Archive for the ‘Cygnal Group’ Category

Common Pitfalls in Sales Compensation Design

May 13, 2008

Today I attended the “Common Pitfalls in Sales Compensation Design” webinar, hosted by Makana Solutions, featuring guest speaker Donya Rose, Founding Partner of the Cygnal Group, a sales compensation consulting company.

I did not manage to get the audio working (the toll-free number was only for Americans and the International number was out-of-service). However I will quickly recap the major pitfalls identified, based on the presentation deck.

Pitfall 1: Sales Credit Wars
Symptom: Time is spent fighting over who is supposed to get credit
Cause: Lack of documentation, rules not formalized
Cost: Lost sales, management distraction, potentially double crediting, morale issues
Solution: Document the policies and credit-sharing criteria

My comment: Another cost which must be considered is the waste of time for the comp team trying to resolve issues and conflicts. In large organizations this can be a huge time burden. However it is generally fairly easy to minimize this situation by having well established rules.

Pitfall 2: Too many Measures
Symptom: Sales people ignore some of the required results and only focus on what makes them earn the biggest commission
Cause: Too many measures…
Cost: Lack of focus, compensation hard relate to actual results
Solution: Only use a few measures.

My Comment: This is a topic I addressed a few times on this blog. Consultants generally agree that there should be no more than 3 independent measures.
Pitfall 3: Commissions Rates only go up
Symptom: Sales people can earn too much money compared to the value they bring
Cause: Commission rates are related to the level of sales even if those sales are attributable to windfalls.
Cost: Comp cost is not in line with sales contribution
Solution: The commission rate should diminish passed a certain performance level

My Comment: A “regressive” commission can protect against an unexpected windfall, but can also avoid an excessive payout caused by a quota set too low.
I often see different rules, formulas and quotas used for orders exceeding a certain mount to avoid a windfall scenario.
Pitfall 4: Extraordinary Performance is Over-Rewarded
Symptom: Dependence on over-achiever sales people
Cause: Over-performance is too attractive to sales people
Cost: Sales people developed entitlement and demanding attitude, more risks
Solution: Use appropriate deceleration in commission rates

My Comment: Deceleration does not necessarily needs to be applied as soon as the initial target is reached. I have often seen cases where the rate increased once the target was reached, and decelerated after another performance level was attained.
Pitfall 5: Unattainable Goals
Symptom: Sales people give-up because goals are too high
Cause: Goal setting issue
Cost: Lack of motivation and engagement, results below expectations
Solution: Set goals appropriately

My Comment: Goal setting should be based on historical data if possible to be “just right”. Making goals too easy to attain can lead to other problems such as a lack of motivation to exceed goals if rate decreases after, or an excessive commission payout.
Pitfall 6: “Phantom Base”
Symptom: Sales People whose salary largely depends on commissions act like they are salaried and under-achieve.
Cause: Compensation plans that pay too much for prior-year sales
Cost: Sub-optimal level of performance, losing account acquisition and penetration skills
Solution: Pay more for new business and less for prior-year sales
Pitfall 7: First Dollar Commission + Base
Symptom: Sales people are too comfortable with below-target earnings
Cause: Sales people are paid a significant base salary and earn commission on sales from first dollar
Cost: Income+Commission too high for actual productivity
Solution: Only pay commission after a threshold level of sales is achieved

My Comment: Other alternatives are possible to fix this situation. The entire compensation mix could be re-evaluated and the base salary could be lowered. It would also be possible to adjust the commission rate before a threshold to minimize the impact of removing commission completely before a certain threshold.