Alignment with
Objectives
Compensation and rewards need to be aligned with
business processes, corporate objectives, organizational
structure and the sales model. If your sales commissions plan is
not well designed you may be compensating sales people to do
things which are counter to your corporate objectives. To learn
more about this see our white paper on
"How to Align Sales Compensation with Corporate Objectives".
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Best Practices
This is really the sum of the best tried and tested
components of a compensation plan. Having been involved in the
design and implementation of numerous sales compensation plans we
can help you avoid mistakes others have made before and leverage
their successes.
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Commissions
Calculating or Administering Commissions can be a
complex process depending on the different variables in your
business model and information systems.
More information on this topic can be found on our
Sales Compensation Administration page.
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Compensation Software
Today there are a number of software solutions for
calculating sales commissions.
MS Excel or Custom Built In-House Solutions SPM (Sales Performance Management) EIM (Enterprise Incentive Management)
MS Excel or a combination of in-house
developed applications are the most common solution for small sales
teams. These can be quick to set up and modify but as they reach a
certain size or complexity they can become unstable and more
complicated.
SPM or Sales Performance Management is a term
being used by a few software vendors and represents the next level
up in sophistication and feature/ functionality from Excel. SPM
Solutions are expected to fill the gap between in-house designed
compensation systems, many of which rely on MS Excel, and the
traditional EIM Solutions. These applications help automate much of
the sales commission calculation process and provide valuable
reporting tools. They can also help you create and benchmark sales
commissions metrics.
Currently there is quite a jump in price between MS
Excel based in-house solutions and EIM and that is the market niche
these SPM Solution providers hope to address.
EIM or Enterprise Incentive Management
solutions are the high end solutions for managing pay across an
enterprise. These are not limited to sales people's plans but can
also include other employees, business partners, executives,
customers, etc.
EIM takes performance management several steps
beyond just calculating sales commissions and often include robust
plan modeling, reporting and integration with other sales operations
applications. Many include detailed reporting pages designed for the
sales reps, managers, and business partners. Think of this as a
convergence of commissions automation and sales analysis.
While EIM and SPM solutions can automate and improve
the sales commissions process they do not guarantee an effective
compensation plan. If you have a poorly designed or misaligned sales
compensation plan all this software will do is to process these
plans more efficiently.
Contact Us if your organization is interested in determining
which solution is right for you.
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Contests and SPIFFs
Contests and SPIFFs or SPIFs (Special Program
Incentive Funds) provide add-on programs to reward sales people
and/or business partners for ad-hoc sales promotions. These are in
addition to the regular sales commissions and allow on-the-fly
additional focus on any specific sales objectives.
SPIFFs can be paid out in: cash, prizes or
additional commission for increasing sales of a particular product
or service.
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Data Accuracy and
Availability
Sales data, especially data which may come to you
from a business partner in the form of POS (Point of Sale) data
needs to be checked and "cleaned" before you use it to calculate
commissions. This process should include verification that they are
using your part numbers correctly, checking that any address
information is consistent (i.e. state and zip match), along with
other relevant checks.
For a sales compensation plan to be successful it
needs to be both measurable and attainable. You can have the best of
intentions, but if there is a problem with the data, quota or
reporting tools you may be limiting your sales potential.
Measurability can be influenced by many factors
including the reliability of your internal sales data reporting,
external sources, and timing. If you rely on multiple business
partners for sales data what happens when one or more reports are
late or incomplete?
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Legal Considerations
These can be addressed in a section of the sales
compensation plan which sales people are given. They should cover
all possibilities you may foresee and even unlikely events.
Topics should include how certain events will affect
commission payouts, such as: terminations, extended leaves of
absence, territory transitions, returns, etc.
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MBO/ KSO
MBO (Management by Objective) and KSO (Key Sales
Objective) cover a portion, either a small part or even whole of the
sales persons' commission pool. These are generally used when there
are certain activities you want a sales person to do which are not
directly measurable by sales revenue alone.
Examples of these Objectives include: # new
customers, attend product training events, make so many
presentations, close x amt. large deals, turn forecasts in
regularly, etc. The MBO is more prevalent with management positions
and the KSO is an adaptation of the MBO for sales representatives.
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Plan Design and Policies
The Plan Design is where the corporate and sales
objectives need to be condensed into marching orders for the sales
people. This needs to support the marketing sales strategies and the
sales coverage plan. By reading the sales compensation plans you
should be able to clearly understand the marketing sales plan.
The policies should establish the ground rules for
behavior within the structure of the compensation plan, however the
plan itself needs to contain the right incentives in the first place
so the policies do not have to make up for its' short comings.
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Plan Documentation
The Plan Documentation needs to strike a balance
between covering all the bases and explaining the plan mechanics
while at the same time not getting too lengthy and overly
complicated. If it is not clear to the sales people how their
commissions are calculated they may not perform all the activities
you want them to do even though you accounted for them in your plan.
Also if a plan is too complex the sales people will
spend a lot of their own time away from selling trying to figure out
how they get paid. Use examples and scenarios to further illustrate
plan metrics, especially the benefits of exceeding plan.
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Quota Setting
Quotas need to be attainable. The better your sales
reporting and analysis the more accurate your quota setting can be.
When setting quotas think about the attainable outcomes and what
results you desire once the actual revenue is counted. In addition
to the numerical outcomes you also need to consider the effect your
quotas will have on motivation and morale.
The desirable outcome as far as quota attainment is
concerned is to have a bell curve with approximately two thirds
meeting or exceeding 100% attainment and the remaining one third
under 100%. There will be people at both ends with some under
performing and others over performing. This bell curve approach may
not be feasible though for small sales teams.
Quotas need to be set so your compensation plan can
reward those who meet and exceed quota while letting those who under
perform see how their lack of performance negatively affects their
commissions.
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Regulations
It may be time to consider a review of your
commission practices in light of ongoing scrutiny of
Sarbanes-Oxley
compliance and industry regulators. Areas of concern to regulators
in addition to being able to identify fraudulent compensation
practices include the ability to audit the sales compensation
process.
From an accounting perspective most of this should
be in place anyway with an ability to audit each stage of the
commissions process from the various stages between raw sales data,
the allocation of revenue to sales people all the way through the
commission plan calculations.
The EIM solutions referenced earlier take this
beyond the capabilities of MS Excel and the average "in-house"
solution by creating an audit trail which even documents changes and
adjustments to commissions.
You may also want to review the latest changes to
the
Fair Labor Standards Act (FLSA). Here you can find out which of
your employees fall in the
Exempt and Non-Exempt categories, and how overtime pay
applies to them.
In November, 2004 Gilmore Consulting, Inc. attended
a joint US and NC Department of Labor Wage and Hour seminar. We met
investigators and learned first hand about the many areas businesses
may be exposed to violations of the FLSA.
We highly recommend you have a representative attend
a similar seminar for your own edification. There are many rules and
even more exceptions that require close attention and preparation to
comply with.
You may wish to reevaluate your sales compensation
plan structure as well as your sales operations policies in light of
these FLSA regulations.
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Territories and
Channels
Territories can be established along geographic
lines as well as by industry verticals, named/ major accounts, and
many other variations. If you are using geographies it is important
that you collect zip code information in your sales reporting as
that is the easiest way to define a geographic territory and retain
flexibility to change territory makeup.
Channels can be regarded as territories for those
responsible for their performance. Multi tier business models can
benefit from collecting sales data at various stages in the channel.
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