How to Communicate Sales Compensation Plans Effectively

Jul 14, 2022

Even the best-designed sales compensation plans will fail if you do not communicate them effectively.

If sales reps don't understand the plan or how to make money from it, they won't engage with it. Even the best comp plan will likely fail if reps don't engage with it within the first few weeks.

Communication is one of the three pillars of sales compensation excellence, alongside Design and Administration.

We use the following framework to enhance our customer's communication of their compensation programs, leading to better results and incremental profitability every time.

What does Best-in-Class sales comp communication look like?

A poor sales compensation communication strategy is at the root of many organizations' sales performance issues. Organizations with best-in-class sales compensation functions have more engaged, more productive sales teams producing better results and lower rep turnover.

In best-in-class sales compensation functions:

Individuals and teams own specific metrics
Reps get real-time, consistent pay updates
Sales comp plan strategy, administration, and analytical functions are unified
KPIs are aligned with organizational strategy
Both routine and ad-hoc reporting are highly automated
Sales leadership proactively communicates incentives and changes
Historical performance data and rep feedback is utilized during compensation design phases
Reps have open and easy support and feedback channels to ask questions and make requests related to their compensation and dashboard readouts.

Ironically, many sales organizations cannot reach this operational state because of poor communication around sales compensation.

Their inability to communicate the impact of the compensation program on business objectives results in it being viewed as a cost center instead of an opportunity center — and one of the most effective growth levers available.

Administrative cost centers do not attract investment. They deter it. The resulting lack of resources and expertise that many sales comp functions suffer further reduces their communication ability, hampering the organization's agility and the comp plan's efficacy.

You must address all three areas of Sales Compensation Communication to avoid this state.

The 3 Areas of Sales Compensation Communication

Communication around the sales compensation program typically falls into one of these three areas.

1. Communicating the incentive plan to reps

The first area is communicating the plan to sales reps to motivate productive behavior.

Reps must understand how to make money from the compensation plan.

If they don't understand, they won't engage with the plan, and it will fail to produce the desired results or behavior change.

For best performance, reps need to understand the plan well enough to see how much they would earn from individual upcoming deals so they know where to focus their efforts.

Second, they need to see how much they've earned and understand why they made that amount — ideally in real time. Lagging or inaccurate compensation payout data erodes trust and leads to unproductive activities like shadow accounting. A real-time feedback loop also increases the behavioral impact of the incentives themselves.

2. Communicating plan performance data

At a strategic level, finance and leadership need to see which areas of the plan performed well and which didn't to inform plan design and organizational strategy.

To make the best decisions for the organization, leaders need to see performance data about individual products, campaigns, and sales rep performance as often as possible. Many sales commission plans run for several months before performance data is analyzed. That means underperformance often goes unaddressed until the end of the year, putting a significant drag on the business.

Best-in-class sales compensation functions can communicate performance data so efficiently and accurately that they can go a step further. They can use their historical performance data to predict how adjustments to the plan will impact future performance, significantly improving plan outcomes year-over-year.

3. Communicating changes in the plan to admins

The final area of sales compensation communication is purely on the administrative side: executing and auditing change management. It is a more significant element than many organizations realize.

There must be a clear communication channel for instructions and approval of changes and exceptions. Every organization experiences these changes as reps turnover, unexpected deals or partnerships crop up, and ad-hoc bonuses are applied.

That means there needs to be a formalized, permissions-based workflow for requesting and approving such changes. Often, the extent of this formalization is a dedicated email inbox watched by the sales comp team, who then follow up on any requests via email.

Approval processes are very easy to automate, but many organizations fail to do so simply because they don't realize how big of an impact these manual processes have on resources.

Besides seeking approval, the sales compensation team must understand the changes they need to make to the underlying logic governing the sales commission software and how that impacts other plan components and logic.

For example, if Sally the SDR gets an additional bonus because she helped Andy the Account Exec on an expansion deal, and that pushes her into the next payout tranche, or qualifies her for an accelerator, how will that impact her total payout for the rest of the year?

These exceptions seem small but can amount to a significant impact over several months if you fail to account for them.

The amount of money involved in variable compensation makes it a high-risk activity. To reduce risk and meet international standards such as ASC606, SOC-1, and SOC-2, best-in-class enterprises must have a complete and infallible audit trail of all changes made in the system. That log should record details of who, why, and when changes were made in the plan or the logic to administer it, reducing organizational risk and technical debt.

Book a demo here to learn more about how Forma.ai helps enterprises automate the sales compensation process end-to-end, including SOC-1 & 2 compliant permissions and approvals workflows.

How to Communicate Your Sales Compensation Plan Effectively

While many organizations can communicate the plan well enough that reps engage with it, barely any excel because they treat sales compensation as a static process.

When businesses treat sales compensation as static, they produce a book explaining the plan and distribute it, hold one or two training sessions, and check in on results once a quarter. If the program is underperforming to its objectives, they will tack on a SPIF or two and hope for the best until next year.

But sales compensation isn't static.

Sales compensation programs constantly evolve as sales reps turnover, territories shift, new products launch, and market conditions change. Plans are continuously being tweaked as reps work on deals or exceptional circumstances arise.

To reach a best-in-class operational state, approach comp plan communication as a constantly evolving feedback loop.

1. Use your data when planning sales compensation

The crucial first step is to use your existing data when designing your sales compensation plan. That may seem obvious, but many organizations create their sales incentive strategy based on gut feeling, anecdotal experience, and departmental priorities rather than data.

This step relies on comprehensive and reliable data, so it's prudent to invest in your data-management capabilities until all sales performance data is accurate and as easy to access and manipulate as possible.

Base quotas on realistic targets and data — don't just arbitrarily roll top-line figures (i.e. 15% ARR growth) down into individual plans. To do that, estimate territory potential and the associated workload and value created to balance territories and quotas equitably between reps.

Don't just settle for one or two forecasts. Aim for a state where you can run multiple sales simulations of dozens of outcomes to predict the impact of variable changes more accurately and determine the best course of action.

Finally, plan your SPIFs and short-term incentives. Ring fence between 3-5% of the total comp budget for SPIFs and look for periods throughout the year when there are opportunities to use SPIFs to lift sales during seasonal lulls.

2. Involve reps in the initial design

Communicating the plan starts before the program is finalized.

Involving reps in the initial design increases engagement because they feel more ownership and agency, similar to the phenomenon described in the Management-by-Objectives theory.

Representatives are usually suspicious of a new comp plan but will be less cynical if you engage them in its design. It also gives you early feedback and helps you to gauge engagement levels before committing to a plan structure.

While it's important to be open to their feedback, be careful of giving too much weight to what reps say they want over how they actually behave. Use historical performance data to get a clear picture of how they responded to past incentives they said they liked.

This step is particularly important if you want to know what non-monetary incentives best motivate your sales team, such as President's Club rewards. These only work when reps want what you're offering, so it makes sense to ask them first.

3. Hold multiple roll-out sessions

Yes, you'll want a big initial session to explain the WHY behind the new sales comp plan to the whole team. But don't stop there — hold follow-up sessions with smaller groups to focus on areas of the comp plan or practical training and create opportunities for open discussion about the program in more private settings.

4. Gather engagement feedback early and often

The sooner you get information about how reps approach the plan, the sooner you can address concerns or course-correct.

Survey reps from the day the plan launches and monitor performance data closely for signs of underperformance and disengagement.

5. Streamline and automate daily admin

One significant hurdle to best-in-class sales compensation communication is the time and resources needed to collect incoming data, process it to make payroll, and then create performance reports for leadership.

To get to a best-in-class operational state, automate the data collection and validation process as much as possible. Ensure integrations are passing data in as close to real-time as possible.

That consistent, reliable data flow allows you to automate routine reporting and streamline ad-hoc reporting. It ensures all stakeholders get the information they need to make the best decisions without placing a huge workload on the sales comp team.

Future-Proofing Sales Comp Administration

Advanced automation and data processing technology have recently raised the bar for best-in-class sales compensation. First-generation ICM software facilitated the automation of a single aspect of the compensation process: the calculation of commissions.

Best-in-class organizations should aim for end-to-end automation of the sales compensation process.

Create workflows for all the routine change management the sales comp team performs. That speeds up approvals and turnarounds and provides an audit trail of changes that can be referenced later or in disputes.

Then, automate as much of the sales compensation management to reduce the time spent writing and reworking formulas in the backend logic.

The only sales compensation software currently able to do this is Forma.ai. Find out how we do it by booking a demo here.

6. Invest in better sales compensation dashboards

Dashboards are the key to effectively communicating your sales compensation plan, but they're widely underutilized.

At best, most sales compensation dashboards are clunky readouts of a few lagging metrics: last month's commission payout, commission earned to date, estimated pipeline value, and maybe a couple more.

At worst, they are resource drains that limit the organization's agility and flexibility.

We covered our framework for best-in-class sales compensation dashboards in this article, but to summarize it here:

Display information that's helpful, not just what is possible with the software
Real-time payout tracking is a must
Ensure dashboards can evolve with your businesses' and reps' needs
Makes sure you can customize them easily, so you can add or remove specific dashboard metrics for teams or individuals
Is there a way to easily add nudges and highlight SPIFs or new products?
Drill-down capabilities so reps can see how their compensation broke down, helping them to understand the comp plan better and reduce commission disputes.

7. Invest in ongoing training

Training reps on the comp plan is sales training and should be part of your ongoing sales training program.

Celebrating wins isn't enough. Sales reps can be cagey about revealing their successes. Make sure that you instil a knowledge-sharing culture by getting top-performing reps to explain to others what they're doing to maximize their earnings. Reminders that sales is not a zero-sum game are also helpful.

Facilitate informal peer-to-peer knowledge sharing as much as possible by buddying newer reps with well-performing reps. Representatives can only copy winning behavior if they know what that looks like.

8. Create an open feedback channel

The final crucial aspect of best-in-class sales compensation communication is an open feedback channel between reps and the sales compensation function. An email inbox is not enough.

Use a dedicated messaging tool or one that's built into your existing ICM software to give reps an easy way to request information about their sales compensation.

Ideally, they should be able to get quick responses about why things are the way they are and request specific reports without placing any additional strain on the sales compensation team. That is only possible when they're not burdened by clunky software and manual data management processes.

Data Maturity is the Key to Effective Sales Incentive Communication

The key to effective sales compensation communication is reliable and timely data. The more reliable, accessible, and timely your access to sales performance and compensation data, the more effective your compensation plan communication will be.

Invest in automating as much of the collection and processing of data as possible to free the comp team to work on higher-value tasks like reporting and analysis. That will allow you to make the best use of the next-generation data-driven automation tools, like Forma.ai.

Book a demo here to learn more about how Forma.ai can help you automate and optimize your sales compensation program to drive better results.