They say all is fair in love and war. But that’s it – only in love and war. All is certainly not fair in sales.
And that’s ok. Competition is healthy in sales organizations. It inspires sales people to work harder. But there’s a point at which internal rivalries or perceived inequities become destructive. Tension often comes from how much one rep is paid compared to another.
We recently worked with a client that told us the mechanics of their plan were broken: those calculations that tabulate how much a rep gets paid. And they were correct. People were getting paid wildly different amounts for the same performance in the same territory. The reps quickly figured it out and they were mad. Internal tensions escalated and became a major distraction for sales leadership. This was the wrong type of competition for the team. The noise soon made its way to the CEO’s ear.
This incident reminded us of how poor comp plan design can easily trigger unhealthy competition. Here are three common comp design factors that annoy and anger reps:
1. Broken quota processes
This issue is related to varying payouts for the same performance, but more common. We frequently find companies setting quotas without looking at the opportunities in each territory. Equally bad are companies that don’t connect their quotas to any sort of strategy. We’ve seen some sophisticated organizations take an overly simplistic approach to quotas. These sales leaders do little more than say, “Here’s your quota. Go sell as much as you can, to whoever you can.” Not surprisingly, these companies overpay underperformers and underpay some of their best performers. They end up with a reverse bell curve. Again, reps talk. News of pay disparities like this will spread quickly across the team. Your best reps quickly become frustrated and mad.
Solution: First, make sure to have a strategy behind quotas. Then apply a quota methodology that is fair and transparent (or as fair as possible). More to come in future blogs on this topic.
2. No system of governance
A bad quota-setting process can lead to reps were getting paid ridiculous amounts in incentive compensation. At one client, we found a rep making over $500,000 in incentives on a $1.5 million quota! Considering his base salary, the company was paying him almost 50% of the revenue he sold. We’ve yet to find any industry or business model where a cost-of-sales metric like that makes any sense!
A practical issue comes when companies announce they’re changing the comp plan to address this type of issue. Often, a mutiny erupts. While the overpaid reps might depart, your good reps aren’t likely to react well either.
Solution: While we don’t recommend caps on comp plans, a well-thought governance process and advisory board is critical. These become part of the ‘checks-and-balances’ that prevent unfair or unsustainable payouts. A governance board can review ALL payouts for extraordinary performance (i.e., above 250% of goal). This board should be cross-functional and include sales ops, HR, finance, and perhaps legal. Consistency and logic in your governance model keep rep emotions in check.
3. Not focusing on the right behaviors
A sales compensation plan should motivate the right behaviors. But many plans are overly focused on ‘the math’ – specifically the payout curves. These plans aren’t connected to the overall sales strategy. And they don’t guide the daily decisions and actions of the rep in a way that moves the business in the right direction.
Obviously, most reps are motivated by money. Their sales activities will follow the shortest path to the most money. Unfortunately, not every customer is a good customer and not every deal makes sense. Sales managers and leaders can’t blame reps if their comp plan doesn’t drive the desired behaviors.
Solution: Don't rush to your spreadsheet to solve these problems. Take a step back and evaluate your strategy. Do you know with confidence the behaviors you're incenting? Are you paying for the right measures? Are you paying through the right mechanics? How does your plan support or conflict with your strategy?
Of course, sales people will talk to one another. You can be sure they’ll compare their results and payouts. Open communication and appropriate transparency will help dispel rumors. This keeps your reps focused on their jobs.
Too many times sales compensation design is a year-end scramble. Or worse, it becomes an after-thought. Every year, we receive a panicked ‘holiday’ call asking if we can fix a plan design before January 1. Short on time, too many companies end up defaulting to last year’s plan with a ‘tweak’ to a measure or pay-out curve. Clearly, this isn’t a long-term solution. Now is the time to properly assess the current state and future potential of your incentive program.
Contact us for an assessment of your current plan or to simply discuss ideas for potential plan improvements. We’re happy to share more learnings to help keep your reps happy, motivated, and on-track for results.