How to Build a World-Class Sales Comp Function

Despite its potential to unlock incremental revenue for every organization, sales compensation is still regarded as a cost center by many.

Business leaders often lack the data to accurately predict and report the impact of sales incentives on revenue, which impedes their ability to make the best decisions when designing the next sales compensation plan.

This guide contains all the tools and frameworks we use to help our customers build sales compensation programs that reliably move their organization towards its goals.

Sales Incentives Are An Opportunity Center

Think of a sales compensation program as the “invisible hand” of the sales organization. It is a powerful means of influencing sales rep behavior to achieve corporate goals.

Incentives guide rep behavior, aligning individual goals to corporate goals by communicating explicitly (or implicitly) where reps should focus their efforts. The main problem for business leaders is that they lack the data to make the best decisions to optimize their programs.

Sales compensation plans are meant to drive performance through measurement, but most sales leaders go through the plan design process without the data, or without enough of the right data, to know how to structure the comp plan to produce the results they want.

To create a fair, equitable, true pay-for- performance plan, you need that data. It provides the corporate context to forecast accurately and create a compensation plan that moves you towards your business objectives.

The Number One Reason Your Comp Plan Underperforms

One of the biggest causes of underperformance in a sales compensation program is the lack of company context in the design of the program.

During the design phase, many teams either cannot or simply fail to consider the uniqueness of their corporate goals, go-to-market strategy, culture, and the composition of the sales team.

Rather than incorporating the organization’s unique context into the program, design teams rely on industry benchmarks — in other words, their competitors’ compensation programs — or adopt elements of past programs they’ve developed, which leads to the derided “Frankenplan.”

This lack of consideration for company context results in organizations failing to achieve the desired Return on Investment from sales compensation and an increased risk of missing annual targets.

Beware the "Frankenplan"

A “Frankenplan” is the result of combining multiple sales compensation plan elements without considering the organization’s unique context, such as the go-to-market strategy, sales team culture, and corporate goals.

Every time a new sales leader joins, they bring with them a playbook with a sales compensation program that historically generated strong results. These plans are typically directionally sound but lack the new company’s context.

As the new leader attempts to impose their playbook, existing leaders in Finance, HR, and Sales attempt to preserve elements of the existing compensation program.

Due to people’s tendency to resist change — combined with a “culture of compromise” — the leaders will land on a bloated program that incorporates the priorities of all parties but fails on all other counts.

The resulting “Frankenplan” has everything and the kitchen sink. That makes it too complicated to properly motivate reps, and too diluted to make a marked impact on performance.

Frankenplans and Perverse Incentives

Incentives are meant to align salespeople’s behavior with business goals but can have the opposite effect if not carefully planned.

Frankenplans are far more likely to create adverse and unpredictable outcomes from your sales compensation plan.

When organizations get it wrong, it’s usually because they either tried to solve for too many things, or didn’t back up their decision-making with data.

When leaders try to solve too many problems using the compensation plan — rather than through coaching or other sales effectiveness drivers — the program quickly becomes a bloated mess.

The more incentives in the plan, the more likely a conflict will occur that produces unintended consequences and sub-optimal sales performance.

"When organizations get it wrong, it's usually because they either tried to solve for too many things, or didn't back up their decision-making with data."

The Key to a Winning Sales Compensation Program: A Unified Sales Compensation Function

Adopting a unified sales compensation program has allowed many organizations to maintain an analytical environment and “source of truth” that drives reliable and predictable improvements in sales performance.

In a business world that is driven by data and insights, a siloed approach increases the odds of creating a sub-optimal sales incentive program.

When organizations commit to a unified approach, their operations teams can quickly run territory and quota refinements and calculate realistic attainment payout scenarios. That enables management to make data-driven decisions about investments in the sales org, in real time.

These organizations are no longer confined to the time constraints of a siloed approach or the restrictions of their sales compensation software. When organizations have the data to back their program updates, they can prioritize sales performance optimization over risk avoidance.

What used to result in a sales compensation program that rewarded mediocrity becomes one that promotes sales excellence.

"The most successful modern enterprises are driven by data, analytics, and objective truth rater than gut feel, experience, and 'the way it's always been done'."

What is a Unified Sales Compensation Function?

A sales compensation program can be broken down into six distinct activities under two categories: Three strategic activities and three execution processes.

On the strategy side, organizations must determine a territory design, set quotas, and design incentive plans.

On the execution side, they must manage territories, manage quotas, and administer incentive programs on an ongoing basis, usually with specialized sales incentive compensation management software.

These six closely-linked activities are managed in silos in more than 90% of organizations. When strategic changes are evaluated independently, the impact on the sales incentive system and the organization’s wider KPIs is unknown.

Decision-making about what will likely be the most impactful change is limited to intuition and the guesswork of sales leadership.

In a unified sales compensation program, all the elements are brought together under one function, ideally in a single platform.

The time-consuming manual processes managed by compensation analysts drive up the cost of running day-to-day program operations and add a layer of abstraction between the strategic and executional elements of the program that significantly weakens its effectiveness.

That means sales compensation planning, territory design, and quota setting are approached as a single exercise.

It also means integrating and automating as much ongoing maintenance and administration of quotas, territories and sales plans as possible.

Download the full Revenue Leader's Guide for a Case Study on Unified Sales Compensation in Action

Creating a Unified Sales Compensation Program & Strategy

Step 1: Integrate and Automate Maintenance & Administration to Drive Efficiency

The ongoing maintenance and administration of quotas, territories and sales plans are where many organizations lose efficiency.

Time-consuming manual processes drive up the cost of running day-to-day program operations. As the organization grows, they have no choice but to hire more people to run the manual processes they are trapped in.

Organizations should strive to automate sales data and information management processes. The upfront cost may be higher, but you will realize ongoing cost and resource savings as your business grows.

The easiest and most economical way to do this is by investing in sales compensation management software with a robust and flexible data pipeline that becomes the source of truth for territories, quotas, and incentive calculation.

This system should allow you to layer in data attributes needed for strategic analysis of sales results. The data should be organized to make front-end reporting and visualization easy for all stakeholders, from Rep to Senior Leadership.

"Most contemporary ICM solutions are designed to keep your sales compensation team in an execution role—experts in implementing and administrating a tool— rather than experts in sales compensation and what drives your business."

Step 2: Unify Strategic Elements to Avoid the Deadly Sins of Comp Planning

Most organizations commit two grave mistakes so early in the sales comp planning process that their plan is doomed to failure before reps even see it:

  1. Unbalanced territories - If we don’t balance territories properly, reps in high workload territories won’t have enough time to cover all the accounts and opportunities available. Reps in low workload territories will spend too much time on fewer accounts, to the point of diminishing returns.
  2. Unfair quotas - Unattainable or unfair targets will undermine the power of the entire incentive plan. Even if the comp plan structure is well-designed and effectively aligns behavior to corporate goals, it won’t have much impact if reps do not believe they can hit quota.

Unifying sales compensation strategy and administration can solve for perverse incentives, unbalanced territories, and unfair quotas.

Approach territory design, quota setting, and incentive planning as one data-driven, scenario-modeling exercise.

When any of those three areas are being evaluated for change, run multiple scenarios of simulated rep attainments to determine the impact of that change on business outcomes and the other elements of the plan.

Assuming your sales organization is focused on hitting a sales goal for the period, the scenario model should be constructed to evaluate that given goal. The scenario model will take in varying changes in quotas, territories, and plan design to output an array of likely sales performance results based on varying levels of attainment and attainment distributions.

This modeling exercise is only feasible if your system allows the modeler to quickly apply different quota allocations or territory assignments to a plan design. The system should give the modeler multiple attainment outcomes based on account segmentation and sales potential.

Without a purpose-built system for this exercise, each step must be done manually. If an organization cannot model changes to territories, quotas, or sales plans through a set of simulated sales results, leaders can only guess the best scenario for their business at any point in time.

Step 3: Create a Feedback Loop to Power Engagement and Optimization

Steps one and two address the first two pillars of sales compensation, Design and Administration. Step three addresses the final one: Communication.

Communicating the sales compensation plan to reps is critical. If your sales team doesn’t engage with your comp plan in the first few weeks, they will struggle to hit targets for the rest of the year.

To avoid this:

  • Monitor engagement data early and often.
  • Give reps ongoing feedback on their performance.
  • Provide ongoing training to help reps understand what success looks like.

Whatever you do, don’t send out a 40-page book explaining the comp plan and expect reps to perform their best from that alone.

For best results, there needs to be an open feedback channel between sales reps and leadership about what’s working under the plan, as well as ongoing training and coaching.

Create highly accessible channels to submit support and troubleshooting requests along with a support team equipped to provide high-quality responses. That allows reps to ask questions about why things are the way they are or request new insights into their performance.

Talk to reps regularly to get their feedback on what’s working and figure out what is most motivating for them. That helps you learn whether they’re more motivated by bonuses or higher commissions or their experience with the last SPIF, so you can optimize the next one

In Summary: Sales Compensation as a Competitive Advantage

We have analyzed and optimized hundreds of sales compensation programs and plan designs. Most of them were doomed to fail before sales reps saw them because the underlying function was sub-optimal.

Disparate processes, siloed resources, poor data handling and inefficient administrative workflows limit sales compensation plan effectiveness and drag down sales performance in many large enterprises.

To build a world-class sales compensation function, you must unify all aspects of sales compensation design, administration, and communication.

That significantly increases visibility into the comp plan performance, improving decision- making when planning new designs and adjustments. It also opens the door to more extensive automation, increasing organizational agility and efficiency.

The combined improved efficiency, efficacy, and agility that a unified sales compensation function brings can be a significant competitive advantage in an increasingly data-driven world, and we are seeing an increasing number of organizations investing in it.

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