Editor's Note: Sales compensation plans, when well-designed, reflect a clear understanding of the organizations sales strategy and reality - and a careful balancing act. Dan Walter explains that Classic challenge in today's post.
My first real lesson in negotiations was simple: “In a perfect compromise no one walks away completely happy.” Compromise, like sales compensation, requires both sides to give up something in order to get what they really want. When done correctly, there is balance to the final resolution.
Sales compensation is both the easiest and hardest of incentive compensation. Pay must drive specific behaviors, but it needs to avoid unintentional bad behavior. It must align with success at many levels, but provide ease of alignment for each individual. It must be easy to understand, but flexible enough to adjust to critical unpredictable factors. It must be painstakingly exact, while giving everyone some wiggle room to pay as required. Everything about sales compensation design is a compromise.
But the real negotiation is the daily, monthly, quarterly and yearly negotiation between the sales person and the company. When a company is not performing as well as it should, it must pay sales more than it wishes. Great sales people have transferrable skill sets and they need to be paid (if they are doing their job) even when results aren't great. When a company is performing outstandingly, sales people will tell you they aren't paid nearly enough. The equation for sales pay is usually asymmetrical. This creates tension in most measurement periods. Tension results in uncomfortable conversations.
The difficulty is often in communication and acceptance of reality. When a company’s revenues or margin are down, it is easy to blame the people closing bad deals or not enough deals. But, sales professionals will seldom tell you they are doing less than a great job, or putting in less than full effort. And, of course, companies and their management will often chant the same mantra about their own efforts.
Every great sales person can tell you about the time they carried the entire company on their back. “If it wasn’t for me, the company wouldn’t have sold anything. Heck, they probably would have gone under!” But, they are also unwilling to admit when a product is essentially “selling itself.” On the other hand, when a company is doing really well, management will almost always say that “anyone” can sell their product. Some will even explain how the company has made its sales people look better than they actually are. Of course, there are times some of these stories are true. But, there is usually far more hyperbole and misunderstanding than there are facts and accountability.
When you create a sales compensation plan a good idea is to consider throwing away at least 10-20% of the upside and downside exaggeration. Build your plan to pay even when things are dark (but not when things are black.) Design your upside potential to consider the success of the whole company as a component of the success of the individual. And, lastly, make sure you build in an exception to these rules. Because, in a negotiation, you may not really know what it will take to close out the issue until the issue is at hand. And, in that situation you should expect a perfect compromise where everyone leaves friends, but just a little bit unhappy.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.
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