Do You Have a Pay Plan or an Incentive Plan?
Compensation is always a hot topic. When we speak on sales process or strategy or hiring or anything else related to sales management, we get good crowds. But bring up the topic of sales compensation and it is standing room only. We have come across some companies that have not changed their compensation plan in 15 years and others that have changed it six times in two years. People are always trying to figure out the best way to set this piece of the puzzle. As we have looked at and evaluated literally hundreds of sales compensation plans, we find that a high percentage of them do not drive the d
esired behaviors. Most of them are what I would call a “Pay Plan” rather than an “Incentive Plan.” What’s the difference? It’s quite simple. A Pay Plan is a simple mechanism that ties pay to sales. That’s it. You sell something, you make x% of revenue or gross profit. They are easy to understand, easy to calculate and easy to manage. The drawback is that in many cases, they don’t drive any specific behavior. Your company strategy, goals and focus probably shift every year or few years. Why wouldn’t your compensation plan shift with it?
Say your company leadership sits down at the start of the year to develop your strategy for growth. You decide that your current base of clients is flat to declining and you are not getting enough new clients in the door. Additionally, you are coming out with a new line of products that could help with driving revenue. These are your two strategic initiatives for the year. You talk about them at your company meetings. You may even have them documented and distributed throughout the company and created plans and forecasts related to them. But your Pay Plan does not change at all – the salesperson still gets 5% of revenue of ANYTHING they sell. So what happens? What we see most is that salespeople may understand direction, but they will gravitate to whatever is easiest to sell – their current customers.
Now take a different approach – the Incentive Plan. Using the same scenario as above, we would recommend that you change your compensation plan. Instead of 5% on everything, you might say that current account sales get paid at 3.5% and new accounts get paid at a rate of 7% (or something similar). Likewise, we might put a spiff (extra commission) on sales of the new product. This suddenly becomes very clear what we want the sale people to focus on. We like to go by the mantra “A salesperson should be able to immediately understand what they should focus on by reading the Incentive Plan.” In this case, they make more money from new clients and the new products. That’s where they should spend their time.
Here is another miss we see quite often. Salespeople have a “Pay Plan” and they also have a goal. For example, the Pay Plan is 5% of revenue and the goal is $2M in revenue. Most people agree that having and achieving goals is important. But the two aren’t tied together whatsoever. If the salesperson sells $1.5M, they make 5% of sales. If they sell $2.5M, they make 5% of sales. There is absolutely no incentive to achieving goal. Sure, they make more money by selling more, but the goal could be irrelevant. If the salesperson is ok making 5% of $1.5M and that income fits their lifestyle, they could care less about the goal. In this case, you have a simple and easy to understand “Pay Plan” but certainly not an Incentive Plan. Better options include having a lower rate of commission until you get closer to goal, then the rate increases as you achieve and surpass that goal. There is incentive to achieve the goal.
I could go on for hours on compensation including topics like how to establish goals, how to roll out new compensation plans, how to evaluate the effectiveness of your plan, etc. There is simply not room here to do so. What I will do is leave you with a few thoughts:
- People manage people…compensation plans do not. Having a good Incentive Plan that aligns with the company strategy is very important. It provides direction and motivation. But that alone does not drive behavior. That comes from strong leadership, coaching and accountability.
- Every new compensation plan is a bad plan in the salesperson’s eyes. I say that somewhat tongue in cheek, but we hear it over and over again. The salespeople tell us “Don’t mess with the comp plan” then we roll it out and they gripe for about 3-6 months. Then they tell us “Don’t mess with the comp plan.” Why does this happen? First, people don’t like change, especially when it affects their income. Second, they figured out how to maximize the new plan.
- Communication of the plan is critical. We’ve seen it done poorly, “Here’s your new plan,” with little to no explanation. And we’ve seen it rolled out well. Be sensitive to answering questions about why it is changing and how it affects them.