Not directly tying the sales commission plans to the company’s current revenue strategy is a problem that I often see with many small and medium size businesses. These executives have designed the company’s strategy for the year but miss a critical step that will lead to revenues being below plan. That step is to align the sales compensation plans to this defined strategy. Too often companies are afraid to change their commission plans so many choose to leave them as is even if they are not working optimally. Changing your commission plans is stressful for the sales organization and companies fear turnover. Learn more about the risks of changing your sales compensation plans too often.
Here are common signs your Sales commission plans don’t match your revenue strategy:
1. Your revenue is below plan.
Your company wishfully thinks the opportunity is $12m. That number is pulled from the sky without anything to back it up. The realistically opportunity for this year is only $10m. If the company allocates the $12m to the sales rep, it is called over-deployment of the sales quota. In this case the executives had rose colored glasses on when setting the revenue goal and a quota reduction is in order.
Best practice tip: The quota assigned to the sales reps should be realistic yet aggressive.
2. Your revenue is below plan and the mix is off.
Your sales reps are selling what is easiest not what is most important. In this case the focus on your sales measures is not aligned with your corporate strategy. The combination of the quota for a measure and the associated incentive reward puts the focus on attaining the goal. If the focus is not put on the right place, you are not aligned with your strategy, you still get what you inspect but it isn’t what you need.
Best practice tip: Allocate most of the incentive earnings to the primary focus of the plan.
3. Your revenue is close to target but your margin is way too low.
This is a difficult choice, between a revenue goal or a margin goal. Unfortunately you can’t have everything and you must decide what is important, revenue or margin. If you decide margin is it, then do you want the sales rep to walk away from a sale if the margin does not come in at the right level?
Best practice tip: Do not assign a margin goal if the rep can’t control margin. The value of the goal assigned must be in the reps control.
4. Your revenues are below plan but your cash flow is ok. You pay your commissions when the cash has been received. This actually causes your reps to waste valuable sales minutes on non-sales activities. When you pay at cash receipt your sales rep will continue to monitor the sale until the cash comes in the door taking time away from generating new business.
Best practice tip: Reward the rep as close to the event they control.