Implementing Strategic Sales Compensation Plans

An estimated 85 percent of companies in the United States use incentive plans, accounting for approximately 40 percent of total sales compensation. That’s a lot of money and managerial effort. Yet in a recent survey of 700 firms by CSO Insights (Sales Performance Optimization – Sales Rep Hiring/Compensation Analysis), 20 percent reported that their compensation plans had “minimal or no impact on selling behavior,” 12 percent said they “do not know” about the impact of their plan and only 8.9 percent found their pay policy “consistently driving precise selling behavior.”

One reason for disconnects between incentives and salesperson behavior is that, in many firms, the people designing pay plans do so according to an obsolete vision of sales tasks. There’s no such thing as effective selling if that selling doesn’t link to your firm’s strategy. To bridge this gap, businesses should adhere to the following when designing their compensation plans:

  • Understand the important sales tasks in your organization and what the sales person must do to drive strategy execution and results. In selling to retail trade customers, for example, sales tasks can usually be divided into three categories:
  1. Volume-Influencing Activities: selling new items, getting more shelf space for established items, selling point-of-sale materials or in-store displays and negotiating trade promotions.
  2. In-Store Service Activities: shelf audits, handling damaged merchandise, ensuring product freshness and handling queries from store managers.
  3. Supply-Chain Management Activities: sales forecasting by account, establishing and managing delivery schedules, and coordination with your firm’s operations people for that customer.
  • Set priorities among these tasks. It’s your strategy, not a generic selling methodology or organizational legacy that should determine the priorities. For example, companies with automated replenishment systems for customers have less need to focus on supply-chain tasks in their sales comp plans because these tasks are largely handled in non-sales areas, such as IT. Similarly, B2B compensation plans should emphasize which portion of selling is attention to delivery, price negotiations, building channel relationships, pre- or post-sale applications support, cold calling, or cross-selling more to current accounts.

The relative importance of these tasks typically changes over the course of the product-market life cycle. Early in the cycle in technology-driven businesses, for example, customer education and applications development are often key sales tasks. But as the market develops and standards emerge, salespeople spend more time selling against functionally equivalent products or developing third-party relationships. Your comp plan should keep pace with these task changes or strategy execution falters.

  • Finally, in designing compensation plans and shaping incentives, there is ultimately no substitute for ongoing field interaction, including actual sales calls. Especially in an age of “big data,” that field knowledge is a necessary complement to aggregate data about markets and burgeoning statistical correlations.

It’s not the responsibility of customers to inform you when changes occur. It’s the seller’s responsibility to track and adapt compensation plans accordingly. The point is to focus on how the salesperson makes a difference with customers today, not yesterday.

Frank Cespedes is the MBA Class of 1973 Senior Lecturer of Business Administration at Harvard Business School. He has run a business, served on boards for start-ups and corporations, and consulted to many companies around the world. He is the author of six books, most recently “Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling,” and many articles in Harvard Business Review, The Wall Street Journal, California Management Review, and other publications.


Follow Frank on Twitter @fvcespedes.

This article originally appeared on Business 2 Community.

Categories:   Blogs, Marketing