In the first 2 “Back to Basics” blogs, we covered the basics of getting your guiding principles in place and determining the appropriate pay levels and mix.
In this blog, we turn to the initial decision required for the sales compensation plan – metrics upon which to pay for performance. Businesses measure their performance on many metrics, but for a metric to be appropriate for the sales compensation plan, it must meet the following 3 criteria:
- Strategic: Everything in a sales incentive plan should derive from the business strategy and goals. If you have a focus on price maintenance/increases, then the incentive compensation plan should include a gross margin or average selling price metric.
- Measurable: Oftentimes, companies want to hold salespeople accountable for things they either cannot measure—or, if measurable, the chosen metrics are not “comp grade.” For example, many companies want to measure and pay for territory-level gross margin, but their systems are not yet able to measure profitability down to that level.
- Controllable: Salespeople must be in control of the metrics. Companies that put metrics in the plan that are not in the salesperson’s control quickly find that salespeople look to the metrics that they can control to reach their incentive compensation goals.
Once these critical criteria have been met, there are other decisions that will help you finalize your plan metric:
- What “level” is the metric? Only the accounts/deals the salesperson “touches”? All sales in the salesperson’s assigned geography (which may or may not be the same as the deals the salesperson touches)? Team metric?
- Against what should we compare the measurement? If the metric is revenue, should the metric be absolute revenue? Revenue growth? Revenue vs. quota?
- Do you care “how” salespeople sell? In other words, are all sales dollars created equal? Or do you want to reward selling the “right” products to the “right” customers at the “right” price and in the “right” way? All of these may imply different metrics.
Finally, here are some general best practices on metrics below. I say “general” because there is always an exception but, in the vast majority of cases, these hold true:
- The plan should have a maximum of 3 metrics
- All metrics should be weighted at least 15% of the total incentive payout
- Pay for performance on measurable results and avoid paying on activities, if possible
Next week’s post will focus on some more detailed elements of plan design.