Presented at the Sales Performance Conference, May 2009

1. Sales Comp 201
Application of the principles of
sales compensation plan design in tricky situations
Donya B. Rose
Managing Principal, The Cygnal Group, Inc.
1

2. You’ve got the basics, including…
• Understanding the roles for which you are designing
• Building an appropriate pay structure (total comp, pay
mix, and leverage)
• Using the right incentive measures and weights
2

3. But your leaders are saying…
“These commission rates were fine when we set them, but we
just paid Sam $50k for something he did three years ago, and
now he’s coasting…”
“I hardly know what our market will do next month – how can I
set a reasonable quota for the whole year?”
“We believe in simple plans, but it’s not enough to make the
sales goal – we need some focus on product mix as well. How
do we put that into the plans without separate quotas for each
product?”
3

4. But your leaders are saying…
“It takes a village to close some of our deals, but we simply
cannot afford to double-comp – how do we reward teaming
and collaboration without overpaying?”
“Sales are declining, and sales comp is declining a bit too, but
profits are declining faster. How do I adjust comp to fix it?”
“We only control the comp plans, not the quotas that come
from corporate – and they have been unattainable the last few
years. How do we keep our sales people motivated?”
4

5. Your plan has a tail
“These commission rates were fine when we set them, but we
just paid Sam $50k for something he did three years ago, and
now he’s coasting…”
This typically happens with
– Commission-based deal level plans
– High prominence sales roles
– Expectations that sales remains involved through
implementation, or throughout an annuity
relationship
– Significant risk that actual deal value may be
different from value apparent at signing
– Significant time between signing and cash
5

6. Your plan has a tail
Comp Design Principle: Cost of Sale vs. Cost of Labor
Commission Incentive
Bonus Incentive Form
Form
Mechanics A “piece of the action” is The target incentive for the role is
delivered for selling – usually earned for meeting the sales goal
communicated as a percent of set for each individual seller
revenue or margin sold
Pay philosophy Cost of Sales: The sale has an Cost of labor: The sales job has a
economic value to the company, market value, and we will pay a
and we will pay a portion of our targeted compensation level for
profits for successful selling effort meeting sales goals
 
Earlier stage companies, or More mature companies/
Appropriate
new product/service markets
for . . .
introductions  Strong brands, well-supported
 Equal selling opportunity sales organizations
across all assigned territories  Significant differences in
 Goal setting challenges selling opportunity among
sellers
 New account hunting roles
 Solid goal setting processes
 Retention/penetration roles 6

7. Your plan has a tail
Comp Design Principle: Cost of Sale vs. Cost of Labor
Revenue
Introduction Growth Maturity
Time
Cost of Sales philosophy is typical Cost of Labor philosophy is typical
Sales person “owns” the customer Company “owns” the customer
 
(territory/account changes may be difficult)
 Separate departments are in place for lead
 generation, sales, fulfillment, collection
Sales person may be heavily involved in
servicing and delivery
 Sales person typically part of a larger selling
“team”
 Sales person prominence in the selling process
is high
“Best” sales people are good at matching

“Best” sales people are well-known in the
 customer needs to company offerings, great at
industry, very aggressive, and entrepreneurial follow-through and relationship management, and
solid team players inside the company 7

8. Your plan has a tail
Comp Design Principle: Payout Timing
Payment should be…
Made when the sales person has achieved a significant

milestone
Made when the value to the company of the deal is known

Completed at the point at which the sales person should

typically disengage and move on to the next sale
Subject to charge-back in case of unexpected reductions in the value of the
deal to the company (non-collection, serious delays, volume shortfalls, etc.)
8

9. Your plan has a tail
Comp Design Principle: Predictable Compensation, amount
and timing
Compensation plans are most motivating when…
They are linked in a straightforward way to measures that are

clear and understandable to the sales person
They are paid as close to the sales person’s main success as

practical
Payments are accurate and supported by clear and concise

reporting
How many plans can you administer, report and pay
concurrently and accurately for any one person?
9

10. Your plan has a tail
What are your options?
A: Live with it
Benefits Risks
• Promise of substantial future • Reps are spending time on old
payouts can help keep reps deals, not new ones
• Would you rather retain reps who
involved with deals, and help with
retention think they have great deals in their
future (than those who want to be
paid for past deals)?
10

11. Your plan has a tail
What are your options?
B: Taper or shorten the tail
How Benefits Risks
• Decrease the rate paid for later • Pay better • New deals may
years to keep the focus on this aligned with become so
year OR reduce the length of effort attractive that
• More risk this
time over which the rep relationships
aren’t maintained
continues to be comped year based on
• For all future deals, OR this year’s results (increased churn)
retroactively
• Increase the first year or up-
front payment
11

12. Your plan has a tail
What are your options?
C: Amputate
How Benefits Risks
• Pay all compensation • Clear focus on new • After-care may
for a deal within a year business suffer if there are
• Compensation is much
of closing implementation
• Increase rates to keep easier to administer (one, or retention risks
reps whole or at most two plans for customers
• Buy-out of “old tails” • Reps may feel
being maintained)
• Better ability to realign
may be necessary freer to leave the
(usually at a discount) territories, redirect reps company
12

13. Your crystal ball is broken
“I hardly know what our market will do next month – how can
I set a reasonable quota for the whole year?”
This can be due to
– Unstable markets
– Unpredictable competitive activity
– New product or service launches
– Product defects or recalls
– General economic uncertainty
13

14. Your crystal ball is broken
Comp Design Principle: Cost of Sale vs. Cost of Labor
Commission Incentive
Bonus Incentive Form
Form
Mechanics A “piece of the action” is The target incentive for the role is
delivered for selling – usually earned for meeting the sales goal
communicated as a percent of set for each individual seller
revenue or margin sold
Pay philosophy Cost of Sales: The sale has an Cost of labor: The sales job has a
economic value to the company, market value, and we will pay a
and we will pay a portion of our targeted compensation level for
profits for successful selling effort meeting sales goals
 
Earlier stage companies, or More mature companies/
Appropriate
new product/service markets
for . . .
introductions  Strong brands, well-supported
 Equal selling opportunity sales organizations
across all assigned territories  Significant differences in
 Goal setting challenges selling opportunity among
sellers
 New account hunting roles
 Solid goal setting processes
 Retention/penetration roles 14

15. Your crystal ball is broken
Comp Design Vocabulary: Performance levels
Productivity
Definition
Level
90th percentile performance (only the top 10% of your sales
Excellence
people do this well or better)
Target The expected level of productivity for the on-target (not a
problem, not a star) performer
The level of productivity below which an employee’s
Threshold
contribution is unacceptable for the long run
15

16. Your crystal ball is broken
Comp Design Principle:
Curve shape anticipates goal setting accuracy
450%
Payout % Target Incentive
12.00%
Percent of Sales People
400%
350%
10.00%
300%
8.00%
250%
6.00% 200%
150%
4.00%
100%
2.00%
50%
0.00% 0%
0% 50% 100% 150% 200%
Actual Sales % Goal
 The payout curve (blue) shows a typical performance distribution for individual contributor territory sales
people with good goal setting accuracy
 Motivational traction from the compensation plan begins when the sales person sees that s/he is “in the
money” (at or above the first acceleration point = 70%)
 The accelerated slope between target (100%) and excellence (130%) keeps the motivation high for over-
target performance
 Deceleration over excellence recognizes the likelihood that performance beyond this level, while desirable, is
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likely the result of a bad goal and/or a windfall, and perhaps at a lower level of profitability

17. Your crystal ball is broken
Comp Design Principle:
Curve shape anticipates goal setting accuracy, continued
350%
Payout Percent Target Incentive
Typical Quota Accuracy
300%
Quotas Questionable
250%
Quotas Inaccurate
200%
150%
100%
50%
0%
0% 50% 100% 150% 200%
Actual Sales % Goal
As confidence in quotas decreases the curve flattens
17

18. Your crystal ball is broken
What are your options?
A: Flatten your curve
How Benefits Risks
• Differentiate less • Quota attainment
Lower the stakes on quota
attainment right at the point becomes less
• Reduce deceleration below of quota important to reps
• Overpayment for
quota attainment
• Reduce acceleration above • Acknowledge under-
quota uncertainty and performance
• Reduce or eliminate any quota maintain
attainment bonuses credibility
18

19. Your crystal ball is broken
What are your options?
B: Shorten the measurement period
How Benefits Risks
• Move from an annual • Ability to adjust as market • The quota setting
quota to quarterly conditions become work has to
quotas (or even clearer happen more
• Better overall quota
monthly?) times per year
• Announce the quota for • The reps may
accuracy for the year
• Ability to continue to have suspect you’re
the coming
“quota teeth” in the comp
measurement period as going to see to it
that they can’t
firm plans
• Announce quotas for over-achieve
later measurement
periods as tentative, or
don’t announce yet
19

20. Your crystal ball is broken
What are your options?
C: Adjust quotas during the year
How Benefits Risks
• Deploy your best quotas at the • A clear plan from • The debate is
beginning of the year the start just postponed
• If, as the year unfolds, it • Some security for • Reps may put a
becomes clear that quotas are the reps that a lot of energy into
unattainable, adjust them reset will be making their
down considered if case for reduced
• IF you announce at the outset expectations quotas
of the year your intention to become clearly
review and consider a reset, unattainable
provide criteria for when it
would be considered
20

21. Mix matters
“We believe in simple plans, but it’s not enough to make the
sales goal – we need some focus on product mix as well. How
do we put that into the plans without separate quotas for
each product?”
Mix is important when
– Different product deliver
different margins
– Production capacity needs to be fully utilized
– Volume commitments to suppliers are
important
– Product focused business units are
accountable for their results
21

22. Mix matters
Comp Design Principle: Measure selection
Good measures are. . .
– Aligned with key accountabilities of the role
– Directly influenced by the sales person in the role
– Track-able based on existing systems (or systems that
can be created)
– Three or fewer in number
– Measured at the level at which results are generated
(individual, small team, division, etc.)
22

23. Mix matters
What might be proposed
From this
Total Sales Quota Based Regional Profitability
Incentive Opportunity = +
Incentive Quota Based Incentive
Weights at Target 80% 20%
To this
High Margin Lower Margin Important
Regional
Product Product New Product
Incentive Profitability
= Sales Quota + Sales Quota + Sales Quota +
Opportunity Quota Based
Based Based Based
Incentive
Incentive Incentive Incentive
Weights at 50% 20% 10% 20%
Target
23

24. Mix matters
What’s wrong with this?
High Margin Lower Margin Important
Regional
Product Product New Product
Incentive Profitability
= Sales Quota + Sales Quota + Sales Quota +
Opportunity Quota Based
Based Based Based
Incentive
Incentive Incentive Incentive
Weights at 50% 20% 10% 20%
Target
– Too many measures
– Measure with < 20% weight
– Inaccurate quotas (the finer you cut them, the lower
your accuracy)
– For some sales roles: contrary to solution selling
24

25. Mix matters
One approach: Product breadth multiplier
( ) Regional
Total Sales
Incentive Product Breadth Profitability
= Quota Based x +
Opportunity Multiplier Quota Based
Incentive
Incentive
Weights at Target ------------ 80% ------------ 20%
Multiplier on Total
Product Quota Sales Quota Based
Attainment Incentive
All three >= 95% 1.1 Modify multipliers
Modify ranges and
to change degree
rules depending on
All three >= 85% 1.0
of emphasis on
how exactly quotas
product breadth
should be attained
At least 1 < 85% 0.9
25

26. Mix matters
What are your options?
C: Solve it with product focused sales roles
How Benefits Risks
• Assign product overlay • Help sales people • May be cost-
specialists to support sales learn and prohibitive in smaller
people in selling the most succeed with the organizations
• May disadvantage
challenging, complex or more difficult
new products products some product lines
• Rep quotas should increase • Keep all the based on quality of
in anticipation of their comp plans overlay reps
increased productivity from simple
this support
26

27. It takes a village
“It takes a village to close some of our deals, but we simply
cannot afford to double-comp – how do we reward teaming
and collaboration without overpaying?”
This may be an issue when…
– Product or technical specialists are
vital in defining requirements or configuring
the deal
– Decision makers are in different parts of the
organization/world (corporate, divisional)
– Channel partners are involved
27

28. It takes a village
Comp Design Principle: Use of team measures
Mechanics
For a team incentive, a measure is defined for the entire team, and all members share
equally in the reward generated by the team’s performance
Appropriate when . . .
– Team membership is well-defined
– The team is small enough that each person feels s/he can make a meaningful
difference in team results
– Team results can be measured reliably
– Members of the team depend on each other to sell
Not appropriate when . . .
– Team members are linked only by reporting relationships (not shared effort on
shared accounts or opportunities)
– The only real reason is to share the upside (“pooled lottery ticket”)
Note that team measures may be combined with individual measures when team members
back each other up, as in many Inside Sales teams.
28

29. It takes a village
What are your options?
A: Layered quota/ layered credit
How Benefits Risks
• Strong • Difficult to model
Each participant in a
sale receives full quota encouragement for selling costs in
and full credit for the participation of relation to sales
sale (or “their” piece, e.g. multiple sellers in an productivity by
Product Specialists take opportunity product or sales team
• Clear message • Special care must be
only their product slice)
regarding taken to ensure the
expectations team size is
communicated via appropriate for the
quotas opportunity
29

30. It takes a village
What are your options?
B: Finder’s fee
How Benefits Risks
• Easy to model, • Can motivate
Bonus paid for leads
turned over to another communicate and pay behavior to sell
• No downside for
seller resulting in closed products not needed
deals over a specified by the customer
bringing in another
• Difficult to predict
size seller
selling costs
30

31. It takes a village
What are your options?
C: Credit splits
How Benefits Risks
• Easy to model and • Disincentive to team
Credit for all sales
is divided among anticipate selling costs with others due to
participating team in relation to results anticipated reduction in
• Opportunities will tend
members, with total sales credit
• Expectations regarding
credit adding to to be handled by the
100% of actual sale smallest effective team degree of teaming are
value not communicated via
quotas
31

32. Shrinking profit
“Sales are declining, and sales comp is declining a bit too, but
profits are declining faster. How do I adjust comp to fix it?”
This may be an issue when…
– The business is maturing and
the offering is becoming more of a
commodity
– Product with very different margins may
relieve the same quota
– Challenging quotas and market conditions
are combined with sales person control over
discounting
32

33. Shrinking profit
Comp Design Principle: Choose the right measure
Some of the common measures in sales compensation plans
Type of Measure Use when . . .
 Sales people have little to no control over pricing
Volume
 Different products and customers with the same volume have similar
value to the company
 Sales people have little control over pricing
Revenue
 Different products and customers deliver similar profitability as a
percent of sales
 Sales people influence profitability via product mix and/or pricing
Profit
 The company is comfortable with sales people knowing at least relative
profitability of products
 Profit can be measured reliably at the sales person level
 Market dynamics affect all providers in the market similarly so that the
Market share
size of the market is not the direct result of effective selling
 Market share can be measured reliably and frequently
33

34. Shrinking profit
Comp Design Principle: The lower your margins, the more
likely you should be goaling in margin dollars, continued
100%
80%
60%
40%
20%
0%
34

35. Shrinking profit
What are your options?
A: Make profit a minor plan component
How Benefits Risks
• Carve out 20% - 30% of the target • Begins the • May still
incentive and assign a profit goal process of allow reps to
• Assign it at the level at which it can focusing reps ignore
on profit profitability
be reliably measured (sales rep,
• Requires good and remain
region, business unit)
comfortable
• Provide helpful reporting so reps profit
performance
understand how they influence
before
profitability
leveraged pay
• Limit upside for over-goal
is delivered
performance on primary component
unless the profit goal is achieved
35

36. Shrinking profit
What are your options?
B: Move the primary measure to profitability
How Benefits Risks
• Aligns sales compensation • Sales people may try to
Set sales
goals and directly with value created manage the cost side of the
measure for the company profit equation
• Requires sales people to • Sales people know a great
results in
terms of focus on the ways they deal about the operating
profit influence profitability model, which might be
(usually shared outside the
gross company
margin) • Sales capacity may be
squandered in arguments
about profit calculations
36

37. Shrinking profit
What are your options?
C: Use a profitability proxy
How Benefits Risks
• Create a new sales • It is not required that sales • Sales credit will not match
crediting “currency” people know the cost of any income statement
that increases credit products, or even that they value, and so cannot be
for more profitable know the new currency is validated easily at an
sales (and reduces profit-based aggregate level
• Sales people will focus on • The initial measurement
credit for less
popular sales) the sales that provide the period will be a bit
• Restate history in the most credit and comp, disoriented due to the new
new currency to help aligning them with the currency
• Can feel more complex to
with the transition business goals
and goal setting sales people than straight
sales (top line) measure
37

38. Unattainable quotas
“We only control the comp plans, not the quotas that come
from corporate – and they have been unattainable the last few
years. How do we keep our sales people motivated?”
This may be an issue when…
– “Corporate” mandates a goal,
and requires that it be fully
deployed to the sales team
– Sales leaders have a belief that
higher quotas create more sales
– The compensation levels required to attract
talent aren’t “affordable” for the true
productivity expected
38

39. Unattainable quotas
Comp Design Principle: Lessons from behavioral science
Incentives and rewards will be most effective when…
 Used for the benefit of the employee(not just to create benefits for
the employer)
 Focused on challenging activities (not on activities that employee
salready like to do)
 Tied to specific reasonable, objective, and attainable standards of
performance
 Accompanied by celebration of significant successes by the
organization
Reward systems that are discretionary, subjective, or based on pleasing the people in
charge are often seen as unfair and coercive. What is “good” today may not be good
enough to earn a reward tomorrow.
*Judy Cameron and David Pierce, Rewards and Intrinsic Motivation, c 2002
39

40. Unattainable quotas
One Idea: Shift the curve to pay the target incentive < 100%
350%
Payout Percent Target Incentive
300% Most People >= Quota
250%
Most People >= 90% Quota
200%
150%
100%
50%
0%
0% 50% 100% 150% 200%
Actual Sales % Goal
40

41. Unattainable quotas
What are your options?
A: Shift the payout curve
How Benefits Risks
• Rearrange tiers in • Allows full deployment • May over-pay for the
the payout table so of mandated quota sales function vs.
• Delivers market
that market business model
competitive pay is competitive pay to most assumptions
• More challenging to
delivered at the people
expected design, document
performance level rationale, and explain
• Continue to publish forecasted comp
performance against costs
quota
41

42. Unattainable quotas
What are your options?
B: Adjust the target incentive
How Benefits Risks
• Reduce the official • Achievable quotas • Sales leaders may be
target incentive to provide realistic basis hesitant to
the level the for assessing communicate the
business feels is performance reduced target incentive
• Most people earn the • Management may balk
affordable for
expected median target incentive at deploying less than
performance • Plan design and the full quota and/or
• Use best practice modeling are simplified adding sales staff to
curve shape supply adequate
(accelerate at new coverage
reduced quota)
42

43. Unattainable quotas
What are your options?
C: Switch to a commission
How Benefits Risks
• Devise commission rate that • The plan designs can • Modeling the cost of
deliver market competitive be somewhat comp under different
pay at expected productivity independent of quotas scenarios can be
• Communicate the plans • Some sales leaders complex
feel a quota provides a • Quota-less plans may
using commission tables
“stopping place” and
without quotas (tiers defined be disorienting to sale
by YTD sales, for example) that no-quota plans people and sales
create more sales leaders
43

44. About The Cygnal Group
The Cygnal Group is a consulting firm specializing in sales compensation plan design. We are based
in Chapel Hill, NC and serve clients headquartered all over the U.S., and even some in Europe.
Our practice spans large and small companies, public and private, global and locally focused.
Clients include very large companies (e.g., Home Depot, Comcast), mid-sized companies (e.g.,
Valassis, Misys, Thomson), game changers (e.g., Red Hat, Sensus Metering), and smaller
companies (e.g., GXS, Prometric), and even some companies hiring their first sales person (e.g.,
Meritech, Magnet Street).
Donya Rose is the Managing Partner of The Cygnal Group. She speaks regularly to audiences of
Business, Sales, and HR leaders, and has contributed to numerous articles on the subject of
compensating the sales force. Prior to founding The Cygnal Group, Ms. Rose was a consultant in
the Sales Rewards practice at Towers Perrin.
Learn more about our services, and read our sales comp blog at
www.cygnalgroup.com
Contact us at
info@cygnalgroup.com
929-933-2290
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