Retaining the wrong people? Is your sales compensation plan to blame?
In today’s business environment it is harder than ever to retain your top sales talent. It’s hard to fill the open sales positions too! Everyone is competing for the limited resources and your sales compensation plan plays a major role in attracting that talent. Retention is a key goal in many sales compensation plans design too. But be careful here – not all retention is good. You want to design your sales compensation plans to retain top performers, not all sales reps.
In the words of Barbara Corcoran – “shoot the dog early”. She did not want low performers hanging around encouraging mediocracy and the bottom performers were terminated on a regular basis. I personally would not want to work in that kind of organization. Nonetheless her method was effective and she reached her revenue goals but there was a downside. It’s hard to terminate someone. It can cause confusion and uncertainty for those remaining. I’m sure her team was on edge all the time and employee morale was negatively impacted. But what if you could encourage the low performer to self-select out of the organization? The low performers will stay if they can earn enough to live comfortably on or leave if they can’t.
These are the elements of the sales compensation plan design that can encourage low performers to stay:
Base pay too high – when the base pay is excessively high your reps can live a comfortable life without much effort to earn the incentives. Your Target Total Compensation (TTC) or On Target Earnings (OTE) is the amount you need to pay to attract and retain top sales talent. The mix between base and incentive should be determined based on the amount of control the sales rep has over the close of the business. Plans with a high percent of base to incentive should have little influence over the close of the business but sometimes when the plans are designed incorrectly the base is set too high for the job role and will discourage high performers from staying because of the little upside earnings potential and encourage just the opposite for low performers.
Earning too much incentive at too low a performance – I repeatedly see this when a plan is structured with one rate regardless of performance, often referred to as a flat rate incentive plan. I’ll guarantee that you’ll be paying too much for your underperformers and not enough to your top talent. I also see incentives too high for the performance when the plan design pays a retroactive commission rate once a threshold is reached, often referred to as a tied to first dollar plan.
Quotas set unrealistically high for everyone – when quotas are set unrealistically high, almost everyone is below quota and it breeds a culture where underperformance is acceptable. When the base pay is high and the incentives are flat it will encourage low performers to stay because their pay has little to do with their performance and low performance is tolerated by management.
Rewarding mediocrity – this will show up as bonuses and Spiffs given when performance is average. I’ve see reps who have missed their annual quota but knew how to play the Spiff and Bonus game, making more money in those categories than in commissions. Talk about a plan design flaw!
Failing to measure – there is nothing worse for a top performing sales rep than not knowing where they stand against their goal. But for your low performers, not knowing is a good thing and will actually encourage them to stay. Failing to measure can also be related to the difference between their sales goal and what the plan pays on or when most of their earnings potential has little to do with their performance.
By making some simple shifts in your sales compensation plan design you could encourage low performers to exit on their own. By aligning the correct base pay based for the job role, setting realistic quotas, adding a commission rate that changes with attainment, creating bonuses for excellence and Spiffs to focus short term specific behavior, you’ll go a long way to encourage your bottom performers out of the organization.