Your Sales Compensation Program will Change for the Next Fiscal Year
More than 90% of all companies make some type of change to their sales compensation program for the new fiscal year. Most changes will be minor, others significant and about 10%-12% of all companies will undertake a major top-to-bottom review of the pay practices for sales personnel.
First, let’s examine the most common annual sales compensation plan changes. Then, we suggest using our checklist to prepare for the pending fiscal year program updates.
What is the most common change each year? Performance measures! You can anticipate that management is eager to align the sales force with the company’s new strategic objectives. The critical inflection point of the sales compensation program is the performance measures. Want to reward revenue growth? Pay on revenue growth, new account or reduced account churn. Want to reward profitability? Pay on profitability—pricing, deal margin or product mix. Want to improve penetration selling? Reward cross-selling outcomes.
The list continues.
Do you have a new sales objective for the coming fiscal year? Make sure the sellers are aligned with that objective. Yes, you will need to update the pay plans for the looming fiscal year.
Consider these additional factors causing pay program changes: redefining the customer experience, new sales channels and mergers or acquisitions. These changes will drive changes to customer contact jobs. Sales job changes will require updates to the pay plans.
Sales Compensation Fiscal Year Checklist
Sales compensation plans have many moving parts. If your company has numerous jobs with lots of sales personnel, even minor changes to the pay program require precision coordination of stakeholders, resources and HQ personnel.
- Game Plan - Begin with a well-documented game plan: steps, accountabilities and timelines. Secure senior management approval of each project element: assessment, alignment confirmation, plan design and implementation requirements, including IT automation and communication roll-out.
- Strategic Objectives - Interview senior management, including business unit management, finance and the general manager. Ask what the sales department needs to accomplish next fiscal year: What should it continue doing, stop doing and start doing?
- Enablement Platform - Meet with senior revenue leaders. Review all sales enablement efforts: recruitment, onboarding, learning, career pathways, performance reporting, appraisal/development, digital selling solutions and first-line sales manager charter. Determine how reward programs, such as base pay, sales compensation, contests/spiffs and recognition programs, align within the full sales enablement envelope.
- Pay/Performance Analytics - Find out how the current pay program is functioning. Conduct pay/performance analytics by job to determine how well the pay program drives and rewards important sales outcomes.
- Job Clarity and Focus - Work with sales strategists to confirm, and in some cases, redefine sales job duties. For each job, measure time allocation, confirm expected sales outcomes, review headcount levels, reconfigure jobs that have become outdated, overburdened, conflicted and ineffective. During field interviews ask these simple questions of job incumbents: What does your manager expect you to accomplish? How well is your work configured to accomplish these objectives? Does the current incentive program recognize the realities of your job? Is the pay program aligned and fair?
- OTE/Mix/Leverage - Get fresh market pay data to update on-target earnings: base salary plus target incentive. Recognize that recent inflation and recession trends have upended historic pay level trends. Labor shortages are driving up starting salaries and thus causing wage compression. Revisit salary budgets to ensure they are competitive with market practices. Ask survey providers to update any data older than six months. Confirm the pay mix (base/target incentive) split. Remember, more seller influence, the greater the pay mix; less influence, the higher the base pay. Use 90th percentile survey pay data to ensure the leverage (upside earnings) is competitive for each job.
- Regulatory and Representative Requirements - Ensure compliance with regulatory and representative requirements. Depending on country location, expect numerous regulatory requirements affecting pay mix, sales crediting and program changes. Representative requirements, such as works councils, need engagement and concurrence.
- Design and Cost Modeling - Assemble a task force representing sales management, field sales leaders, sales operations, product management, finance, IT and HR. Charter this committee to assess the current plans, confirm job duties and design new plans—as necessary—for each job.
- Quotas - Ensure revenue management delivers vetted quotas in a timely manner to power the incentive plans. Quotas—degree of challenge? Set quotas so that at least 50%-60% of sellers can reach and exceed their sales objectives. Adopt a mega-order policy to address unpredictable mega orders. Keep uncertain new product revenue out of the revenue quota. Instead, use contests/spiffs to launch new products. Add new product revenue during the next quota setting cycle when predictable revenue performance emerges.
- Modeling/Costing - Power up spreadsheets or incentive compensation software to model the cost of the new pay plan. For each job, assume different levels of overall performance. Assess the cost implications. Use historic data to evaluate the impact on individual sellers. Adjust if cost exposure is too risky or pay displacement affecting individuals is too generous or too punitive.
- IT Automation Planning - To avoid overtaxing plan administration and automation support, limit the number of incentive components per job to three or less. Reduce discretionary practices. Adopt clear rules without exceptions for quota adjustments, account assignment changes and sales credit assignments and splits.
- Communication and Implementation - Time to sell the new plans. Use field sales management to communicate changes and updates to the pay plans. Provide robust communication materials. Where legally required (and elsewhere) obtain signed acknowledgements from job incumbents.
- Clarifications and Corrections - Provide clarification communications to address unexpected confusion. Recognize mistakes that might have occurred. Correct mistakes and provide timely explanatory communications.
Do you need to update your sales compensation for next fiscal year?
Now is the time to get moving and revise the pay plans. Waiting until year-end will only compound the challenge.
Nothing undermines sellers’ confidence more than delayed pay programs. They want to sell, but they also want to know how they will be paid for their efforts.