Is your pay plan working? Try doing our top-line review this summer and find out
I am often asked to help a client determine whether their current sales rep and sales manager commission-bonus plans are working, by design or in practice.
Before engaging in time-consuming and in-depth rounds of fact finding, interviews or analyses, I always suggest a “top-line” review to see if there appears to be a problem in the first place.
So, what is a top-line review? Glad you asked. It is a high-level analysis of the effectiveness of your current commission-bonus plan. It simply asks the general question: “Are your sales reps and managers being paid correctly based upon their performance?” To do so requires three simple steps:
- First, collect two years (or more) of performance data for each sales rep, sales territory, account assignment or region—however the sales force is organized. You will want to use performance metrics like: revenue, gross profit, contribution profit before overhead, volume or other quality-of-revenue measure of performance. Much emphasis should also be placed of year-over-year growth. When I have finished collecting this data, I then meet with the CEO and ask which performance metrics are most important to enterprise success—usually it quickly evolves into a sales versus profit discussion. With priorities set for the performance metrics, we then rank the sales reps and managers high to low starting with the best performers within the entire affinity group at the top of the page. Simple so far?
- Then, we collect sales-rep and manager territory or region commission and bonus data for the same period of time as the above performance data—we usually recommend the last six to eighteen months, or more. Current-year data can also generally be predicted based upon (at least) six months of year-to-date results for both performance and pay. With the matching commission-bonus data in hand, we can then also rank the sales reps and managers highest to lowest with the best earners at the top of the page—just as we did above. Do you see where this is going?
- Lastly, lay both above lists side by side. Do the best performers earn the most? While you are seldom going to find a perfect one-on-one match or correlation, an effective pay plan will (rank-order) match top performance and earnings over 75% of the time. And if you break the performance rankings into top 1/3, middle 1/3 and bottom 1/3, the correlation of pay and performance for an effective plan should even be higher.
Using a top-line review, an effective pay plan will clearly shine, while non-effective plans will display nothing but exceptions. If your plan is clearly not effective, quick action is indicated—and midyear is a good time to find out.
While the findings of your sales-pay assessment might not turn out to be black and white, the above analysis will clearly present a series of questions to be addressed and will also likely prescribe a required course of action and next steps.
It is the middle of summer and your accounting staff has just probably closed the 1st half of the year. Ask your CFO for 2013 and 2014 YTD performance metrics tomorrow and start your top-line review immediately. You have no time to lose.
Wilkening & Company has spent three decades assisting clients with improving sale force effectiveness through performance management, compensation and organization. If you think your sales force or sales-pay plan is falling behind the competition or the market, call us we can help. firstname.lastname@example.org, (847) 823-5090.