Why the Right Compensation Plan is Important

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A well designed sales compensation programme can provide dramatic improvements to sales results and motivation.  They ensure the right focus and desired behavior in achieving corporate goals and objectives. In addition to setting clear objectives for people, they reward good performance, the better the performance, the greater the reward.  This in itself can help Companies retain its best people and recruit top professionals from outside the organisation while encouraging average performers to get better. Through Special Incentive Programmes (SIP’s), which are discussed later, dramatic results can be achieved for focused campaigns.

Compensation Plan Best Practice

When designing compensation programmes there are some basic principles which need to be followed.

  1. Plans should be aligned throughout the hierarchy – as with individual KPI’s, to drive the desired results, everyone should be working towards the same goals. The only way to achieve this is to align the plans throughout the hierarchy so results contribute to the master plan. This is normally facilitated through a top down plan, where the corporate goal filters down through the organisation.
  2. There should be 1 plan for each job role – Sales compensation follows sales job design. The plan should support the sales management objectives and KPI’s for each sales position. The number of unique sales compensation plans should be equal to the number of unique sales jobs.
  3. Plans should support corporate and customer goals – People typically behave in the way they are rewarded. The compensation plan should reward individuals for exhibiting the right behavior required to achieve corporate goals. Given that “world class” sales organisations focus their activities around helping the customer achieve their goals, compensation plans should include reward for developing excellent relationships with, and a deep understanding of customers.
  4. Plans should drive corporate results – whilst the most successful sales organisations are customer centric, the best plans drive the behavior and activities required to achieve you corporate results. In line with setting job role KPI’s in line with corporate strategy, compensations plans should also focus on a small number of these KPI’s to really focus the sales force on the critical elements.
  5. Compensation plans should be self-funding – a mature plan will ensure that while top performers can earn large amounts of money, it is only a proportion of the additional revenue they generate for the corporation.
Summary Table of Best practice
UnderstandingLimit complexity 

Enhance communication


Provide timely communication of  plan details



FairnessConsider differences in growth opportunities across territories and account base in plan design 

Improve accountability and measurement of territory and account performance


Gain field level acceptance of goals


MotivationPay for performance 

Provide tangible goals


Maintain uncapped payouts ( but self-funding)


Provide accountability towards individual goals


Provide up to date information on

performance against goals


TargetsHave a fiscally responsible target 

Develop goals tied to corporate objectives


Allow focus on solutions that improve customer productivity and help them achieve their business goal


Compensation Plan Potential Pitfalls

Implementing a plan as a new initiative or revising an existing plan does not come without its problems. In most cases the problems occur because the design of the plan has flaws. When changing an existing plan there is normally substantially more data available to aid in the design of the new plan than there is when implementing a plan for the first time. To protect both the company and the sales force, it is normal practice to implement the plan with lower risk for both sides. One of the biggest sources of problems when implementing a new plan is poor communication. People like to know exactly what is expected of them, when and how they are performing against target. Other common pitfalls are:-

  1. The plan is too costly – this is normally down to overstaffing or the targets have been set too low.
  2. Using the plan to promote product push – although SIPS’s are a good mechanism for driving specific campaigns, they should be used in addition to the main compensation plan. Where plans have been designed around product mix, they tend to focus on product push and do not focus on the customers’ real needs.
  3. The sales force think the targets are too difficult – sales targets should always be difficult but also achievable so people buy into the concept and want to perform well.
  4. People ignore certain aspects of the plan – this is normally down to poor design. Human nature dictates that most people will go for the route of least resistance to gain reward. The plan needs to drive the desired behavior and results. To achieve this, it is critical that the key aspects of the plan reward the desired results.
  5. The plan includes things that you cannot measure – again this is normally down to poor design. The plan must only include things that the organisation has the ability to measure. One of the biggest de-motivators for the sales force does not understand where they are against plan and what they need to do to achieve their reward.
  6. Copy a plan from elsewhere – although compensation plan models can work across different organisations, each plan needs to be tailored for each individual organisation to accommodate the uniqueness of each.
  7. Paying the sales force too much – this can breed complacency, where people are satisfied with their income and do not strive to deliver better results. This scenario also encourages average and below performers to stay around.
  8. Paying the sales force too little – this will result in the top performers leaving the organisation. One other factor to consider here is that it can take 6 – 24months, depending on the complexity of the environment or sales cycle time, for a person to become fully productive. This needs to be a consideration when recruiting new people and a guarantee period should be put in place.
  9. Paying top performers too little and poor performers too much – the outcome of this is simple, top performers will leave and poor performers will stay.

Other Considerations

No plan is totally perfect, in particular when a new plan is first introduced. It is normal to find occurrences where earnings do not reflect performance. The reasons for this are normally down to incorrect goal setting, market changes or the portfolio of accounts. In instances such as these it is important to firstly understand the reasons for the discrepancy before making decisions on the outcome. It is also important to involve impartial arbitrators.


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