Does your sales-pay plan need a 2014 tune up, or a new engine?

Does your sales-pay plan need a 2014 tune up, or a new engine? 

As 2013 reaches the quarter pole, it is a good time for CEOs and sales executives to pause and ask themselves whether the sales force’s 2013 pay plans are still effective and will still work for 2014 and into the future. In our experience, there are five basic questions to ask that will get to the heart of pay-plan effectiveness and its strategic compatibility:
  • Is your pay plan delivering competitive earnings for those sellers who do what you ask? This question is answered directly by gaining access to market-pay data and comparing your actual pay-plan outcomes (or targeted pay-plan outcomes) with select job or industry pay benchmarks. We suggest using a national database like Towers-Watson, and coordinate it with other local or industry sources (if available). The trick is matching your jobs and performance expectations to the right market benchmarks.
  • Is your current sales pay plan perceived as fair? Of course, fairness is always measured in the eyes of the beholder. From the perspective of the company we assume that it is a fair plan—otherwise why would you be risking the damage an unfair pay plan can cause—i.e.: lack of performance or high and costly turnover. But what about your sellers? We find the best way to answer that question is to ask them. Use either an attitude survey or third-party interviews to collect the attitudes and perceptions of the sales force toward its current pay plan. Never ask them if they should make more money—the answer is predictable. But, broadly inquire about such as topics as: paying “right” or “fairly” or “adequately recognizing seller performance.” A good survey or questionnaire can reveal much about seller attitudes and the sales force as a whole, and objectively establish a solid case for future remedial actions.
  • Are there features inherent to your current pay plan that work at cross purposes to seller motivation, performance or retention? This generally requires a review of the “mechanics” of the pay plan. In such a review, we advise you look for telltale signs of trouble as:
    • The payout mechanisms of the plan take (e
      ither already paid, or to-be-paid) bonuses away from the seller or freeze payouts for months at a time;
    • The thresholds for acceptable performance (and payouts) are high and the average seller does not or cannot earn a bonus. [Now paying for performance is important in any plan, but you must pause and ask yourself if a general lack of bonus payout is a performance issue or caused by the design, metrics or goals of the pay plan?]
    • A seller must wait too long to see any bonus payout throughout the year? If the sales plan is highly leveraged, “too-long” may mean the difference between paying bills on-time, or borrowing to do so.
    • The sales pay plan is quite complicated in description and methodology, and difficult to understand or explain to a 3rd party, or anyone [Remember the one-page rule].
  • Does your current pay plan drive the “right” behavior from your sales force? A simple way to answer this question is to look at macro results for the company and sales force. For example, if your multi-year goal has been to increase the profit contribution of the business, then the pay plan should have motivated the sales force to do so—channel-by-channel or transaction-by-transaction. If you have not grown profit as desired, the design or direction of the sales-pay plan may be suspect. While there may be other factors in such a shortfall, sales pay must be considered prominently in the mix of causes. On the other hand, if you have steadily met your strategic objectives over the past years, you can bet that something about paying your sales force has contributed to that outcome; even if you cannot make the direct link. In such a situation, be very careful if you decide to change your pay plan for the coming year. Beware of unintended consequences.
  • If you are using revenue or profit goals to determine performance (and ultimately bonus payouts) have more than 2/3 of the members of your sales force earned a target-sized bonus (full-bonus), if overall company annual goals or objectives are achieved?  In other words, do 2/3 of your sellers have a statistically-high probability of achieving their performance goals? If not, your goals may be set too harshly—where sellers are destined to routinely fail. While some would argue that performance goals are not part of the mechanics of your plan, how (and where) they are set is surely instrumental in the motivation and confidence of the sales force. As is often said: a good sales pay plan with unrealistic goals will ultimately fail.

So, does your sales-pay program need a tune up for 2014? To answer that question, ask yourself the above five questions starting this week.

If you get mixed results to your inquiry, it is generally an indication that something is amiss. In such a case a pay-plan tune up may be more appropriate than a total overhaul. Of course if your company is dramatically changing its strategic direction or goals for 2014, forget the questions, a pay-plan overhaul is very likely required.

We have suggested that a good time to evaluate sale-pay plans is about this time of year (or, early autumn). This allows thoughtful preparation for the coming year. But, we really believe that these five questions should be on the desk of the CEO and top-executive team every day of the year.

Your sales-pay plans are far too important to be examined but once a year.

Wilkening & Company has assisted clients for near 25 years in the evaluation & design of effective sales-force, manager and executive compensation arrangements. Over 100 plans have been implemented. Are you having a problem with your incentive or bonus plans? Give us a call, we likely have a solution.

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