What Your CEO Needs to Know about Sales Compensation

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   The Revenue Roadmap: Connecting Strategy to Compensation

   

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   When it comes to sales compensation, many companies make the mistake of jumping straight to the numbers. They pull out their calculators and start crunching figures without considering the bigger picture. But here's the truth: your sales compensation plan should be a strategic tool that drives your business forward. Think of it as a Revenue Roadmap. This roadmap has four key layers: Insight, Sales Strategy, Customer Coverage, and Enablement. Each layer builds upon the other, creating a cohesive plan that aligns your sales efforts with your company's goals. Let's take a closer look at each layer: 1. Insight: This is where you gather intelligence about your market, customers, and competition. It's the foundation for everything that follows. 2. Sales Strategy: Based on your insights, you develop a strategy for growth. Are you focusing on new markets? Expanding existing accounts? Your compensation plan should support these strategic choices. 3. Customer Coverage: This layer determines how you'll reach your customers. It includes your sales channels, team structure, and territory design. 4. Enablement: Finally, we have the tools and processes that support your sales team, including training, technology, and yes, compensation. By considering all these layers, you ensure that your compensation plan isn't just a standalone element, but an integral part of your overall sales strategy.

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   Motivating Different Breeds of Salespeople

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   Now, let's talk about your sales team. I like to think of salespeople as different breeds of dogs. You've got your Lapdogs, your Dobermans, and your Retrievers. Each has its strengths, and each needs to be motivated differently. Lapdogs are your relationship builders. They're great at maintaining long-term customer relationships but might need a push when it comes to hunting for new business. Dobermans are your aggressive hunters, always on the lookout for the next big deal. Retrievers fall somewhere in the middle, adept at both hunting and nurturing relationships. Your compensation plan needs to motivate each of these breeds effectively. For Lapdogs, you might want to include incentives for new business acquisition. For Dobermans, you could offer higher commissions on new accounts. And for Retrievers, a balanced plan that rewards both new business and account growth could be ideal. Remember, it's not about changing who these salespeople are. It's about designing a compensation plan that brings out the best in each of them.

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   The Reverse Robin Hood Principle: Rewarding Top Performers

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   Now, let's tackle a controversial topic: should you pay your top performers significantly more than your average performers? I call this the Reverse Robin Hood Principle, and my answer is a resounding yes. Here's why: In most sales organizations, a small percentage of salespeople bring in a disproportionate amount of revenue. It's not uncommon to see 20% of the sales force generating 80% of the revenue. These top performers are incredibly valuable, and your compensation plan should reflect that. But how do you do this without demotivating the rest of your team? The key is in your plan's upside potential. This is the maximum amount a salesperson can earn above their target compensation. A good rule of thumb is to offer upside potential of 2x to 3x the target incentive for exceptional performance. For example, let's say you have a salesperson with a base salary of $100,000 and a target incentive of $100,000. Their upside potential might be an additional $200,000 to $300,000 for truly outstanding performance. This gives your top performers a real incentive to excel, while still providing achievable goals for the rest of your team.

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   Measuring Performance: The Key to Effective Compensation

   Now that we've covered the "who" and the "why" of sales compensation, let's talk about the "what" - what exactly should you be measuring and rewarding? I like to think about this in terms of what I call Performance Measures Cubed. This involves three key elements: 1. Measures: What specific metrics are you tracking? This could be revenue, profit margin, new accounts acquired, or any other relevant metric. 2. Level: At what organizational level are you measuring performance? Individual, team, or company-wide? 3. Frequency: How often are you measuring and paying out incentives? Monthly, quarterly, annually? Each of these elements needs to be carefully considered. For instance, if you're only measuring revenue, you might encourage salespeople to slash prices to win deals. By including profit margin as a measure, you ensure they're bringing in profitable business. Similarly, the level at which you measure can have a big impact. Individual measures promote personal accountability, but team or company measures can encourage collaboration. And frequency? Well, that depends on your sales cycle. For transactional sales with short cycles, monthly payouts might work best. For complex, long-cycle sales, quarterly or even annual measures might be more appropriate. The key is to choose measures that align with your overall business strategy and that your salespeople can directly influence.

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   Implementing Your New Compensation Plan: The Change Management Challenge

   Finally, let's talk about implementation. You can design the perfect compensation plan, but if you can't get your sales team to buy into it, it won't be effective. This is where change management comes in. Here are a few key steps to ensure a smooth transition: 1. Start Strong: Communicate the reasons for the change clearly and early. Help your team understand how the new plan aligns with the company's goals. 2. Craft the Change Story: Develop a compelling narrative about why this change is necessary and how it will benefit both the company and the salespeople. 3. See the Organization's View: Put yourself in your salespeople's shoes. What concerns might they have? Address these proactively. 4. Get the Change Forecast: Anticipate how different segments of your sales force might react to the change and plan accordingly. 5. Leverage Learning Modes: People learn in different ways. Use a variety of communication methods - presentations, one-on-one discussions, written materials - to ensure everyone understands the new plan. Remember, change can be uncomfortable, but with proper communication and management, you can get your team excited about the new opportunities the plan presents. In conclusion, effective sales compensation is about much more than just numbers. It's about aligning your compensation strategy with your business goals, motivating different types of salespeople, rewarding top performers, measuring the right things, and managing change effectively. By mastering these elements, you can create a compensation plan that not only drives sales performance but also propels your entire business forward. Thank you for joining me on this journey through "What Your CEO Needs to Know About Sales Compensation." I hope these insights will help you create a more effective, strategic approach to sales compensation in your organization.

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