This is the first in 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. Our goal here is to break this down into a series of bite sized topics that are easily digestible.
Two plan types dominate the Sales Performance Management landscape, the Sales Commission Plan and the Sales Incentive Plan. Keep in mind that we are talking about plan types here as the term “Commissions” has become synonymous with pay related to the variable portion of a sales reps compensation independent of plan types. The decision of what plan type to build is a complex one and should not be taken lightly. The behavior these plans will drive can be vastly different.
Sales Commission Plan
Typically describes plans that compensate the sales rep with a % of each sale. There is a strong correlation between the sales reps action and the closing of a sale. The sales cycle tends to be short This is a very results oriented plan where the overwhelming focus of the rep is on closing business (as opposed to other related activities such as account penetration, customer service, design wins, etc.). Commission plans can be based on many measures such as sales revenue, gross profit, or gross margin but the plans typically will focus on only a single measure. Reps will typically expect to be able to drill down and view the commission that was earned and paid on each deal or transaction. This can get complex when commission rates are tiered and sales may straddle two commission rate tiers.
Sales Incentive Plan
Typically describes plans that compensate the sales rep based on achievement of a predefined goal, target or ‘quota’ within a predefined territory or patch. Sales Incentive plans will often have multiple plan components with each referencing a unique performance measure (revenue, customer satisfaction, Sales cycles can vary across industries with performance periods (the time period over which performance is measured and rewarded) commonly matching up closely with the sales cycle. Quota time periods and Payout time periods may vary based on a number of variables such as Base/Variable compensation mix,
Other Plan Types:
Management Incentive Plan (MIP)
Focused plan targeted to senior executives based on company-wide metrics. Typically not part of a Sales Performance Management system, but occasionally included as they are typically not as challenging mathematically to administer and manager.
Individual plans; (aka MBO)
An MBO plan is an interesting plan type where the individual is measured against a finite set of predefined goals. These goals can be either qualitative or quantitative. Quantitative goals may or may not have sufficient systems in place to support the automated calculation of achievement (they often do not). The qualitative elements require managers and reps to collaborate on achievement to these objectives and rank achievement on an achievement scale. Goals may or may not have the same weight and achievement for qualitative goals are often quantified by a rating system (1= low performance to goal & 10= high performance to goal).
Not typically covered in a focused Sales Performance management Solution: Profit sharing, Gain sharing, Stock Options.