As most companies kick off their 2015 plan design this month, our blog is going “back to basics.” Over the next 10 weeks, we will cover all of the building blocks of sales incentive plan design so you have everything you need for your 2015 plan. Each week will focus on a different topic – from pay mix to metrics to payout formula – and provide key ideas on each element.
In this first blog, we want to focus on 2 critical elements of the design process – incentive plan eligibility and plan guiding principles.
What we mean by eligibility is: “Who should be on a true sales compensation plan, as opposed to a broad-based or management incentive plan?” The simple answer is: “Salespeople should be on a sales incentive compensation plan.” But, of course, roles aren’t that cut and dried. Many roles influence top-line growth in the company that should not be on a sales incentive plan.
The simple rule of thumb is that, to be eligible for a sales incentive plan, the role should be customer-facing and influence the purchase decision. Both of these elements are important. Customer service personnel, while customer-facing, usually do not influence the purchase decision and therefore are usually not on a sales incentive plan. Marketing personnel may be able to influence the purchase decision through price and advertising but are not customer-facing and, therefore, not on a sales incentive plan.
A 3rd criterion for eligibility is that the individual/role spends at least one-half of their time in this customer-influencing role. For example, senior executives (such as the CEO) are asked to get involved in large sales periodically but spend less than one-half their time in that function and, therefore, should not be on a sales incentive plan.
Once the roles eligible for sales incentives have been decided, companies must then develop guiding principles. Guiding principles are a set of 8-12 unbiased “guideposts” established up front that steer decision making in an objective fashion. Anyone who has gone through the incentive plan design process knows that it can get emotional, perhaps even heated at times, and having unbiased objective principles to fall back on will steer the group toward a peaceful resolution.
Guiding principles link back to strategy (“plans must include a pricing component worth at least 20% weight”) or reflect a company compensation philosophy (“hunter sales roles will have a minimum of 45% of their pay at risk”).
For guiding principles to be useful, they should be as specific as possible. For example, a guiding principle of “the plan should pay for performance” is not particularly helpful in the process. But, a guiding principle such as the following would be very instructive and useful: “The plan should differentiate payouts by paying the top 10% performers at 2.5X the target incentive amount or more and the bottom 10% performers at 0.3X the target incentive amount or less.” The specificity in the principles will eliminate ambiguity and reduce arguments within the core team on the final plan design.
Next week’s post will focus on pay level and mix.