Our Global Sales Force Effectiveness Practice Leaders often discuss with our clients how to identify the top drivers of sales performance as a first step when redesigning the sales incentive compensation plan.
We recently met with the head of rewards at a B2B firm with a large sales department. She's helping structure the compensation package for the company's salespeople in order to re-align their selling behavior with the company’s revenue growth goals. The company has grown over the years, both organically and through acquisitions, while facing a tight labor market.
Through the hour-long conversation, we spent about 15 minutes discussing compensation design, and the remainder of the call on sales role strategy, territory design models and quota setting frameworks. Some leaders don’t understand why when they ask about sales compensation practices we respond with a set of questions around how they plan to grow the business. Many leaders understandably want quick answers to questions like, “What should our pay-mix be?” However, we ask questions about their business because understanding the business environment and strategic priorities is fundamental to identify the next steps towards a comprehensive sales compensation plan.
When a company is focusing on sales behavior, we want to hear leadership's perspective on the type of person who is likely to be successful and how the company plans to enable this person's success.
There are two common approaches that we observe when working with companies that are rebuilding or revitalizing their organization’s sales compensation plans.
A common approach is to focus solely on sales compensation market trends. This attempts to identify and match sales compensation pay levels at peer group companies. While this sounds like a logical approach, there are several pitfalls to be aware of. The first relates to sales role definition. It is easy to assume that your talent comes solely from your competition. However, it may be more accurate that your top sales talent comes from a company in a completely different industry but has the skill set necessary to be successful in the sales roles that you have defined. The second potential drawback is that your competition undoubtedly has a different territory design model. Along with sales role definition, territory design is focused around the needs of your current and prospective customers. Aligning the right sales personnel with the right territory is critical to ensure that you are delivering on your customers’ needs, but this is often an afterthought. Many companies design territories out of necessity. For example, if a sales person leaves the company, another rep will be assigned to all or part of the vacant territory based on some arbitrary reasoning. Goal setting is the linchpin between territory design and sales compensation so it must be handled methodically.
The other approach that we recommend begins with rigorously clarifying sales roles, territory design, and quota setting before modifying sales compensation components. This approach does require resources to continuously and properly aligning the following four components we go into more detail on below. However, the work will be worth it once you’ve designed a sales compensation plan that truly matches your business strategy.
1. Sales Role Definition: Customer needs evolve faster than most sales organizations can evolve. However, the right mix of account managers (farmers) and business developers (hunters) is more complex than it seems. As your business grows, your offerings might expand. Selling multiple products into different departments in the same organization, for example, muddies the waters between the hunter/farmer ratio. Sales support and sales engineers are playing a more prevalent role in all industries, which adds another layer of complexity. The key here is to first identify your target customers, what they need, and how they buy, then align the right staff within your sales organization.
2. Territory Design: Your sales team and customer base will ebb and flow, so having a framework for territory design will help ensure that you can adjust throughout the year with minimal disruption. Leveraging the right tools and data to analyze territories helps to intuitively separate the territory from the rep. Reps should not be assigned to certain potential customers based simply on how their leader thinks they might interact with the client. A consistent framework that reps understand will minimize disruptions when territories need to be realigned.
3. Quota Setting: You might have a solid sales compensation plan, appropriate pay levels, and a sound territory design process, but if your quota-setting framework is lacking then you will be undermining your sales performance. Sales reps are judged and compensated based on their performance to quota. There’s a lot riding on your quota, yet many companies have a hard time explaining in detail their framework for quota setting.
4. Sales Compensation: Sales roles definition, territory design, and quota setting frameworks are all taken into consideration when reviewing sales compensation plans. Without a full understanding of one of the first three topics in this list you will have a hard time making recommended changes to your sales compensation plan. For example, adjusting pay mix to drive a different behavior may sound like a good idea, but if there isn’t alignment with the role that your reps are going to take on, the territories in which they work, and their goals, you might find that a change in pay mix results in behavior that is the opposite of what you intended.
Next Steps
Every company has a unique opportunity when fine-tuning their current sales function. Rather than focusing first on the sales compensation plan components, leadership should consider a broad range of factors that have the biggest impact in building a high-performance sales organization. The first place to start is to define your sales roles, then create the building blocks to manage territories and quotas. Compensation is a crucial component of this equation, but one that relies on many other influences.
If you have questions about sales compensation design and would like to speak with a member of our compensation consulting group, please write to consulting@radford.com.
