(Re)designing Tiered Compensation Plans
/A reader writes, "My company's sales compensation plan has three commission tiers. Not once since the plan has been in place has a rep ever hit the highest tier. They told me they wanted to earn more money and seemed excited about the plan at first. I thought reps were supposed to be money motivated. What happened?"
Tiered compensation plans offer layered payment structures. Salespeople earn a larger percentage of commission or bonus as their sales increase.
As an example:
| Sales Revenue | Commission Percentage |
|---|---|
| $0-$375,000 | 4% |
| $375,001 - $500,000 | 6% |
| $500,001+ | 7% |
Tiered plans challenge mid-level producers to sell more and reward superstars for superior performances.
Painful truth
Though tough for business owners to hear, offering a lucrative commission plan does not guarantee success. If no salesperson ever hits the top tier, it demotivates the sales staff.
Worse yet, when an unsuccessful comp plan of any type remains in place for a period of time, the salespeople make jokes about it. I know this from experience as both a salesperson and a sales manager.
History
Typically, flawed tiered compensation plans get put in place for three reasons:
- Growth targets
- Extrapolating from a unique customer
- Extrapolating from a unique salesperson
Growth targets
Let's say a business owner decides to grow their company 50% over two years. With little thought to rep workload, sales territories, lead generation, or past performance, they increase the sales quota to match. At the same time, they offer a more generous compensation package.
The owner thinks, "Sales people are money motivated, right? No problem. Sure it will work." But the owner quickly grows frustrated with the lack of stellar results and so do the reps.
Extrapolating from a unique customer
Several years ago, a salesperson closed a large deal - maybe the largest sale the company had seen to date. The business owner wants more sales of that size closed on a regular basis. Who could blame her? It happened once, right?
Before thinking about how and why this particular sale occurred in the first place, the business owner alters the compensation plan to encourage larger deals and waits for them to start rolling in.
Extrapolating from a unique salesperson
At one time that rare breed, the superstar, was in your employ. During their "era" they blew their quota away. They resigned - you guessed it - in a disagreement about money. Vowing never to let another rep leave because they felt they weren't earning enough, you put a higher commission tier in place.
However, none of the current staff has as much talent as the superstar. Not one has ever come close to the superstar's revenue production. Everyone feels discouraged.
Don't delay
Never stay with a compensation plan that simply isn't working on any level. Take corrective action as follows.
Review the numbers
Analyze the current staff's performance over the last few years. Calculate the monthly / quarterly averages for both the individual reps and the group. Identify the top and bottom performing reps.
Let the numbers guide you toward a more realistic top tier for a new compensation plan. Suggestion: At least 25% of your reps should achieve the top tier each year.
Talk with the reps
Always, always, always... ask the reps what motivates them. What would they like to see in the plan? What has kept them from selling more? Most business owners express surprise at the realistic advice they receive from their staff.
Staffing
Sales staffs need the right combination of talent, motivation, and skills to succeed with any compensation plan. Those skills must be a strong match for the sales cycle of the particular product the salespeople represent.
Do you have the right people and products in place so the sales staff can take advantage of a high performance comp plan?
The right idea
You created the tiered plan to motivate your staff. The success of your business depends upon it. That's the right thing to do. Revisit the existing comp plan. Change the tiers to adequately reflect the performance of your current sales staff for now.
After a period of time, begin to make any changes necessary to upgrade the overall performance of the entire sales organization.
One final note
Many of my first-time clients, upon inspection, have one or more of their salespeople on salary-only compensation plans. While this type of compensation is typical for lots of jobs, it isn't typical for sales.
A lot of business owners persuade themselves (or are persuaded) that commissions "just aren't appropriate" for their business. You don't know how many times I've heard this. Many of these same business owners eventually put in commission plans that resulted in increased sales and a more satisfied staff.
If this resonates with you and you want to reconsider your sales compensation, call or email me.
