Compensation Design Principles

Laura Roach, CCP

512-415-9972

Ongoing Sales Performance Management

Design, Model, and Cost Plan

Communicate and

Implement Plan

Calculate, Administer &

Report

Analyze, Monitor, and

Process

Compensation Design Principles Assessment

• How effective is the current plan?• What evidence is there to support plan changes or modifications?

Design and testing

• What changes could be made to plan mechanics?• Will such changes redirect sales behavior?• Support sales financial data?• Improve results?

Implementation

• Impact and perception from Sales force• Maximum motivation• Transparency to results

Monitoring

• What actions are taken to confirm sales received and understand plans

Common Design Flaws Executing Plans out of sequence

• Modifying incentive formula without modeling impact• Understanding new business objectives and alignment to new metrics

Limiting Design Work to single function

• Leverage multi-function team for best sales design (Finance, HR, Sales, Sales Operations, Marketing, IT)

Misunderstanding how long the design process will take

• Too Little / Too Much

Design Errors

• Salary/incentive ration inappropriate for particular sales role (Leverage)• Performance Measures that can not be influenced or accurately tracked/credited• Sales Quotas (goals) that do not reflect sales potential / territory

Ineffective Implementation and monitoring

• No formal process for communicating plan change• No defined / assigned change accountabilities• Lack of clear leadership message about change• No predefined measures of plan success• No set time period for assessing success• No reports or analytics to assess/monitor performance

Compensation Design Principles

Objectives – Confirm strategic foundation of program Labor Market Comparison Competitive positioning Pay Mix Ratio Factors (Base/Variable) Performance Measures

◦ Incentive Metrics/Measures

• Performance Measure Factors• Job: Reflect accountabilities and influence (Line of Sight)• Business Drivers: Measures should be consistent with financial

measures of success in business plan• Focus: Meaningful payout opportunities for each measure. No

more than 3 measures.• System Capabilities: If it can not be tracked does it belong in a

plan?• Types: Financial, Non-Financial

Plan Design Elements

Financial Measures◦ Sales Revenue: overall, by segment or channel, for specific products◦ Growth: overall, by customer, account, channel, segment◦ Absolute Volume: number of units or transactions◦ Gross Profit: percent, dollars

• Non-Financial Measures• Qualitative: Market share or share of account “taking business”• Activity measures such as number of calls• MBO’s / KSO’s: usually point based or relies on management discretion.

• As a rule of thumb these create an averaging of pay for all participants and thus fails to differentiate top performers

Commissionable dollars taken away from financial success measures reduce the impact of the plan

As a rule of thumb, No more than 3 Measures to avoid plan dilution

Plan Design Elements

Performance Standards◦ Threshold, Target, Excellence◦ Payout Formulas

Sales Crediting◦ Single◦ Multiple◦ Splits◦ Partial

Plan Types◦ Commission or bonus plans◦ Single or flat rate commission◦ Individual commission rate (payout rate)◦ Tiered (or “ramped”) commission structure◦ Adjusted (or “variable”) commission rate◦ Bonus: single/fixed, interpolated, step rate

• Timing Considerations• Plan performance period• Cumulative or Discrete measurements• Payout Frequency

• Modifiers• Linkage• Hurdlers• Matrix• Accelerators• Caps

Type Examples

Flat CommissionsRate x Volume

• 3% x ($x)• $100 / Unit

Individual Commission Rate(Individual Incentive Target divided by Individual Quota)

Rep 1: $100,000 IT / $1,000,000 quota = 10% rate applied to sales volume

Rep 2: $100,000 IT / $1,500,000 quota = 6.7% rate applied to sales volume

Ramped: Rate adjusted based on achievement levels

0-100% of quota 5% rate

100% of quota 7.5% rate

Adjusted: Rate varies based on characteristics other than volume or quota

Product A 5% Base Rate

Products B& C 7.5% rate (base rate * 1.5)

Types of Commissions

Questions to Consider…..

Is everyone on the same plan regardless of role? Do people in similar jobs have the same amount of target pay or different

amounts? Of the target compensation (OTE), how much is at risk? Is it aligned with sales

role? How many components or measures are uses? What percentage of sales plan is on sales volume? Is this quota or absolute

dollars? Other components, is it quota based? Is there a min or max achievement? What type of plan is used to calculate payout? (commission/bonus) What type of components? Are they linked? How frequently is the plan measured and paid?

Step 1: Clarify Business/Strategi

c Objectives

Step 2: Assess Current Plans

Step 3: Define Objectives of

Sales Plan

Step 4: Assess Eligibility of Jobs

Step 5: Establish Compensation

Levels

Step 6: Select Performance Measures and

Weightings

Step 7: Develop the formula

Step 8: Determine Performance Measures and Payout Periods

Step 9: Complete Cost Analysis and

Determine Earnings Impact

Step 10: Finalize and Launch Plan

9

A 10 Step Approach

Goal – Complete by xxx and Paying xxxxx