If a nose were 12 inches long, would you call it a foot? Let the debate begin!
Though humorous, it does ask a deeper question, what is the appropriate unit of measurement? When it comes to your sales compensation plans, how you effectively define your plan measures can affect your strategic GTM strategy, how you track your KPIs and how best to reward your sales team for achieving these measures.
But what if there are multiple measure? When one gets their blood drawn, if the only measure was “how red is it” you might feel short changed on all the tests we can run to assess a level of health. But even the next layer down, we could give you a result with 100 different variables, could we maximize every single one of them? Probably not. A healthy balance needs to be had between what we define as trackable success and the weighting of importance we give it to incentive appropriate action towards success.
Sales Compensation Plan Measures
Here are some common measures and elements used in sales compensation plans:
Revenue-Based
- Sales Revenue: Compensation based on total sales revenue generated.
- Sales Growth: Bonuses for achieving a certain percentage increase in sales over a previous period.
Profitability-Based
- Gross Profit: Incentives tied to the gross profit margin on sales.
- Net Profit: Compensation based on the net profit generated by the salesperson’s efforts.
Performance-Based
- Quota Attainment: Bonuses or commissions for meeting or exceeding sales quotas.
- Sales Targets: Specific sales goals for products, services, or customer segments.
Customer-Centric
- Customer Acquisition: Incentives for bringing in new customers.
- Customer Retention: Rewards for maintaining and growing existing customer relationships.
- Customer Satisfaction: Bonuses based on customer feedback and satisfaction scores.
Product-Specific
- Product Mix: Compensation for selling a balanced mix of products, including high-margin items.
- New Product Sales: Incentives for promoting and selling new products.
Activity-Based
- Lead Generation: Rewards for generating a certain number of leads or prospects.
- Sales Calls/Meetings: Compensation tied to the number of sales calls or meetings conducted.
- Conversion Rate: Bonuses based on the percentage of leads converted into sales.
Strategic
- Market Penetration: Incentives for increasing market share in a specific territory or market segment.
- Cross-Selling and Upselling: Rewards for successfully selling additional products or upgrades to existing customers.
Team-Based
- Team Performance: Compensation based on the collective performance of a sales team.
- Territory Performance: Bonuses for achieving targets within a specific geographical area.
These array of options can help define the important metrics for the organization, but how much weighting should we give them?
Sales Compensation Plan Weighting
The general rule of thumb is to have no more than 3 measures as part of any sort of performance evaluation. Any more than 3 and you are likely spreading your sales team too thin across numerous metrics. It’s a negative for two reasons: focus and compensation. Trying to juggle too much makes it harder to focus on what really matters, and if the weightings are too light, by default a sales rep will not put any serious intent behind pursuing those goals.
Here are the key guidelines to follow when it comes to weighting:
- No more than 3 measures, ideally 1-2
- Minimum weighting of each measure must be at least 15% of target incentives
- Avoid subjective evaluation as much as possible, this can lead to major “fairness” questions
- Use Key Sales Objectives (KSOs) to work towards results that are difficult or unable to be tracked by sales
Plans versus Weights
Remember, your success is what you track and measure. The plan measures and weights are how you decide for the company and the sales team but you think is the best way to measure success. Weighting key measures can help focus goals and outcomes (incentives) to ensure holistic approaches can be achieved.
This article is part four of a monthly series on sales compensation planning and is brought to you by Alvarez & Marsal, a Talentfoot Executive Search strategic partner. For more information about how we can help you recruit sales talent and build an effective sales compensation plan, please contact us here.
