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How to avoid C-suite sales compensation queries before year end

Compensation Strategy & Design
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By Ron Burke , Darren Tse and Brenda Maldonado | December 1, 2020

Analysis and data can help organizations motivate and fairly compensate sales forces in today’s fluid environment.

The pandemic is driving a variety of sales performance outcomes. Some sales professionals cannot access customers and have no orders, while others are seeing record sales. Managing sales compensation in this environment is challenging.

Organizations have responded with everything from immediate plan design changes to a “wait and see” approach. Organizations ultimately share the same key objective: keeping the sales force motivated while avoiding changes that may create bigger problems down the road. As we approach the end of 2020, we consider four key questions that sales compensation practitioners will need to address:

  1. How have 2020 sales compensation plan changes and exceptions panned out?
  2. Should we make year-end retrospective adjustments?
  3. What should 2021 sales compensation plans look like? Should we carry forward to 2021 changes we made in 2020?
  4. Should we manage issues on an exception basis?

There are two quick analyses we find useful to explore how plan changes and exceptions panned out: incentive distribution and incentive differentiation. The distribution of total incentive earnings relative to target incentive can provide good insights. For example, a symmetrical bell-shaped distribution (figure one) signals a typically desired outcome, whereas a bi-modal distribution (figure two) can signal “haves” and “have nots.”

Bell-shaped projected incentive earnings distribution

Figure one is a bar chart showing an example of a symmetrical bell-shaped distribution that signals a typically desired outcome. The data measures year-to-date projected incentive earnings distribution with percent of population on the Y axis and earnings as a percent of target incentive on the X axis.
Figure 1: A symmetrical bell-shaped distribution signals a typically desired outcome.

Bi-modal performance distribution

Figure two is a bar chart showing a bi-modal distribution example that can signal “haves” and “have nots”. The data measures year-to-date projected incentive earnings distribution with percent of population on the Y axis and earnings as a percent of target incentive on the X axis.
Figure 2: A bi-modal distribution can signal “haves” and “have nots”.

Visualizing the range of incentive earnings relative to the median incentive earned (figure three) provides a useful view of earnings differentiation. How steep is the curve? Is the differentiation appropriate by role? Together these two analyses provide a window into plan outcomes.

Earnings differentiation

Visualizing the range of incentive earnings relative to the median incentive earned provides a useful view of earnings differentiation.
Figure 3: Analysis of incentive earnings provides a window into plan outcomes.

Potential adjustments

What happens if an analysis suggests plan outcomes are not desirable? What adjustments should be made? Under normal circumstances, retrospective adjustments are not recommended. However, the current environment may provide some justification for these adjustments in lieu of making prospective changes in an uncertain environment.

An interesting approach is applying a relative rank or indexed performance overlay. A relative rank overlay (figure four) can be designed to provide minimum incentive payments based on a salesperson’s relative rank. For example, a salesperson ranked in the top 5% may be provided a minimum 300% payout (percent of target incentive), while a salesperson ranked around the 50th percentile would be provided a minimum 100% payout. This reshapes the payout curve and helps drive a healthy payout distribution without impacting the core incentive plan.

Relative rank overlay

Figure 4: A relative rank overlay can be designed to provide minimum incentive payments based on a salesperson’s relative rank.

Rank
Sample Payout Structure
Payout as a % of Target
Top 5% 300%
6-10% 250%
11-20% 180%
21-30% 140%
31-40% 120%
41-50% 100%
51-60% 50%
61-70% 30%
71-80% 0%
81-90% 0%
91-100% 0%

A similar alternative is using an indexed performance overlay (figure five), which works like grading on a curve. For example, if national performance is 80% and a salesperson achieves 96% of their individual objective, indexed performance is 120% (96/80).

Indexed performance overlay

Figure 5: An indexed performance overlay works like grading on a curve.
Illustrative Individual Performance Company Performance = 90%
Indexed Performance
120% 133%
110% 122%
100% 111%
90% 100%
80% 89%
70% 78%
60% 67%
50% 56%

Planning for 2021

At the same time as decisions are being made to close the plan year, questions about 2021 compensation need to be addressed. Should plan changes implemented in 2020 continue through 2021? Should a new design be implemented?

For many organizations, 2021 performance still cannot be forecasted with confidence. In the face of uncertainty, sales compensation changes based on the best available data today may backfire in the face of tomorrow’s reality. One way to address this challenge is to limit changes to the core incentive plan and use special short-term incentives (SPIFFS) for focus. For this to work, SPIFFS should be based on measures complementary to the core incentive plan and be limited in duration (no more than six months). That short-term orientation provides extra flexibility in times of uncertainty. In addition, the SPIFF payout should be calibrated such that it doesn’t exceed 50% of the core plan target incentive.

When weighing the advantages of making plan changes vs. managing through exceptions, it is important to consider these are not mutually exclusive approaches. A clear, documented exception management framework complements thoughtful design.

We recommend identifying the most common exception requests and documenting the policy for each. Of course, not every exception can be anticipated in advance, so keep in mind that consistent treatment of exceptions creates a precedent that can be almost as important as the policy itself. This reinforces the importance of a robust governance process.

If your organization does not have a documented SIP governance process today, consider implementing one now. We also recommend establishing a cross-functional exception review committee to ensure a well-rounded review of exceptions that includes input from sales, sales operations, HR/compensation and finance among others.

As you consider the tactical questions that arise as we approach year end, keep C-suite questions in mind. Facts will go a long way. Simple analyses like payout distribution and incentive differentiation provide a solid frame of reference for plan performance. Overlay tactics such as relative rank and indexing provide a way to close out the year without making changes to the core plan. SPIFFS can be a key part of the toolkit, providing flexibility and immediacy.

And in uncertain times, remember that clear exception management and governance can be as important or more important than design.

Authors

Global Practice Leader, Sales Effectiveness and Rewards

North America Practice Leader, Sales Effectiveness and Rewards

Director, Rewards

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