Sales compensation plans should be designed to reinforce business strategy, reflect different sales roles, and maximize motivational impact. An effective plan attracts and retains top talent by offering competitive total compensation. It considers factors like role requirements, company pay philosophy, market practices, and the appropriate mix of base salary and incentives. The goal is to deliver target total cash compensation between the 50th to 75th percentiles compared to market peers.

1. Sales Compensation Best Practices
Compensation models for maximising sales performance
Sales Institute of Ireland
12 October 2011
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2. Why do we have unique sales incentive plans?
Incentive Compensation Objectives
Attract and retain Focus effort Motivate performance
l In turn, positive impacts on l More positive
customer experience – customer
more continuity experience, higher
satisfaction levels
l Higher employee
retention Outcome l Higher customer
of retention
Well-Designed
l Better employee Plans
engagement l Higher product
utilisation
l Higher recurring
l Deeper relationships/
revenue, better business
more cross sell activity
results
Well designed incentive plans focus, motivate, and engage talent
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3. Sales compensation is only one of a
variety of tools at management’s disposal
Sales effectiveness is all about:
l Getting the right people
with the right skills . . .
l Focused on the right
opportunities . . .
l In a highly engaged and
motivated fashion
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4. What makes for an effective sales compensation plan?
Outcomes of Effective Sales Means of Achieving
Compensation Plans
I. Reinforce strategy and desired l Utilise the right performance measures with appropriate
behaviours weights
II. Reflect the nature of the sales role l Manage sales incentive eligibility
in compensation
l Clarify sales roles
l Ensure pay mix and incentive form align with the role
III. Maximise motivational impact of l Pay distribution
incentive earnings
l Pay differentiation
l Pay and performance correlation
IV. Support top talent attraction and l Competitiveness of total compensation
retention
l Maintain appropriate internal pay equity
V. Govern plan design and l Track and manage compensation cost of sales (CCOS)
administration
l Identify potential financial and behavioural risks
l Create a formal governance process
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5. I. REINFORCE STRATEGY & BEHAVIOURS
Performance Measures
Key Considerations
l Strategic — Does the measure align with
the strategic direction of the company?
Best Practices
l Measurability — Can the measure be
l No more than three different measures calculated from available data?
per plan
l Manageability — Do
l Tied in some manner to individual managers’/employees’ actions readily
performance or to a carefully defined affect the measure?
group with “shared dependency” in a
process or outcome l Sustainability — Can the measure
accurately forecast the trend of future
l Results-based rather than activity-based results?
l Relevant and controllable by the l Communicability — Can the measure be
individual easily explained to managers, employees,
l At least 20% of incentive pay per and owners?
element l Unifying — Can the measure be used by
other functions with shared destiny?
l Stability — Can the measure be
developed so as to prevent manipulation
or gaming?
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6. II. REFLECTING THE ROLE
Eligibility: Establish sound criteria
to determine sales incentive eligibility
If the position: If the position:
l Is directly involved in the sales process l Writes proposals, but has little to no direct
l Spends a majority of time on selling activities customer interface
(preparing for, following up to, AND conducting l Conducts research and analysis for the sales
customer sales calls) force
l Plays a prominent ‘customer facing’ role l Serves as an administrative assistant to a
sales person
l Has the ability to impact and influence
customer buying decisions l Develops marketing and sales strategies,
l Generates, qualifies and/or pursues sales conducts market research, or develops
marketing and sales tools
leads
l Develops and/or manages products
l Is expected to close sales
l Spends some time on sales but the majority on
l Serves as a designated customer relationship
other tasks (service, operations, etc.)
manager
l Contributes to sales, but does not close sales
l Manages a group of salespeople
Then...
Then...
Corporate incentive plan, with some
‘Sales’ incentive plan is most appropriate
customisation, is most appropriate
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7. II. REFLECTING THE ROLE
Pay mix implies a trade off between the degree of
management control and sales force urgency
Sales Force Degree of Sense of Urgency
Pay Mix Management
Perception
Control
90%/10% Asleep Highest Lowest
80%/20% Motivational High Some
70%/30% Gets attention Good Meaningful
60%/40% Drives behaviour Only key things Significant
50%/50% High risk Limited High
> 50% at risk Make quota or quit Minimal to none Very high
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8. II. REFLECTING THE ROLE
Sales role clarification is the foundation
of the sales compensation design process
How Customers Buy
Transactional Consultative
l Purchase decision is simple l Purchase decision is complex
l Sales cycle is short l Sales cycle is long
l Price is key l Value is key
l Focus on efficiency l Focus on solution
New Customer Acquisition
l New customer acquisition
l Cold calling or prospecting
l Little post-sale effort Small Game Big Game
Hunter Hunter
Territory Manager
How Sales People Sell
l Grow territory revenue based
on good relationships with
many customers/prospects
l Growth comes from building a
reputation in the territory Territory Rep Territory Consultant
l Some post-sale effort
Account Manager
l Retain and grow accounts
l Identifying and addressing
customer needs Account Manager Key Account Executive
l Significant post-sale effort
l Penetrating customers with
new services/products
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9. II. REFLECTING THE ROLE
Sales compensation implications of role differences
Framework Drives:
l Pay mix How Customers Buy
l Upside earnings potential
l Performance area Transactional Consultative
l Incentive form
l Highest variable pay l High variable pay
New Business
Acquisition l Fewest performance areas l Few performance areas (2 –
How Sales People Sell
(1 – 2) 3)
l Commission oriented l Commission/bonus oriented
l High variable pay l Moderately high variable pay
Territory
Manager l Few performance areas (2 – l More performance areas (3 –
3) 4)
l Mix of commission and bonus l Mix of commission and bonus
l Low variable pay l Moderate variable pay
Account l Few performance areas (2 – l Most performance areas (3 –
Manager 3) 4)
l Bonus oriented l Bonus oriented
Position Drives:
l Pay levels
l Performance measures Mapping roles to the matrix helps narrow the choice of
l Incentive plan mechanics optimal plan designs
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10. II. REFLECTING THE ROLE
Commission vs. bonus — which makes sense?
Definition When is it appropriate?
A planned (or target) payout l Cost of labour philosophy
($/€/£) for reaching a l High goal-setting confidence
predetermined objective(s); l Mature business/industry
Bonus typically expressed as l Low or high prominence
percentage of a target bonus or l Unequal territory sizes
base salary, or as a flat currency
amount
A piece of the business or a l Cost of sales philosophy
percentage of the take; l Low goal-setting confidence
typically expressed as a l Immature business/industry
Commission percentage of gross sales or l Moderate to high prominence
profit $/€/£, or as a currency l Equal territory sizes
amount per unit sold
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11. III. MOTIVATING PERFORMANCE
The most effective sales compensation
plans move the middle and celebrate the stars
Expected Performance Distribution
20
16
12
2
Reps
1 8
You definitely need to
4 keep the stars happy,
The very low performers
should be managed out, but there are only a few
0 of them and they may
and will be more <70% 71% to 81% to 91% to 101% to 111% to 121% to >130%
concerned about be more motivated by
80% 90% 100% 110% 120% 130%
keeping their base pay recognition and personal
% Goal Attainment
achievement
3
You get the biggest ‘bang for the buck’ in the middle of the
pack. Most of your sales people are here and this is where
the sales incentive plan is likely to be most effective. These
people must participate and this is where the steep part of
the payout curve should be
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12. III. MOTIVATING PERFORMANCE
Best practice sales incentive design has 85% to 90%
of the population earning at least some incentive
Expected Performance Distribution
20
Threshold is Excellence is
the point below 16 the point at
which no which target
incentive is 12 leverage is
Reps
paid. It paid. It
represents 8 represents
'unacceptable' 'outstanding'
performance, 4
performance,
usually defined usually defined
as the 10th or as the 85th or
0
15th percentile. <70% 71% to 81% to 91% to 101% to 111% to 121% to >130% 90th percentile.
80% 90% 100% 110% 120% 130%
% Goal Attainment
Below Target Above
Performance Excellence
Threshold (100% of goal) Excellence
Percent of 55% above, 45%
Rules of 10-15% 10-15% above excellence
Population below
Thumb
Amount to Pay 10-50% 100% 200% to 300% (avoid caps)
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13. III. MOTIVATING PERFORMANCE
If you expect different distributions of
performance, you should have different payout curves
Situation Performance Distribution Appropriate Payout Curve
Example A Payout Curve (Example A)
20 300%
% of Target Incentive Earned
250%
Typical B to B sales 16
12
200%
Reps
150%
or 8
100%
4
Growth products 0
50%
<70% 71% to 81% to 91% to 101% to 111% to 121% to >130% 0%
80% 90% 100% 110% 120% 130%
50% 75% 100% 125% 150%
% Goal Attainment
Goal Attainment
Example B Payout Curve (Example B)
50 300%
% of Target Incentive Earned
250%
Strategic account sales 40
200%
30
Reps
150%
or 20
100%
10
50%
Modest growth products 0
<70% 71% t o 81% t o 91% to 101% to 111% to 121% to >130% 0%
80% 90% 100% 110% 120% 130%
50% 75% 100% 125% 150%
% Goal Attainment
Goal Attainment
Example C Payout Curve (Example C)
50 300%
% of Target Incentive Earned
250%
Recurring revenue sales 40
200%
30
Reps
150%
or 20
100%
10
50%
Mature products 0
<70% 71% to 81% to 91% to 101% to 111% to 121% to >130% 0%
80% 90% 100% 110% 120% 130%
50% 75% 100% 125% 150%
% Goal Attainment
Goal Attainment
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14. IV. TALENT ATTRACTION & RETENTION
Evaluating target total cash compensation
annually helps ensure competitive 'on target earnings'
Key Considerations
Total Target
l Role specific requirements (experience level, education, Cash
specialised knowledge, risk tolerance) (100%)
l Company pay philosophy
Target The sum of the
l Cost of sales Incentive base salary
Compensation midpoint (60%)
l Cost of labour and TIC (40%)
(40% of TTC)
l Percentile at which to benchmark pay levels equals 100% of
target total
l Competitive practice compensation
(TTC)
l Product/service competitors Base Salary
(60% of TTC)
l Labour market competitors
l Need for appropriate mix of base salary and incentive
l Need for meaningful and motivational incentive levels
l Justification for different pay levels within and across
the sales organisation (e.g., by role, geography)
Most sales organisations target delivering compensation between the
market 50th to 75th percentile for 'on target' performance
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15. V. GOVERNANCE
Studies show sales compensation governance is often
sorely neglected
“In most organisations, the term sales compensation
governance is an oxymoron.
Sales compensation is often a free-for-all, ‘owned’ by
everyone and no one at the same time, subject to a wide
variety of individual pressures, governed by exception and
loosely run on an ad hoc basis”*
* Source: Gundy P. and Gaeta E., “Sales Compensation Governance: The Last Frontier of Corporate Reform,” Benefits Quarterly, First Quarter 2004.
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16. V. GOVERNANCE
Creating a plan governance framework
Alignment & Design
Alignment and l Compensation philosophy
Design l Incentive plan design
l Scenario modelling and costing
Codify or Œ
Refine Goal Setting and Budgeting
Processes and
Procedures
• • l Goal setting
Document
Expand Assign l Budgeting, forecasting and accruals
Outcomes/Create Accountability &
Audit Trail Consequences
Ž Administration
Monitor,
Oversee &
Enforce l Collecting and validating performance
data
l Calculating award amounts
l Communicating, motivating and
reporting
l Managing exceptions, disputes and
adjustments
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17. Done well, sales compensation serves to align the
interests of different stakeholders
l Convenience
l Value
l Information
Customers
l Solutions
l Shareholder return l Compensation
l Profitability Sales
process l Career
l Growth value development
l Corporate image added l Job satisfaction
l Compliant sales
Sales
Companies
personnel
The topics discussed today are critical to realising this alignment
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18. Thank you!
Ron Burke
Director, Sales Effectiveness & Rewards
Towers Watson
71 High Holborn
London
WC1V 6TP
+44 (0)20 7170 3257 office
+44 (0)7989 337 248 mobile
ron.burke@towerswatson.com
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