the underlying customer acquisition processes. If you remember nothing else, please remember: NEVER USE COMPENSATION TO FIX A SYSTEM OR MANAGEMENT PROBLEM.
  • To the extent that compensation does create a greater focus on an outcome, you can’t influence more than one behavior at a time.

How are you keeping score?

As I shared in my previous post, I have not always been an advocate of this philosophy and approach. I’ve seen compensation systems motivate. I thought this was especially true of salespeople who, I believed, are more competitive than most people. I realized that I had, in fact, seen the effect, but I had misunderstood its cause.

Compensation appears to yield significant influence because it is a very simple and clear means of keeping score. Unfortunately, it’s often the only clear means of keeping score.

Money wasn’t motivating people; the desire to win was. As a friend of mine is fond of saying, “If you want to know the importance keeping score has on behavior, just watch a group of 12-year olds before and after someone says, ‘Hey everybody, let’s keep score.’” On a side note, this is the reason that sales commissions have such a bad reputation. 

Your people are keeping score; the question you must answer is what and where is the scoreboard you want them using. Then you want to ensure that your comp plan aligns with, and balances, your scoreboard.

The Ultimate Story on Sales Compensation

Compensation is a gigantic, unwieldy, and expensive stick. Ralph Waldo Emerson said, “What you are speaks so loudly I can’t hear what you say.” There are few things that speak as loudly about what you are (as a company). 

For this reason, your compensation program is very important.

Compensation, however, has very little nuance (and when you try to add nuance into the plan, it creates so much conflict and complexity you’d likely have been better off doing nothing). You have very little control over the unexpected consequences that your compensation program will unleash. It’s also a very expensive tactic.

It’s for this reason you should work to keep your compensation program as simple and straightforward as possible and take the time and money you save and put it towards creating a structure designed for success.