Tuesday, May 13, 2008

Common Pitfalls in Sales Compensation Design

Today I attended the "Common Pitfalls in Sales Compensation Design" webinar, hosted by Makana Solutions, featuring guest speaker Donya Rose, Founding Partner of the Cygnal Group, a sales compensation consulting company.
I did not manage to get the audio working (the toll-free number was only for Americans and the International number was out-of-service). However I will quickly recap the major pitfalls identified, based on the presentation deck.

Pitfall 1: Sales Credit Wars
Symptom: Time is spent fighting over who is supposed to get credit
Cause: Lack of documentation, rules not formalized
Cost: Lost sales, management distraction, potentially double crediting, morale issues
Solution: Document the policies and credit-sharing criteria

My comment: Another cost which must be considered is the waste of time for the comp team trying to resolve issues and conflicts. In large organizations this can be a huge time burden. However it is generally fairly easy to minimize this situation by having well established rules.

Pitfall 2: Too many Measures
Symptom: Sales people ignore some of the required results and only focus on what makes them earn the biggest commission
Cause: Too many measures...
Cost: Lack of focus, compensation hard relate to actual results
Solution: Only use a few measures.

My Comment: This is a topic I addressed a few times on this blog. Consultants generally agree that there should be no more than 3 independent measures.

Pitfall 3: Commissions Rates only go up
Symptom: Sales people can earn too much money compared to the value they bring
Cause: Commission rates are related to the level of sales even if those sales are attributable to windfalls.
Cost: Comp cost is not in line with sales contribution
Solution: The commission rate should diminish passed a certain performance level

My Comment: A "regressive" commission can protect against an unexpected windfall, but can also avoid an excessive payout caused by a quota set too low.
I often see different rules, formulas and quotas used for orders exceeding a certain mount to avoid a windfall scenario.

Pitfall 4: Extraordinary Performance is Over-Rewarded
Symptom: Dependence on over-achiever sales people
Cause: Over-performance is too attractive to sales people
Cost: Sales people developed entitlement and demanding attitude, more risks
Solution: Use appropriate deceleration in commission rates

My Comment: Deceleration does not necessarily needs to be applied as soon as the initial target is reached. I have often seen cases where the rate increased once the target was reached, and decelerated after another performance level was attained.

Pitfall 5: Unattainable Goals
Symptom: Sales people give-up because goals are too high
Cause: Goal setting issue
Cost: Lack of motivation and engagement, results below expectations
Solution: Set goals appropriately

My Comment: Goal setting should be based on historical data if possible to be "just right". Making goals too easy to attain can lead to other problems such as a lack of motivation to exceed goals if rate decreases after, or an excessive commission payout.

Pitfall 6: "Phantom Base"
Symptom: Sales People whose salary largely depends on commissions act like they are salaried and under-achieve.
Cause: Compensation plans that pay too much for prior-year sales
Cost: Sub-optimal level of performance, losing account acquisition and penetration skills
Solution: Pay more for new business and less for prior-year sales

Pitfall 7: First Dollar Commission + Base
Symptom: Sales people are too comfortable with below-target earnings
Cause: Sales people are paid a significant base salary and earn commission on sales from first dollar
Cost: Income+Commission too high for actual productivity
Solution: Only pay commission after a threshold level of sales is achieved

My Comment: Other alternatives are possible to fix this situation. The entire compensation mix could be re-evaluated and the base salary could be lowered. It would also be possible to adjust the commission rate before a threshold to minimize the impact of removing commission completely before a certain threshold.


BTB Management Sales and Presentation skills training Ireland said...

Hi Julien,

Congrats on a very informative and interesting post. I have however a concern in relation to Pitfall 4. Extraordinary Performance is Over-Rewarded.

While I agree its makes no sense to have all your eggs in one basket in terms of only one or two sales people delivering.

The problem however might be in having deceleration in commission rates
over a certain threshold could potentially make it difficult to either hold on to or attract top sellers.

Im thinking here in terms of a market and compeitors that over reward the same leval of performance.

I would be interested to hear your opinions/thoughts/solutions around this.

Keep up the good work,

Donya Rose said...


We generally recommend that rates decrease at a very high level of performance, well above goal. And the decrease should continue to hold the rate above the "base rate" (immediately below goal rate).

I agree that this is not always appropriate, but should be considered when:
1. The plans are goal-based and goal setting is "loose" so that some people achieve, for example 200% of the goal. In this case, the high level of achievement could be due to a bad goal.
2. The sales people sell very large deals, which could tend to make performance "lumpy." Oftentimes these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it's probably not twice as hard (and it may not be worth twice as much to the company).
3. The company has a history of capped plans. Deceleration is always much preferable to caps.

The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it's great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing unaffordable windfalls in comp.

- Donya Rose
Managing Principal, The Cygnal Group

Julien Dionne said...

Hi Niall, Donya,

Thanks for the great comment and answer. Very good webinar also...

I think Donya captured the principles very well in her answer. I have seen a lot of plans not including caps or restricting the commission potential... And that can work until the company gets burned and have to tweak their plans and add caps mid-year to avoid exceeding their forecasted compensation budget. Obviously this is something sale reps really don't appreciate!

A company should really think about adjusting their incentives if competitors/market offer bigger rewards for the same level of performance. If for some reason the reward can't be matched, there should be other perks and benefits available to retain and attract employees.


Niall Devitt said...

Thank you ladies for your insights. I really appreciate you both taking the time and also the debt of your answers.

Getting a correct balance in relation to Commission/Incentive schemes can prove challenging for many companies.

This problem can be confounded by the fact that Is can also prove difficult (at least in my neck of the woods)to seek out advice and guidance in relation.

I intend to post (with your permissions of course) on the subject of commission structures referencing Julien's original post and both Julien's and Donya's follow up comments.

Thanks again,

Niall Devitt said...

My last comment should have read thank you Julien and Donna rather than thank you ladies. My apologies lol. Feel free to change.

Julien Dionne said...


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Ottawa, Ontario, Canada
Julien Dionne is a well-rounded consultant with global business management experience and outstanding technical, business and leadership skills. He earned a Bachelor of Applied Science in Software Engineering from the University of Ottawa, Canada, and he is a member of the Canadian Professional Sales Association. The views posted within this blog do not reflect the views of Julien’s current or previous employers and clients. Julien can be reached at julien.dionne@gmail.com