Compensation is the number one reason why sales talent joins – and, in many cases, leaves – your organization. But with most companies revamping comp plans every year, it’s tough to ensure that your plan isn’t falling behind the pack.
To help you keep your compensation plan competitive in 2011, we’ve developed a list of the 5 keys to effective sales compensation plan design.
Here are the highlights:
1) Set Challenging, Yet Achievable Goals: Aim to have roughly 50% of the sales force hit goal. Goal achievement levels beyond this benchmark signal that goals are too easy, but less than 50% damages rep morale and leads to turnover.
2) Prioritize a Few Key Metrics: Include no more than 3-4 metrics in any compensation plan, and be sure that one of these is either gross revenue, profitability, or sales of specific products. Companies with more than 3-4 metrics in their plans find that reps become confused about how to spend their time.
3) Stay in the Variable Pay “Sweet Spot”: Set variable pay at 20-40% of total target compensation. Reps underperform when less than 20% of their pay is at risk, but they also become dissatisfied with the plan beyond the 40% variable mark.
4) Reward Your Star: Star performers should receive 2x-3x the pay of an on target performer. Pay leverage at this level is enough to satisfy stars without demoralizing core performers.
5) Over-Invest in Compensation Plan Communication: Ultimately, effective communication from line managers on how pay is determined and how fairness is ensured is more important to reps than plan design.
For more guidelines on compensation plan design, please see our 20 Principles for Designing and Maintaining Sales Compensation Plans.