Event Recap: The Art of the Sales Comp Plan

Creating Sales Comp Plans that Motivate without Killing Margins

“Two things: Sales people are coin operated,” said a CFO at the recent Bridgepoint Leader’s Edge event for finance executives, “And changes to a comp plan can have bad unexpected effects if not thoughtfully planned.”

This was part of the discussion when Bridgepoint Consulting recently hosted an interactive roundtable with 25 CFOs and finance leaders at the offices of Multimedia Games about the topic of sales compensation plans. The discussion was led by industry veterans Adam Chibib, CFO of Multimedia Games and Trey Chambers, CFO of Compass Learning, and was moderated by Bob Smith of Bridgepoint Consulting.

“While not always true, I’ve found that sales people that are more motivated by a higher variable opportunity are typically more confident and hungry, and therefore more successful at selling,” said another CFO in the group. “However, most want both – high base and high variable compensation.”

What was the common base / variable balance among the group for their sales teams? The total compensation “balance” varied between a 50-50 split of base and commission pay out, to a 20-80 split that offered higher variable opportunity.

A variety of topics, considerations and opinions were shared. The list below highlights a few of the discussion topics.

• Fixed and variable comp ratios – Among the group of executives, there was a mix of ratios of base and variable comp. All agreed that both approaches have merit depending on the product, pricing, sales cycle and recurring revenue options. In the technology company attendees, it was agreed that comp plans for hardware products are much easier to manage than software products.
• Create plans thoughtfully and monitor closely to avoid unintended consequences – for example, accelerators, a commission percentage in excess of quotas, can backfire. Be careful or you will be spending more time negotiating payouts with your sales person than with the customer in which the sale was made. Also, you don’t want to get into a situation where the sales team hits their goals and earns commissions, but the company misses their earnings targets and yet owes significant amounts to the sales team.
• Company draws – Several of the execs said they allow financial draws for sales people, especially new team members. However, they agreed that you can’t count on recovering the draw if the employee quits before it is paid back. One
• Incentives drive profitability – Contests with cash incentives, as well as the esteemed President’s Club (P-Club) recognition, are very popular motivators that incent the sales team to go the extra mile, especially during slow quarters or months. Several CFO commented that “…the best sales people are very competitive and ego-driven.”
• Splitting commission – if multiple personnel are involved in a given sale, it can be very challenging to split the commission after the fact. This needs to be very thoughtfully spelled-out beforehand to avoid conflicts and headaches.

“I have no problem at all paying out high commissions to high performers,” said an exec among the group, “If they are making more money than me, that’s a good thing.”

In summary, the simpler the sales comp plan can be outlined, the easier to manage and execute. However, that’s easier said than done, especially if you add spiffs and sales contests throughout the year. Also, the clear communication of measurable objectives is paramount when implementing any changes to sales compensation plans to ensure maximum performance by the sales team and maximum sales and revenues for the company.