3 Hazards of Performance Pay
Sales positions fall into 2 basic categories with degrees of variable compensation. On the one hand we have new business development positions that normally have at least 50% of their compensation achieved through ‘at risk’ performance. In some instances this can be 100% commission only programs. On the other hand, we have strategic account management compensation that is normally 80% or more salary based with lower levels of ‘at risk’ pay. The difference between the 2 categories is largely based on the primary responsibility of the representative. New Business Development reps are there to grow new accounts, while strategic account managers are there to retain and grow existing accounts. The positions are very different. In many instances, strategic account managers may have very long sales cycles and there maybe market forces that uniquely impact their ability to sell. In addition strategic account managers may only be acting as one player in a group of people that are required to sell through a product or service.
Those are the basics. What are the 3 Hazards that HR managers should avoid when designing compensation plans for these categories? Here they are:
HAZARD 1 | Don’t establish and measure too many Key Performance Indicators
“Tell me how I get paid, and I will tell what I will do.” This is the premise and often the thinking of anyone with an ‘at risk’ performance plan. Diluting the commission ‘pot’ by establishing and measuring too many key performance indicators (KPI) is seen as a disincentive. For example, if $2500 per quarter is available with 20 equally weighted KPI’s then the odds of ever getting $2500 is very low. By comparison, using fewer KPIs provides clearer focus and increases the probability of hitting the target. Most effective commission programs are designed with 3 or fewer KPIs. This increases job performance and employee satisfaction.
HAZARD 2 | Don’t make the measurement formulas difficult to understand
“I just got paid, but I have no idea how they arrived at the amount on my paycheque.” These words are all too often echoed by many representatives. The secret is to make it simple. If translating net margin calculations is complicated then don’t use them as a KPI. Go upstream and set gross margin targets. Put business controls in place to ensure net margins are predictable. Don’t make reps responsible for things they can’t control. A good rule of thumb is that commission payouts should only take a few minutes to understand. If you are spending more than an hour each pay period with your reps trying to explain how they got paid…it’s broken. It needs to be fixed.
HAZARD 3 | Don’t pay for X and expect Y
“I hit all my sales targets, that’s all I care about.” Sound familiar? If you are paying for individual effort then you get what you pay for. It is very important to establish in advance the type of sales team you want. If you are rewarding individual effort then you will attract independent thinkers. They will not be team focused. If you reward team effort, then you will attract team players. The devil is in the details.
In Summary
Every job position in an organization is an investment. Shareholders assess their investment level in people and determine the lowest possible costs with highest possible returns. Human Resource Managers assist in determining the value of each position within a defined company budget, and consistent with fairness, pay equity guidelines and market conditions. All sounds pretty familiar…right?
Consider sales positions that have some or all of their pay at risk based on performance. There are a number of variables that can be ‘at risk’. Here is some of the key performance indicators most often included in determining at risk compensation:
Individual sales targets
Net Revenue
Net Profit
New Account Acquisition
Existing Account Growth
Customer churn (losing existing customers)
Customer Retention (saving existing customers)
Gross Revenue
Customer satisfaction targets
Team sales targets
Company sales targets
Sales compensation design is a big topic. I would sure like to get your thoughts on this article.