Implementing a Sales Compensation Program

Confidential. Copyright © Stratford Managers Corporation. All rights reserved. 1

Introducing a Sales Compensation Program to your Organization

Mike D’Amico

Stratford Managers Corporation

[email protected] June 17, 2015

mailto:[email protected]


• Are you ready for a sales comp plan?• Engaging key stakeholders• Key design considerations• Transition considerations• Developing a pilot program• Preparing to administer the plan• Implementation tip sheet

Presentation Agenda


• Established in 2008, Stratford Managers is a Management Consulting firm with expertise in multiple management disciplines. – Strategy - Sales– Marketing - Finance– Intellectual Property - Business Operations– Human Resources - Digital Transformation

• Unlike traditional management consulting firms, Stratford is led by operationally accomplished senior managers who proactively drive businesses to achieve higher performance—and sustain it.

• We provide hands-on implementation and operations plus ongoing advisory services that deliver results.

• Focus on customer satisfaction and relationship building.• We have a background in all areas of HR gained through in-depth

experience and HR leadership roles that have been held by members of our HR Consulting team.

About Stratford Managers


• Do you answer ‘yes’ to these questions:– Do we have a corporate strategy that focuses on

revenue growth?– Do we have roles in the organization that are externally

focused on generating revenue?– Do these roles interact with customers and influence

the buying decision?– Do we want to incent and focus behaviour to support

our revenue strategy?

Are you ready for a Sales Comp Program?


• Technology Company• Generates revenue through:

• Product sales• Product licencing • Advisory services

• Growth strategy with revenue targets north of $100M• Never had a dedicated Sales Comp program

Case Study example


• Senior Management• The Board of Directors/Compensation Committee• Finance department• Human Resources department• Sales staff

Engaging Key Stakeholders


Corporate incentive plan• Limited customer contact

for purpose of generating revenue

• Base salary makes up majority of earnings

• Comp administered on base salary – smaller additional ‘bonus’

• Payouts typically driven by company performance

Sales Comp v Corporate programs

Sales incentive plan• High degree of customer

contact, persuasion and influence

• Lower base salary, higher leverage

• Compensation is administered on total target earnings

• Emphasis on individual performance goals and targets


• Salary/incentive splits• Quotas vs Commission• Caps and thresholds• Quarterly, semi-annual or annual administration• Number of goals; avoiding goal conflict; goal dilution• Accelerators• Claw-backs• Draws

Key Design Considerations


• Provides an employee with significant earnings upside through a highly “leveraged” compensation plan

• Sales Compensation is typically administered on Total Target Cash (TTC) or On-Target Earnings (OTE)

• Equals Base Salary + Target Incentive (the target of at-risk incentive pay at 100% achievement of all objectives)

• During start-up mode everyone is a “hunter” with significant pay at risk (40% to 50%+) and significant upside opportunity.

• Maturity brings a customer base, thus revenue that must be defended and “farmed.” “Farmers” typically have less pay at risk (25%-30% or less) and less upside opportunity.

Salary/incentive splits


• Commission plans pay a rate or percent on a representative’s sales.

• Generally, commission plans are straightforward with clear line of sight between the action and payout.

• Representatives find them easy to understand and can equate their immediate earnings to their performance.

• There are a few different plan designs:• Straight/flat commission• Ramped commission• Variable commission

Quotas vs Commission Plans


• In a quota plan, sales representatives have performance targets, or ‘quotas’, they are expected to achieve.

• Used in more mature situations in which a history of performance exists - provides a stronger ability to forecast and set targets.

• Allows the organization to cascade financial goals to the sales organization.

• Setting quotas can be challenging if there is insufficient data for determining allocations for new products, territories, or overall growth goals.

• Inaccurate targets can result in the organization paying out too much or too little – both of which create issues.

Quotas vs Commission Plans


• Chose to use a variable target incentive approach– Either 40% or 50% depending on the role

• Chose to use a quota approach in their plan– Felt they were at a level of maturity that they had an ability

to forecast and plan

Case Study example


• Some organizations will put a cap or limit on incentive payouts to mitigate risks of huge payouts

• Prevents excessive payouts from ‘win-fall’ scenarios• Can de-motivate or dissatisfy the employee who feels they

have earned the full payout• A compromise can be to ‘decelerate’ payouts once a certain

achievement level has been achieved

• Thresholds establish the minimum performance level that will result in any incentive payout

• For example, achieving anything below 60% of quota will be deemed such poor performance that no bonus will be earned

• Commission plans usually pay from 1st dollar, and thus typically have no thresholds

Caps and Thresholds


• Accelerators are a design tool that can be used to incent behaviors through increased bonus opportunities

• Often used to motivate a sales rep to keep pushing even after they have reached quota target

• Prevent ‘saving’ revenue for the next period

• Consideration should be given to the timing when accelerators activate

• You don’t want to motivate a rep to intentionally let revenue ‘slide’ to the next quarter

• A recent study found the use of accelerators drove over 13% higher revenues & 2% higher profit than models that did not include accelerators.

Accelerators


• Chose not to put a Cap on payouts, but rather to decelerate the payout beyond 200% achievement– Payouts for performance above quota (100%) was paid at

the accelerated rate of 3.5:1– Anything above 200% of quota decelerated back to 2:1

• Chose not to put a threshold in place– All revenue attainment resulted in some incentive being

paid to the employee – only zero revenue would result in zero bonus

– From 1% to 100% of quota achievement, the payout was made at a 1:1 ratio.

• i.e. 50% of quota achievement would deliver a payout at 50% of target incentive

Case Study example


• How frequently will sales incentives be paid to participants?• For what period will sales targets be set?

• Largely driven by the length of your sales cycles and your ability to accurately forecast revenue

• Important to understand the impact of sales timing and revenue recognition – especially if there are accelerators built in your plan

• Sales reps are often the best mathematicians in the company, they know how to maximize their payouts!

Quarterly, semi-annual or annual administration


• Measures should align with your sales strategy.• It is recommended to utilize two to five performance measures. • Be conscious of ‘goal conflict’ where different behaviours are

being incented or a goal may drive unintended behaviours• Compensation plans for more mature companies can be

aligned with increased sales role specialization. This often means more specialized performance measures, including:

– New customer revenue/revenue growth– Retention revenue– Strategic product revenue– Gross margin (for companies where representatives can influence price and/or cost).

Number of goals; Avoiding goal conflict


• Chose to administer on a quarterly basis with performance targets and payouts established for each quarter.

• Chose to utilize 2-4 performance goals for each individual’s compensation plan– They were heavily based on the corporate strategy and annual

operating plan– Most participants received 3 goals– Included ‘balancing’ goals of “in year revenue” and “total contract

value”

Case Study example


• Clawbacks are commonly used to address sales that are cancelled or do not end up in revenue collection

• If the sales rep has been paid a commission or bonus based on an assumed sale and that sale does not end up happening the bonus is repaid to the company

• To minimize the impact on the sales rep the repayment is typically “clawed” out of future incentive/commission payouts

• It is important to clearly document the details around your clawback terms to minimize ‘grey areas’ and dissatisfaction

Clawbacks


• A Draw may be used to provide participants with a temporary cash supplement.

• Often used when you hire a new sales rep in consideration of the period of time it will take to become fully productive

• Also used when moving somebody from a corporate plan to a sale comp plan to compensate for a salary decrease

• Draw Types• Initial Offset Draw

– Paid in a lump sum in the first month of the draw period (3 months for a quarterly plan)– Most commonly set at 25% of incentive target– Offset during the draw period by earned Sales Incentive Compensation

• Recoverable Draw – Paid monthly over the draw period– Maximum amount is 25% of incentive target per draw period– Recovered by company during and after the draw period from Sales Incentive Compensation earnings. Must be

fully repaid.

Draws


• Chose to include a standard clawback clause - would recoup incentives paid for revenue that did not end up occurring

• Implemented a draw for staff transitioning to the new sales comp program– Wanted to address the impact of a decrease to base salary– Provided a lump sum draw equal to the amount of the

annual salary reduction– This lump sum was considered an advance on future

incentive payouts

Case Study example


• When will the new incentive plan be introduced?• How will you deal with adjusting salaries for existing staff moving onto the

new program?• Are you able to understand and forecast demand and revenue in order to

set revenue “quotas”?• How will you document roles, responsibilities and processes required for

administering the new program?– Setting goals and targets– Communicating plan terms– Revenue recognition and administration– Payroll

• Who owns the Change Management strategy to:– Train and educate those involved– Document procedures– Communication to plan participants

Transition Considerations


1. Joe’s base salary of $88,000 + $8,800 target incentive = $96,800 TC

2. Market TTC range for Joe’s sales role is $110,000 to $140,000. Peers’ TTC ~ $110,000 to $125,000

3. Weighing Joe’s expertise, experience, sustained performance, etc., a new TTC of $120,000 is set

4. Company has established a 40% target incentive compensation for the role– $120,000 x 40% = $48,000 target incentive

5. This results in Joe’s new base of $72,000 – $120,000 TTC - $48,000 TIC = new salary

So in this example Joe is seeing his base salary reduced by $16,000 but his on target earnings opportunity has increased by $23,200.

Moving a non-sales employee to Sales Comp


• Can you launch on a pilot scale – over a partial year or with a small test group of participants?

• Test out design and work out issues• Test and refine your administration processes• Assess results vs expectations• Refine your program prior to a full scale launch based on the

learnings from the Pilot Program

Developing a Pilot Program


• The company launched their program using a Pilot approach involving five very senior revenue generating employees

• Each individual was transitioned onto sales comp with a resulting decrease in salary but increase in total earnings opportunity for meeting performance targets

• Pilot participants had a transitional Sales Comp plan for the last half of the year

• Comp Plan agreements were provided to each participant that outlined basic terms of the new program

• Lots of learnings!

Case Study example


• Finance• Revenue recognition• Draws• Payments• Clawbacks• Establish a Dispute Resolution Committee

Preparing to Administer the Program


1. Engage key stakeholders throughout the design and implementation

2. Determine design considerations– Salary/incentive splits - Quotas vs Commission– Caps and thresholds - Quarterly/semi-annual/annual administration– Number of goals - Accelerators– Claw-backs - Draws

3. Map out your transition plan– When will the new incentive plan be introduced?– How will you deal with adjusting salaries for existing staff moving onto the new program?– How will you document roles, responsibilities and processes required for administering the new program?

• Setting goals and targets• Communicating plan terms• Revenue recognition and administration• Payroll• Dispute Resolution

– Who owns the Change Management strategy

4. Develop and run a Pilot Program on a small scale– Evaluate results and refine the program and procedures as appropriate

5. Finalize all administration requirements– Document roles and responsibilities– Document procedures– Create comp plan templates– Create communication materials

Implementation Tip Sheet


Thanks for your time