While I firmly believe (and have the data and research to back this belief up) that compensation is a very poor motivator, this does not mean that I don’t believe that sales compensation is not an important component of your structure.
In my previous post, I shared details on the mistakes made with sales compensation. In this post I’m going to share how to create a strong foundation to an effective sales compensation program.
When designing, or advising, on sales compensation, the first thing I do is ask these five questions, the answers to which should drive the details of the decision you make in developing your compensation approach.
The number one mistake made with sales compensation is using the comp system as a replacement for either effective management or process design. To state it simply, a good compensation system doesn’t make up for laziness.
It’s for this reason that you should start by clearly defining the objective of the comp plan. If you’re considering making a change to an existing program, clearly articulate the problem you’ve identified. Then stress test your answer to ensure that compensation is the best way to solve it. (If you do this right, it will reduce 80-90% of the impulse to change compensation.)
Here are two additional tips to help in answering this question:
Establishing a strong culture is important for any business, and your approach to compensation is one of the strongest signals as to whether you put your money where your mouth is.
Here are some things to think about when establishing your compensation philosophy:
If you’re going to be hiring more than 2-3 people in sales, I encourage you to create a sales compensation philosophy statement and share that as you do with other deliverables associated with establishing your culture.
I’ll never forget one of my first meetings when I began working at Merrill Lynch. I was sitting with a senior financial advisor who also served as a pseudo-assistant sales manager.
He leaned over his desk and quietly said, “The most important thing for you to understand about working here is that we utilize poor performers to subsidize top performers. If you’re in the upper quintile, you’re good. You don’t want to not be in the upper quintile.”
He was referring to more than just compensation with that statement, and that statement was clearly reflected in their compensation program. Average and below-average performers were underpaid, so they could overpay top performers.
These are just some of the objectives I often hear when I’m asked to advise on a company’s sales comp plan. To be clear, they’re all worthy objectives.
While the conversation typically focuses on objectives or goals, the ability to achieve the goals is actually focused on behaviors. Specifically, adjustments to sales behavior.
There are two problems with this approach:
As I shared in my previous post, I have not always been an advocate of this philosophy and approach. I’ve seen compensation systems motivate. I thought this was especially true of salespeople who, I believed, are more competitive than most people. I realized that I had, in fact, seen the effect, but I had misunderstood its cause.
Compensation appears to yield significant influence because it is a very simple and clear means of keeping score. Unfortunately, it’s often the only clear means of keeping score.
Money wasn’t motivating people; the desire to win was. As a friend of mine is fond of saying, “If you want to know the importance keeping score has on behavior, just watch a group of 12-year olds before and after someone says, ‘Hey everybody, let’s keep score.’” On a side note, this is the reason that sales commissions have such a bad reputation.
Your people are keeping score; the question you must answer is what and where is the scoreboard you want them using. Then you want to ensure that your comp plan aligns with, and balances, your scoreboard.
Compensation is a gigantic, unwieldy, and expensive stick. Ralph Waldo Emerson said, “What you are speaks so loudly I can’t hear what you say.” There are few things that speak as loudly about what you are (as a company).
For this reason, your compensation program is very important.
Compensation, however, has very little nuance (and when you try to add nuance into the plan, it creates so much conflict and complexity you’d likely have been better off doing nothing). You have very little control over the unexpected consequences that your compensation program will unleash. It’s also a very expensive tactic.
It’s for this reason you should work to keep your compensation program as simple and straightforward as possible and take the time and money you save and put it towards creating a structure designed for success.