Sales Compensation has developed a much higher profile within organizations in recent years as external factors and internal fiscal restraint have assumed greater priority in corporate sales strategy. While compensation plan designs are intended to create a motivating, focused and positive selling environment, the good intentions always come with inherent risks. These risks, while a known part of the incentive landscape can be devastating to companies both financially and from a reputational perspective if they are not mitigated appropriately. To assess sales compensation plan risk potential, it is critical to use a structured approach that covers all potential risk areas. These include:
- Strategic Risks – These include failure to align with business goals and objectives, lack of support for tactical execution and probability that key KPIs for the organization will not be met.
- Financial Risks – These risks occur where there is not a strong link between sales performance and payouts. In such cases, the program compensation- cost-of-sales (CCOS) can be high and yet the company will not achieve its sales and revenue targets. Also in this area there is risk that while volumes may be strong and in fact could increase, but the margins and profitability of sales based upon the mix of products sold and the focus of the sales compensation plan.
- Behavioral/Motivational Risks – These risks relate to the potential for inappropriate sales activities as a result of the sales compensation plan. This includes a lack of focus or focus on the wrong opportunities and failure of the plans to inspire commitment to sales and new business are all risks that need to be identified and modified to improve sales execution.
- Governance Risks – These include risks associated with impugning the reputation of the business, fraud or inappropriate payments or activities related to compensation. The governance risks include approvals of plans and payouts, adjustments to targets, manual adjustments as well as discretionary decision-making and mid-year changes or offers
While many organizations wait until the end of the current year to address issues or changes to their sales compensation plans for the upcoming year, the identification of plan risks and areas to improve sales performance and execution, need to be addressed well ahead of proposed or recommended design changes. These activities are research oriented, data driven and include processes where key stakeholders, plan participants and managers provide input and support the initiative. These analytics are essential to creating world class sales compensation plans. Audits normally will take from 6 – 8 weeks to complete (depending upon the availability of contributors) and ownership for the audit should be independent of those individuals managing the on-going operation of the program.
In order to have a sales compensation program that is well thought of within and outside the organization it is essential that it has integrity and internal controls. It must deliver the sales and financial results that the company needs, while ensuring that customers get the attention and service that they require and that salespeople are committed and motivated to perform. Stakeholders, whether investors, owners, customers, the public or plan participants all have an necessity that sales compensation plans have the practices and well thought out design to ensure their reliability. Auditing your plans is the first and an essential step to delivering on these expectations.
About the Author:
David Johnston is President of Sales Resource Group Inc. He has a broad, international consulting background and offers experience, active participation and a Sales Resource Group approach to consulting with clients. David has over 25 years experience consulting for organizations in diverse fields, such as broadcast and print media, pharmaceuticals, telecommunications, information technology, retail, manufacturing and financial services.
He has held management positions at Ford Motor Company, The Bank of Nova Scotia, Price Waterhouse and Unisys Corporation. His consulting clients include CIBC, Bell Canada, Toronto Sun, Telus, Rogers Communications, Baxter, MeadWestvaco Corporation, SaskTel, Bell Aliant, Bank of Montreal, MTS, Canadian Broadcasting Corporation, and Shaw Communications. David works with clients in the areas of sales compensation, strategy, sales process optimization, performance management & objective setting and change management. He has managed multi-disciplinary teams in large-scale projects and is a sought-after speaker in the area of organization effectiveness.
In addition to his consulting and management background, David holds Masters Degrees in Clinical Psychology and Business Administration. He teaches for World at Work and is a member of The Canadian Professional Sales Association. David is a member of the Canadian Advanced Technology Alliance Leadership Council.
Disclaimer: The views and opinions expressed in this article are strictly those of the author. CPSA does not endorse any of the companies, products and services mentioned within this article.