A common challenge companies have when developing sales compensation plans is ensuring the variable components pay for the desired performance. To do this, you need to understand the definition of "performance" in the first place. Here are three things you shouldn't do, followed by three things you should do:
What Not to Do
- Don't assume last year's performance is a predictor of next year's results. Taking the number up by an arbitrary percent or revenue goal is transparent and careless. Your 'A' players will see right through it and question your credibility. Worse, they will start looking for a new job.
- Don't create quotas in a vacuum. The performance of your company is a single data point that may not represent a complete picture. You might not think there is good data available to determine how to set the quotas of your team. This is incorrect. There are a myriad of resources available to assess territory potential.
- Don't take the base and variable plans from the last few years and raise them by a few percentage points. Invest in market-based information to help craft both the total target compensation (TTC) and the right mix of base and variable compensation.
What You Should Do
- Look at your own historical growth trends by sales territory. Are they growing, contracting or staying flat? Any root causes for the performance? Look for trends like territory turnover, market contraction or outlying factors that might contribute to the performance.
- Look at the performance of your peer group across those same territories. How do you stack up? Where are you leading/lagging the curve and can you point your finger to any potential causes like customer defections, out of business or not enough resources?
- Leverage compensation benchmark information. Use objective data to understand how to allocate the variable compensation component of their pay. Once you've determined the key growth trends by territory, you can begin to understand the performance of the sales rep relative to an objective benchmark. What is the current performance and what is required to match or improve relative to the peer group next year?
Sales reps will always question how their compensation and quota plans are established. Designing plans using objective data and matching it to market trends is a great way to validate your sales compensation models in 2012.
Thanks to Ryan Tognazzini / Sales Benchmark Index
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