This is part of a series of blog posts related to helping build an understanding of sales compensation plans and some of the mechanics that go into building a great plan that takes full advatage of your Sales Performance Management software. Our goal here is to break this down into a series of bite sized topics that are easily digestible. The topic today is an advanced one (more sales compensation 201 than 101 level) related to Performance Periods.
Plans have components that are affected by the element of time in different ways. Key elements commonly affected are Quota's, Performance and Payroll. The time element of each of these dimensions can and often are managed discretely in the plan design process. We often hear about plans with Year to Date achievement against an annual quota, paid monthly and reconciled quarterly. The following scenario is a rather advanced discussion of the implications of some of these Sales Incentive Compensation plan design decisions.
Included below are comments from leading industry practitioners as well;
Subject: Plan design question: Performance Periods
After examining their sales strategy, a company wants to shift from a quarterly performance period with monthly payouts to an annual performance period (with monthly payouts and quarterly reconciliation/true-ups). A well know dynamic of this type of plan is they occasionally result in a negative ‘balance’ for some sales reps after a quarterly reconciliation. What methods have people used to dampen the effect of this negative balance? The fear being that a rep may just walk away from a large negative carry-over rather than work through it over the course of the year.
High level goal:
It would be smart to recognize/award the big sale while minimizing the risk of exposure to a negative balance at the reconciliation/true-up period come quarter end.
Here are two ideas:
#1: Put a ceiling on the cumulative quarter-to-date payout.
This would be reflective of the business since industries experience a lift in certain quarters during the year. For example, if Q3 represents 30% of the annual sales plan, limit the bonus for the first two months in the quarter to no more than 30% of the annual target bonus. A multiplier could also be added to this limit based on individual performance or an overall number set by the business. The reconciliation/true-up at quarter-end would payout any trailing credits, if applicable. If there will be an annual reconciliation/true-up related to the annual performance period, follow the same methodology.
#2: Stagger the sales credit based on milestones.
A large sale usually translates to a potentially lengthy period post sale from an operations standpoint to install, implement, test and migrate client to a formal client services group. There is also the potential of buyer’s remorse or discovering a deal-breaker issue than was not known during the sales process. In this scenario, a certain percentage of the sale would be credited immediately and then the remaining would be credited when certain milestones are reached. As sales people should always be selling and not chasing credit for old deals, the upfront credit should be the large majority of the total sales amount with a $ ceiling limit.
One final thought. Does the business want to encourage or discourage the sales rep. from pursuing these complicated sales? If they want to discourage elephant hunting, make the compensation policy more conservative in terms of when the sale is fully credited.”
“Although caps are usually seen by the sales force as punitive (if I made the sale, you should pay me), when you make the change in your plan and roll it out, show them the data that indicates they could find themselves in a payback mode, and that is seen as a negative as well, so to reduce the impact of paybacks, we are capping monthly payouts at X times monthly target, excluding any spiffs. I think this goes back to not making a forklift change of your plan - doing it in phases, telling them why, keeping them involved, etc .“
“Another potential issue in this situation is the magnitude of the variable portion and frequency of the performance cycles of the sales compensation versus the salary. If the salary / fixed portion of compensation is set at too low a level and a few below-target months of sales results put the rep in an untenable financial position... you might need to revisit your pay mix. It is important to understand the length of the typical customer purchase decision, recurring seasonal, cyclical sales patterns, etc. to best match the performance periods and related payouts in the sales compensation plan.
I once worked with a company that experienced more than 50% turnover in reps largely due to this type of problem. After more than 12 months of training, reps were suddenly switched to a plan that 'starved' them because salaries were set too low and sales incentives could not possibly fill the void when customer purchase decisions took 4 to 12 months. The resulting turnover costs (training time, vacant territories, lost customers, etc.) was far greater than the amount required to adjust the pay mix with a viable salary.”
“This is a great question. I would love to know what measures have been taken to avoid such issues by various companies.
The fact that sales people can leave with a negative true-up balance is valid and happens all the time. We have encountered this situation a few times in our company. Sometimes the company has to take that charge and write it off or in case the individual has a Base Pay plan besides the Variable Pay then the difference could come from the Base Pay. However, not many companies offer both Base & Variable Pay to their sales team and there are legal and compliance limitations as to how much you can take away from the Base Pay”
In my company the employee could ask to receive less during the year, for example 50% of their potential monthly variable, if they think they might not meet their target, to avoid to have to give money back.”
“One other good practice that I have seen is to not pay any accelerator until the sales rep achieves the full plan quota, not the "plan to date" quota. By doing that, you can avoid the overpayment and negative if there is a need to reverse the transaction.”