Waw Sales Compensation 2019 PDF

sales
compensatıon
essentıals
+
a field guide
for the hr professional
2nd edition
Jerome A. Colletti, Mary S. Fiss, Ted Briggs & S. Scott Sands

In Praise of the First Edition
“Sales Compensation Essentials provides an exceptional balance

between the depth required for those experienced in delivering
salesforce success and the breadth needed for those new to the
field. In particular, it offers a clear roadmap for assessing how well
your sales plans are working today, and how best to think about
ensuring they deliver even greater value tomorrow.”
— Laszlo Bock
Vice President, Human Resources
GE Capital Solutions
“This text provides valuable information and reference material

for any HR practitioner or line manager working with salesforces.
Easy to read and chock-full of easy-to-apply ideas and frameworks,
it is one of the best salesforce effectiveness compendia to hit the
shelves in a long time.”
— Gary Starzmann, CCP, CBP, GRP, SPHR
Vice President, Aon Hewitt
“This book provides the HR practitioner with a basic understanding

and approach in sales compensation design. It not only teaches the
basic concepts, but outlines a methodology that can easily be adopted
and implemented into a variety of organizations. It also addresses
alternative approaches which are welcome in today’s environment.”
— Lorrie M. Ferraro, CCP, PHR
Global Director, Human Resources
PAREXEL International
P2 Sales Compensation Essentials — A Field Guide For The HR Professional
sales
compensatıon
essentıals
a field guide
for the hr professional
2nd edition
Jerome A. Colletti, Mary S. Fiss, Ted Briggs & S. Scott Sands

About WorldatWork ®
WorldatWork (www.worldatwork.org) is a nonprofit human resources association for
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and total rewards — strategies to attract, motivate and retain an engaged and productive
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achieving better results for the organizations they serve. WorldatWork has more than
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Professional ® (CBP), Global Remuneration Professional (GRP ®), Work-Life Certified
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No portion of this publication may be reproduced in any form without express written
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© 2014, 2006 WorldatWork Press
ISBN (soft cover): 978-157963-361-5

ISBN (ebook): 978-157963-362-2
WorldatWork Staff Contributors
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Cover Design: Kris Sotelo www.worldatwork.org

Table of Contents
Introduction5
1 | The HR Professional’s Role in Sales Compensation 11
2 | Sales Compensation Fundamentals 27
3 |
Understanding Common Problems
in Sales Compensation 57
4 | Participating in the Design Process 71
5 | Assessing Current Plan Effectiveness 87
6 | Designing a New Sales Compensation Plan 105
7 | Implementing a New Plan 135
8 | Aligning Other Rewards and Recognition Programs 159
9 | Governance of Sales Compensation Programs 171
Glossary187
About the Authors 199

4 Sales Compensation Essentials — A Field Guide for the HR Professional
Introduction 5
Introduction
Introduction 7
P icture this situation. It involves a brief hallway conversation

between Sue Stark, HR manager, and Al Wilson, senior vice
president, worldwide sales, both employees of a global electronic
components company.
Al Wilson: Hi, Sue. Last week, I participated in Q2 sales reviews
with all five of our world regions. It is now clear to me that we
must change our sales compensation plan for next year. We are not
achieving the results that we had expected from the changes we
made in our sales jobs and the compensation plan we implemented
to support our new selling requirements. I am going to call together
some folks to address the needs as I see them. I’d like to have the
first of what I believe will be several plan-design meetings later
this week, probably Friday. Are you available to join us?
Sue Stark: Yes, I would like to participate in that session. What
do you see as my role in the meeting and how would you suggest
I prepare for it?
Al Wilson: Good questions, Sue. I suggest that you call a couple
of our region, sales vice presidents. Ask them to describe to you
their experience with the compensation plan. After you have talked
with them, get back to me with your thoughts about your role in
the meeting and the subsequent work that is required to develop
and implement a new plan for next year. Got to run; see you Friday.
In many companies, the situation that confronts Sue Stark is

very common. Relatively few sales compensation plans remain
the same from one year to the next. This is because companies
continually seek to improve their performance with customers.
Customers demand effective products, better service and quality,
and competitive pricing. The salesforce must deal with changing
demands. In most industries, it’s the primary customer contact
resource, and therefore, the salesforce is often seen as the “face” of

the company. Because of these ongoing changes and the primary
importance of the salesforce, company executives must continually
examine the effectiveness of sales compensation in motivating and
rewarding the salesforce for meeting customer expectations and
achieving overall business objectives.
Like many HR professionals, Sue has a “part-time” responsibility
for sales compensation. It is one of many areas of responsibility
that she must be equipped to handle, because her company cannot
afford to employ experts in all areas of compensation. There are
thousands of professionals like Sue Stark in the HR community who
have a need for a field guide like Sales Compensation Essentials.
HR generalists, compensation professionals and internal change-
management consultants often need to quickly understand the
basics of sales compensation so they can provide practical guidance
to sales executives about the most appropriate process to follow
in assessing plan effectiveness, designing a new plan or both.
This field guide was written for those individuals as well as all
others in a company who are asked to participate in the process
of designing and implementing a new sales compensation plan.
How This Book Can Help You

This field guide can meet the varying challenges companies face when
they seek to create or revise their sales compensation plans. It has
been designed and written so that it can be used in the following ways:
• As a reference guide to the sales compensation concepts, principles
and practices that HR professionals need to be aware of as they
seek to help their companies achieve business goals and objectives.
Thus, it can help you acquire the knowledge and master the use
of tools you will need as you help top managers make informed
choices about plan design, implementation and ongoing management.
• As a design guide that developers of sales compensation plans
can use as they create or modify plans.
• As a change-management guide that various constituencies
in a company can use during the sales compensation plan-
implementation process.
Introduction 9
How This Book Is Organized

This field guide includes nine chapters, which are organized in
three sections.
The sections correspond to the ways in which most HR profes-
sionals are involved with their company’s sales compensation plan.
Section 1, contemporary challenges, sets the stage by discussing
the role and involvement of HR professionals in sales compensa-
tion, the basic knowledge that they should possess and the skills
they should have to help executives identify opportunities for
sales improvement through the compensation plan. Chapter 1,
The HR Professional’s Role in Sales Compensation, describes the
partnering role that HR managers should have with sales leaders
when change in the compensation plan is contemplated. Chapter 2,
Sales Compensation Fundamentals, explains the basics that are
essential to understanding how sales compensation ties into total
rewards, the elements of sales compensation and the alternative
mechanics to consider in plan design. Chapter 3, Understanding
Common Problems in Sales Compensation, identifies the symptoms
associated with a failing sales compensation plan. It also describes
how a company can successfully address and resolve those problems.
Section 2, design and implementation, is the heart of this field
guide. It provides you with the principles, tools and techniques
needed to design and implement effective sales compensation
plans. Chapter 4, Participating in the Design Process, suggests a
road map for guiding the process of plan design and implementa-
tion. Chapter 5, Assessing Current Plan Effectiveness, explains how
to evaluate a current plan in order to identify those features that
work effectively and highlight opportunities to improve salesforce
productivity through new or revised plan elements. Chapter 6,
Designing a New Sales Compensation Plan, describes the business
changes and objectives that most commonly influence plan design
and the elements of a plan that are most commonly changed.
Section 3, effective plan management, covers three important topics
that have a direct impact on the success of a new sales compensation
plan. Chapter 7, Implementing a New Plan, explains the require-
ments of a successful plan launch, including plan documentation,
communication, front-line manager training and measuring the

effectiveness of a new plan, all of which help top managers deter-
mine the level of success they are achieving with its help. Chapter
8, Aligning Other Rewards and Recognition Programs, identifies
the most common programs and practices that must align with
sales compensation and describes how to ensure that they are
complements to the plan and not detractions.
Chapter 9, Governance of Sales Compensation Programs, explains
the importance of the governance process, how to determine if
governance problems exist and how to develop and implement a
governance process that creates an environment for sales compensa-
tion plan success.
It boils down to this simple fact: not all HR professionals want to
be (or need to be) sales compensation wizards. They have a need to
acquire authoritative and practical information about sales compensa-
tion in order to address an immediate need with confidence. That is
exactly where this field guide comes in handy. It will not turn you
into a sales compensation expert, but it definitely will enable you to
pick up significant and useful information and immediately apply it.
The benefit we hope you gain from this book is the confidence to act
competently in situations where you can help sales leaders increase
the effectiveness of sales compensation in your company.
The HR Professional’s Role in Sales Compensation 11
1
The HR Professional’s Role
in Sales Compensation
T he degree of an HR department’s involvement with sales compen-

sation plan design and implementation varies from company to
company. In some companies, HR’s involvement is actively sought
by the sales department.
In others, its involvement is discouraged or prevented. HR profes-
sionals frequently ask, “What can I do to play a more meaningful role
in plan design and implementation at my company?” This question
is not surprising, because having limited or no involvement in the
process of shaping and launching a sales compensation plan means
that companies miss the opportunity to use the expertise of their HR
staff in key people-management areas. These areas include ensuring
that a company’s sales compensation plan is designed to attract, retain
and reward talented salespeople who can win and keep customers.
It is clear that developing and using a compensation plan that helps
a company achieve that goal should draw upon the expertise of the
HR function. This chapter describes the aspects of sales compensa-
tion plan design and implementation in which the HR professional
can play a meaningful role. Further, it provides suggestions about
actions that a professional can take to perform that role effectively.
Working with the Sales Organization

At many companies, the business partner role defines how HR is
expected to work with its assigned organizational client. The client
may be either a business unit that includes the sales organization
or it may be only the sales organization. When the business partner
role is the prevailing model for providing HR services, the HR
generalist is faced with a broad range of duties and responsibilities.
However, an HR professional’s No. 1 priority should be to gain and

continually build a thorough understanding of the assigned client’s
business. When the assigned client is the sales organization, that
understanding should include the following:
• Customer markets served and the product/service offerings provided
• Sales channels deployed and the jobs operating within those channels
• Current year’s business plan, sales strategies and sales financial goals
• Sales leadership’s operational style (e.g., centralized versus decen-
tralized management) as it pertains to various sales management
programs — territory assignment, quota allocation, sales cred-
iting — that impact compensation.
Some senior HR professionals have said that an up-to-date under-

standing of the four areas itemized above is the entry or “ante into
the game.” As in many business situations, the key to success is the
quality of one’s relationships with the individuals in senior leader-
ship positions. Relationships built on trust, confidence and respect
are acquired over time. HR professionals who have successfully
developed effective working relationships with senior sales leaders
did so through regular, proactive and meaningful interactions with
the sales organization. Figure 1-1 itemizes activities in which an
HR/compensation professional should engage to demonstrate a
willingness to learn how the sales organization operates. Through
these activities, an HR/compensation professional can develop a
first-hand understanding of the needs and requirements of the
sales organization for compensation support.
Taking the initiative to understand how the sales organization
operates assumes that sales leaders are receptive to having HR
involved with the sales organization overall, and with the sales
compensation plan in particular. Because in some cases this is not
a valid assumption, Figure 1-2 indicates some of the more common
objections to HR involvement with the plan and provides sugges-
tions for overcoming those objections. These suggestions should be
helpful to an HR professional in convincing the top sales executive
that his or her involvement with the sales compensation plan will
be helpful to both the sales organization and the company.
FIGURE 1-1 The HR Professionals Illustrative Activities —

Sales Compensation Plan Involvement
Who What (Illustrative Interactions)
Sales leaders, i.e., • Regular conversations (monthly, quarterly) about effec-
top sales executives tiveness of current plans — what’s working, what’s not;
and regional sales early ideas for change in the future
executives (e.g., North
America, South America, • Participation in sales leadership meetings related
Europe, Asia/Pacific) to future business planning; implications for sales
compensation
• Review/discuss with sales leadership teams: quarterly

sales results and impact on sales incentive compen-
sation payments (e.g., percent of sales team earning
under the plan, percent of sales team achieving
target-incentive earnings) overachievement earnings;
individual sales performance; and general staffing
concerns
Field sales managers, • Occasional “work withs” to understand challenges
e.g., first- level sales faced by field sales managers in their jobs; define
managers the role sales compensation plays in motivating and
managing its sales team
• Regular calls to selected field sales managers to gain

feedback on current plans — what’s working, what’s not
• Issues/challenges with current plans — identify the

most common questions or problems members of the
salesforce are experiencing under the plan
• Needs relative to managing with the plan, e.g., reports,

response to special requests
Sales staff, e.g., sales • Regular conversations with sales staff supporting the
operations or admin plans to understand employees’ perspectives on what’s
executives working, what’s not and why; early thoughts about
opportunities for plan improvement in subsequent year
• Periodic meetings to confirm system capabilities, abili-

ties to meet management information needs
“Sellers,” e.g., sales • Occasional “ride withs” to understand sales roles and
representatives, account jobs, i.e., how members of the salesforce go about their
managers, sales work, influence they have on customer buying decisions,
specialists service work they perform; how sales compensation
plan influences their behavior and performance
• Periodic salesforce surveys to understand what members

of the salesforce like best/least about current plans
Whether HR is considered an internal consultant or a policy

gatekeeper, involvement of the HR professional with the sales
compensation plan is important to business success. Meaningful
involvement is most likely to take place in situations where the
professional has developed a thorough understanding of how sales
FIGURE 1-2
Overcoming Resistance to HR Involvement with Sales

Compensation
Objections —
Suggested Response — HR Professional
Sales Executives
No relevant experience • Describe experience in sales compensation plan
design and design of management incentive plans.
• Explain role in the process and key contributions

acknowledged by others.
• Describe seminars or courses taken in sales

compensation.
No understanding of • Ask for the opportunity to develop that understanding
our sales channels, by visiting field locations, doing “work withs” with field
processes, jobs managers and going on calls with sales reps.
No time • Explain that priorities have been adjusted to make time
available to work on sales compensation.
Don’t know where it • Suggest a process; offer ideas about specific tasks
would make sense to that HR could undertake and complete; and describe
involve you outcomes and benefits.
operates and has built an effective working relationship with key sales
leaders throughout the sales organization. Additionally, HR/compensa-
tion professionals must develop and improve upon their knowledge
of sales compensation principles, practices and techniques. Every HR/
compensation professional with responsibility for sales compensation
should ask, “What am I doing to continually improve my mastery of
the tools and techniques required to provide innovative compensation
solutions to the sales challenges faced by my company?”
This book’s overall goal is to provide you with the tools and
knowledge required to support the sales organization through
compensation solutions. In particular, the goal of this chapter is to
describe some of the competencies that require master y in today’s
business environment. These competencies include the following:
• Knowing how to help sales executives address and resolve sales
compensation problems as they arise during the course of a year
• Knowing how to assess the effectiveness of the sales compensation
plan and therefore how and when to help sales executives make plan
changes in order to increase sales effectiveness through compensation
• Having the ability to lead or participate in a design process that
includes advising management on which jobs should be eligible
to participate in the sales compensation plan, the appropriate

level of pay for those jobs, what type of plan is appropriate and
how the incentive arrangement should be structured
• Developing a holistic understanding of the company’s sales
management programs and the role their interdependence plays
in the company’s achievement of its sales goals
• Understanding how communication strategies and tactics are
created and executed in order to ensure that a new or changed
plan produces the expected business results.
Six Areas of Sales Compensation Plan Involvement

A solid understanding of how the sales organization operates and
the respect of sales leadership are important prerequisites for
gaining involvement with the sales compensation plan. Once those
prerequisites are established, it is equally important to be confident
about where and how HR involvement with sales compensation is
beneficial to a company and its salesforce. The remainder of this
chapter will describe the following six areas in which HR involve-
ment is most often desired and/or needed:
1. Problem Resolution
Many HR professionals indicate that their first significant involve-
ment with the sales compensation plan was the result of a major
problem that sales leaders believed was caused by the plan. This
can often occur in companies in which HR’s involvement with sales
compensation is either a new or emerging responsibility. In such
a company, an HR professional might be invited to help address a
problem with the plan because there is a new awareness among
sales executives that HR can bring an objective perspective and
fresh thinking that could help address and resolve the problem.
This, of course, means that the HR professional must have the
knowledge, skills and experience to make a meaningful contribu-
tion to a solution. HR professionals are too frequently not asked
for their involvement because they are seen as not having adequate
experience and skills in sales compensation. They are further
perceived as not possessing a sufficiently intimate knowledge of
the business to be of help to the sales organization. The old adage

of “… be prepared …” is quite relevant here. An HR professional
must possess applicable knowledge, skills and experience in order
to make a value-added contribution.
Common examples of plan problems that HR professionals are
frequently asked to investigate include the following: 1) sales employee
dissatisfaction with the plan; 2) exceptions to either payout calculations
or plan rules; 3) overpayments or underpayments; and 4) turnover
either higher or lower than internally expected, industry benchmarks
or both. Seasoned HR professionals should be equipped to help the
sales organization address problems such as these.
Most experienced HR professionals understand human motivation
and how to tap into the workforce through interviews and surveys
in order to determine root causes of job dissatisfaction. Many HR
professionals have also acquired analytical skills that can be applied
to determining the turnover rate and its relationship to overall industry
conditions. The important point is this: Because the problems just
mentioned are common sales compensation problems, a thoughtful
HR professional should be able to respond with a plan of action
when called on for help by the sales organization. This book is one
source of information that can help develop that action plan.
Generally speaking, the exact cause of the perceived sales
compensation problem is less important than how one goes about
helping sales leaders address and fix the problem. Two hallmarks
of success in resolving such problems, at least from the sales
function’s perspective, are a willingness on the part of HR to act
swiftly and authoritatively to identify the root causes of the problem
and the ability to help sales leaders formulate practical alternative
solutions that can be implemented quickly.
It is worth mentioning, however, that HR should take great care
in identifying and isolating the root cause of the problems associ-
ated with sales compensation. In a majority of cases in which sales
compensation is blamed for shortcomings in its overall effectiveness,
the problem’s root cause actually lies elsewhere.
Consider this common situation. When members of the salesforce
are not earning their incentive compensation opportunity under the
plan, field sales managers may report that their people are dissat-
isfied with the plan. However, the dissatisfaction may have little
to do with either the incentive opportunity or the payout formula
mechanics. The real problem may well be overly ambitious sales
growth targets reflected in sales quotas that may be unachievable by
a disproportionately high percentage of the salesforce. The important
point here is this: It is easy to attach blame to the sales compensa-
tion plan, but rarely will a fix to the sales compensation plan solve
a performance problem that has its root cause elsewhere. In Chapter
3, you will learn more about problems that are common to sales
compensation plans regardless of industry or company and how the
HR professional can help sales leaders address and resolve them.
2. Design and Implementation Process

Companies are increasingly following a documented process for
the design and implementation of their sales compensation plans.
Most processes include the following four major activities:
a. Assessment: How effective is the current sales compensation
plan? What evidence is there to suggest that the plan may require
modification or may need to be replaced by a completely new plan
(change in business strategy) implementation of new or restructured
sales channels, jobs or both; or new product launch?
b. Design and testing: What changes could be made to incentive
pay mechanics? (That is, linking performance to pay.) And, will such
change redirect sales behavior in the areas management requires
for achievement of the coming year’s business results? Can such
changes be supported with sales financial data (i.e., costing and
individual performance modeling) that show a proposed change
will result in a material improvement in business results?
c. Implementation: How will plan changes or a completely new
plan be introduced to the salesforce so that it will produce maximum
motivational mileage and thus contribute to achievement of desired
business results?
d. Monitoring: What actions are taken to confirm that the salesforce
has received and understands the plans and field sales managers
are managing effectively with the new plans?
It is easier to lay out these activities than to actually execute them

effectively. There are three common flaws in the plan design and
implementation process that you should watch out for at your company.
a. Assessing and modifying existing plans, or designing new ones.
The first type of flaws are those that are present both in the underlying
process used to assess the current plan and in the process to either design
new plans or modify current plans. There are three common process
errors: (i) executing design tasks out of sequence (e.g., modifying the
incentive formula without first assessing how well the current plan is
working, understanding what the new business objectives may be or
both); (ii) limiting design work to a single function such as sales, when
the design process would actually benefit from a multifunctional approach
that includes sales, finance, HR and others; and, (iii) misunderstanding
how long the design process takes and thus either spending too little
time (the most common mistake) or too much time on it.
It is frequently the HR professional’s role to ensure that one or more
of these three process flaws does not encumber the design process.
To do so, HR (or the designated process owner) should pull together
representatives from all of the functions that currently have involve-
ment with the plan and agree on the safeguards that will be put into
the process — for example, agreeing to a defined project work plan
with regular checkpoint meetings — to ensure that none of these
flaws will be allowed to creep into the design process.
b. Design errors are the second most common category of flaws
that occur during the process. Common errors include a salary/incen-
tive ratio that is inappropriate for a particular sales job; leverage (i.e.,
upside incentive opportunity) that is either too little or too high;
performance measures that cannot be influenced or accurately tracked
and credited to members of the salesforce; and sales quotas (goals)
that do not appropriately reflect the sales potential in salesforce
territories. Here, too, the HR professional should take an active role
in advising others who are involved with the sales compensation
plan that these types of design flaws are common and should be
avoided in the process.
c. Ineffective implementation and ineffective monitoring of perfor-
mance represent the third set of common flaws that occur when
changes are made to a sales compensation plan. Examples of

ineffective implementation include no formal process for commu-
nicating plan change; no defined/assigned change accountabilities
and lack of a clear leadership message about change (what will
change; why change is important now; and how change will benefit
customers, salespeople and the company). Examples of ineffective
monitoring of the new plan’s impact on the business include no
predefined measures of plan success; no set time period (e.g., after
first payout, after first quarter, midyear) for assessing success; and
no reports provided to field sales managers so they can see how
the salesforce is performing under the plan.
HR typically plays an important role in developing materials for
communicating the compensation plan to the salesforce. Employee
communications is a key competency of many HR professionals.
This is therefore one area where help is usually welcomed. However,
HR generally plays a less active role in monitoring the effective-
ness of new sales compensation plans. This should not be the
case. Because the plan can play an important role in salesforce
performance management, the HR professional should be proac-
tive in helping sales leaders define how success under the new (or
revised) plan will be assessed and measured.
3. Sales Compensation Guiding Principles

Guiding principles are the main values that best-practice companies
follow in order to design effective and successful sales compensation
plans. These principles are based on and support the company’s
philosophy of pay. However, they are rarely documented and
assembled in one place for ready reference and use. There are two
disadvantages to not using a set of documented guiding principles
during a plan-design process:
a. The absence of guiding principles is analogous to trying to
shoot at a target in the dark. How do you know when you have
hit the bull’s-eye? The answer, of course, is that you don’t know.
Thus, guiding principles set forth the standards against which a
plan or plans are designed. The principles provide each of the
participants in the plan design process with the same understanding
of what the design team is shooting for at a conceptual level and

in terms of the design results. A statement of sales compensation
guiding principles typically includes the following topics: i) business
strategy; ii) competitive compensation positioning; iii) plan types;
iv) performance management; and v) administrative considerations,
such as a desire for plan simplicity, management commitment to
effective communication.
b. The second disadvantage of not having and using guiding
principles is that it is virtually impossible to know the extent
to which a new plan has contributed to business success. For
example, the statement of guiding principles typically defines the
expected performance distribution under the sales compensation
plan. Without the benefit of a specific expectation in this area, it
is difficult to determine if the plan paid more or fewer salespeople
than expected.
You will learn more about guiding principles in Chapter 2. However,
it is sufficient to say at this point that an HR professional involved
with a sales compensation plan should encourage the design team
to formulate and use a set of guiding principles for the plan-design
and implementation process. Using guiding principles will provide
the design team with a blueprint that both sets forth clear direction
and can save time during the process itself.
4. Competitive Pay Assessments

In most companies, sales executives look to the compensation plan
to help attract and retain the caliber of people they need to success-
fully sell to and interact with customers. Because attracting and
retaining top-notch talent is one of the most persistent challenges
faced by sales organizations, HR has an opportunity to make a major
contribution to the sales compensation plan through competitive pay
assessment. HR’s role is to assure sales executives that pay levels
are externally competitive and internally equitable (or otherwise
consistent with the organization’s compensation objectives based
on the roles and responsibilities of the jobs).
It is typically HR’s job to assemble labor-market data that can
be used in making decisions about where to set sales pay levels.
This means that HR is responsible for identifying and selecting

reliable labor-market surveys for use in job pricing. A company
will usually rely on two to four survey sources for competitive
data. It is commonly an HR professional who has been given the
responsibility to select and purchase the survey data and to assist
with or manage the data submission from the company. More
information about this process is provided in Chapter 5.
HR should help management determine the appropriate competitive
position (e.g., median, 75th percentile) in the labor market for use
in pricing a company’s particular sales jobs. This is an important
contribution to the sales compensation plan because the total
cash compensation level for each sales job must be large enough
to attract, motivate and retain top-notch talent, as well as pay for
the performance that drives desired business results.
5. Industry Trends and Practices

Sales executives are vitally interested in how various practices
affecting the sales compensation plan compare to others in their
industry. The HR professional, through participation in industry
networking groups and compensation survey job-matching sessions,
can be in an excellent position to gain an understanding of trends
and practices that may affect the sales compensation plan. Thus,
the HR professional should be a member of and active participant
in industry survey groups.
Sales leaders are also typically interested in knowing about
changes taking place in sales channels and sales coverage in the
markets in which they compete for customers. Job-matching sessions
in industry-survey groups are often one place to learn about how
others in the industry are covering the market. For example, if new
jobs that your company does not have are surfacing in either the
surveys or the job-matching sessions, that may be an indication of
a trend in sales coverage that should be brought to the attention
of sales leadership.
A third area of interest to sales leaders is how the operation of
the sales compensation plan is affected by administrative practices.
For example, draws, sales crediting and splits (duplicate crediting)
are all topics of great importance to sales leaders as they consider

a current plan’s effectiveness. An HR professional involved with
sales compensation should consistently make ever y effort to learn
about industry trends and practices that are likely to impact both
the thinking about and the planning for sales compensation, and
share those findings with sales leaders. Doing so increases the
value that the HR professional provides to the sales organization.
6. Plan Effectiveness Assessment

At most companies, sales compensation return on investment (ROI)
is an important topic. The reason for this interest is that companies
have begun to think of sales compensation as an investment in
improving overall sales effectiveness instead of thinking about it as
an expense to be minimized. Thus, they have shifted their outlook
and view sales compensation as a means of achieving increased
volume and quality of sales. This shift in thinking provides an
opportunity for the HR professional to help sales leaders rethink
their approach to plan assessment.
One of the reasons for the difficulty of assessing plan effectiveness
is the existence of unclear expectations for sales compensation.
The best time to gain an understanding of what sales leaders
expect to accomplish through the compensation plan is at the
time the plan is being formulated. The key question is: What are
the outcomes that sales executives (and, in turn, top management)
anticipate from a new plan? These outcomes are the quantifiable
results that management wishes to derive from its investment in
cash compensation for the salesforce.
The selection of assessment metrics, including ROI, is determined by
the goals of the business and the priorities set for the sales organization
by top management. Thus, the actual metrics used are situational; that
is, they should be tailored to a company’s particular situation and set
at the beginning of the new sales compensation plan year. Because
the optimal environment is one in which the HR professional is a
very active participant in the assessment of a current sales compensa-
tion plan’s effectiveness, two subsequent chapters (Chapters 5 and 7)
provide information and tools to help with that work.
Summing Up
Sales compensation is one of the more important tools that a
company uses to attract, retain and reward talented members of the
salesforce. Involvement with the sales compensation plan offers an
opportunity for an HR professional to make important contributions
to business success. To gain involvement with the plan requires that
an HR professional has the respect and confidence of sales leaders
and other key executives (e.g., finance, marketing, IT) who have
had a role in determining the plan in the past. Gaining that respect
and confidence will require an HR professional to demonstrate
an understanding of the company’s business — markets, products,
current sales model, competitors — and to possess the competen-
cies associated with sound plan design and implementation. This
means that the HR professional must develop and demonstrate the
expertise to work with sales leaders and others involved with the
sales compensation plan.
HR professionals should be proactive in seeking opportunities
to become involved with the sales compensation plan. There are
six areas in which the involvement can be both professionally
meaningful and materially beneficial to the company. Those areas
include problem resolution, design and implementation process,
sales compensation guiding principles, competitive pay assessment,
industry trends and practices, and plan-effectiveness assessment.
An HR professional involved with a sales compensation plan should
continually strive to improve mastery of the concepts, tools and
techniques required to provide innovative, yet practical, solutions
to effectively paying the salesforce for desired results.
Sales Compensation Fundamentals 27
2
Sales Compensation
Fundamentals
L earning about sales compensation can be like learning a new

language its own unique key concepts and terms. One of
the most difficult challenges of working on sales compensation
within your organization is ensuring that everyone is using the
same language. The following sections in this chapter describe
fundamental concepts that are widely used in discussions about
sales compensation:
• Compensation Tied to Total Rewards
• Variable Pay Plan Categories
• Sales Compensation Philosophy
• Guiding Principles
• Timing Considerations
• Alternative Mechanics.
Your knowledge of the fundamental concepts of the language

of sales compensation will add to your ability to effectively
participate in your organization’s sales compensation plan design
and implementation.
Compensation Tied to Total Rewards

It is important to first understand the charter and scope of sales
compensation. The amount of pay called “sales compensation”
typically cannot fulfill all of the attraction, motivation and retention
requirements of a total rewards strategy by itself. In fact, most
companies suffer from using sales results and sales compensation
earnings as the only indicators of a sales professional’s perfor-
mance. Many companies fall into the trap of overemphasizing
the pay results to the point that sellers say, “If it’s not in the
sales compensation plan, then I’m not paid for it.” While no one
can argue that these factors do not matter, other results are also
important, and may not be built into the sales compensation plan
or performance management evaluation. This fact becomes even
more important when your company asks talented sales profes-
sionals to tackle more challenging sales assignments or when
your sales organization is integrated into a merged or restructured
organization. An important responsibility of the HR professional
is to help the company learn to accept and communicate that
“total compensation,” including all of the aspects of the rewards
of work, is used to reward “total performance.”
WorldatWork defines total rewards as “All of the tools available to the
employer that may be used to attract, retain and motivate employees.
Total rewards include everything the employee perceives to be of
value resulting from the employment relationship.” The Rewards of
Work study1 describes the five types of rewards shown in Figure 2-1.
As you work with the sales organization, it is important to have a
common understanding of what is included in all the reward types
as they pertain to a salesforce. This common understanding will help
ensure that all components of the total rewards system are appropri-
ately aligned with the company’s expectations for sales jobs.
Direct and Indirect Financials (Total Pay). In some companies,
a significant amount of time and energy is devoted to determining
the total pay plan for the salesforce. Elements of total pay include
the following:
• Base salary
• Incentive compensation — bonus, commission
• Specialized Performance Incentives for Field Force (SPIFFs),
including sales contests
• Recognition/Overachievers Club
• Benefits
• Perquisites.
1 Ledford, G., & Lucy, M. (2003). The rewards of work: The employment deal in a changing
economy. New York: Sibson Consulting, The Segal Company.
FIGURE 2-1
Types of Rewards
Affiliation:
“The feeling of belonging to

an admirable organization
that shares your values”
Direct Financial: Work Content:

Total
“All the monetary rewards Rewards “The satisfaction that comes
you receive” System from the work you do”
Career:
Indirect Financial:
“Your long-term opportunities
“Your benefits” for development and advance-
ment in the organization”
While total pay is very important in attracting, motivating,

rewarding and retaining a highly effective salesforce, putting too
much attention on it could create a culture that is counter to busi-
ness success. Sales leaders in high-performing sales organizations
increasingly seek to strike the right balance between total pay and
other types of rewards.
Affiliation. It is critical for most employees to belong to an admirable
organization. All employees are interested in the company’s vision
and strategy. For the salesforce, however, such interest is particularly
strong because its members “face” company customers regularly.
Thus, the following elements of “affiliation” are particularly important:
• Business vision and aspirations
• Company image, reputation; for example, how customers feel
about the company
• Top management’s support and recognition of the salesforce
• Consistent sales-performance management activities
• Support and mutual respect of peers
• Openness of communication
• Ethics — commitment to doing business honestly.
Affiliation can have a significant impact for sales organizations

if many sellers are remote or home-based employees. Extra efforts
may be required to ensure they remain advocates of the company
rather than solely advocates of customers to whom they are closest.
Career. Most sales employees welcome the opportunity to grow in
their career, although many find a role as an individual contributor
highly satisfying. For the salesforce, key elements of individual
and career growth include the following:
• Performance management and coaching style
• Opportunities for career advancement within sales and other areas
of the company (e.g., sales operations or product development
and marketing)
• Opportunities for individual development and growth.
Work Content. Finally, the quality and content of the job is now
more important than ever. With that in mind, sales employees at
all levels have heightened interest in the quality of the job and
the workplace. Key elements of that building block include the
following:
• Meaningful involvement of first-line sales management
• Working relationships (trust and commitment) with colleagues
in other functions
• Effectiveness and efficiency of the selling process
• Effective sales-support tools (e.g., CRM, mobile computing, quote/
configuration automation) and resources
• Innovation and commitment to new products
• Investment in training — market, products and selling skills.
You probably hear most often that the sales compensation plan is
the “most important tool” the company possesses for the purpose
of attracting, retaining and motivating its salesforce. However, work
content and other “intangibles” are often more influential than
pay, especially for those in complex selling roles. Understanding
how the sales compensation plan fits into total rewards at your
company is a key element in working to develop a philosophy
and guidelines for the program. While all five areas of the total
rewards model are important, most companies fail to excel in

all. In advising your company, you should evaluate which areas
provide the best competitive differentiation for your current and
prospective talent pool and place strong emphasis in those areas.
Variable Pay Plan Categories

Before addressing the details of plan-design elements, it is important
to understand that there are three basic variable pay or rewards plan
categories in which customer-facing employees might participate:
individual, team and corporate. As you will learn in later chapters,
these categories might be short-term or long-term, and can use
cash or non-cash as the reward. The right type of incentives must
be aligned with each role to ensure an effective total rewards
strategy. Appropriate incentives balance the degree of salesperson
impact and the company’s ability to measure that impact so that
the program or plan is fair, equitable and manageable.
Individual incentives create payouts based on the results of an
individual relative to his or her assignment. While there may be
team members (on the account team, for example) sharing in those
results, the individual’s pay is based solely or primarily on what
that person’s accounts or territories achieve. Companies typically
use this kind of plan for individual contributors (sales reps, account
managers, product specialists) as well as sales management.
Team incentives are based on how a group of similarly functioned
or similarly tasked people performs collectively. The plan combines
all results, and the members of the team receive payment on the
total result. Although on occasion there is some modification at
the individual level, the team results drive the payouts. This kind
of plan best fits pooled resources assigned to support a range of
sellers, in which individuals do not always have direct control
over the specific assignments or opportunities to which they are
assigned and may work across multiple opportunities.
Corporate incentives represent broader plans based on total
company or division performance. This typically occurs through
some funding process that may or may not allow for differentiation
at the individual level. Companies typically implement this kind
of plan for a variety of roles beyond customer-facing jobs. This

may include sales support functions that have minimal customer
contact, support a wide range of sales professionals or have many
other duties outside of sales support.
“Sales compensation” generally describes individual or team
incentives, or a combination of both. Rewards are shorter-term
(the measurement period is typically one year or less) and the
reward currency is cash.
Sales Compensation Philosophy

To develop an effective sales compensation program, the design
should be consistent with your company’s compensation philosophy.
This philosophy is frequently both undocumented and informal. It
is therefore very helpful to confirm and document the philosophy in
order to support alignment across all related programs. Elements of
the framework for a sales compensation philosophy are as follows:
1. Objectives: Confirmation of the strategic foundation of the programs
• Legal and regulatory requirements
• Business and financial alignment
• Personnel objectives.
2. L abor Market Comparison: Appropriate companies and jobs

3. Competitive Positioning: Percentile positioning and relationship
to other jobs in the company based on the skills, competencies
and focus required to successfully perform in each role
4. S alary/Variable Pay Ratio Factors: Based on the company’s
philosophy of risk vs. reward
5. Base Salary Determination: Elements/programs that will be used
6. Short- and Long-term Incentives: Eligibility/type.
Guiding Principles
Once the sales compensation philosophy is defined and docu-
mented, various “guiding principles” related to plan design can
be determined. These principles are based on key elements of
the philosophy. They can be used throughout the organization
to “test” decisions as sales compensation plans are developed
or revised in order to ensure that the plans are consistent with

the company’s philosophy. Examples of “guiding principles” are
provided in Figure 2-2.
Once the conceptual groundwork has been established, it’s
important to understand the criteria for determining who should
participate in the sales compensation plan and the key components
of any sales compensation plan framework: target earnings, the mix
of fixed and variable pay, upside earnings potential, performance
measures and performance standards.
Eligibility for Sales Compensation

When your company is going through a change initiative, and the
result is new jobs, new products or new processes, it is critical to
validate the eligibility of relevant jobs for participation in the sales
compensation plan. Whether the job is direct-to-consumer (like a
retail clerk), or business-to-business, the key criterion is the role
each job plays in the sales process, particularly the degree to which
the job is involved in persuading a customer to buy the company’s
products or services. To validate the eligibility of relevant jobs
for participation in the sales compensation plan, the team must
FIGURE 2-2
Illustrative “Guiding Principles”

• Plans are aligned with the company’s business strategy and primary goals — sales
growth, profitability, new product sales and other strategic initiatives (as highlighted
in the business plan).
• Plans are designed to the specific accountabilities of each job.
• Plans differentiate various levels of performance.
• The absolute number of performance measures is limited (i.e., up to three) within
a specific plan, and the capability to track and report results is confirmed prior to
plan finalization.
• The goals of the salesforce are based on optimal performance distribution. This
means that threshold and excellence performance levels are realistically achievable;
that is, they will be set so that at least 90 percent of the salesforce achieves threshold,
60 percent to 70 percent achieves or exceeds quota and 10 percent to 15 percent
achieves or exceeds excellence.
• The company is committed to using plans that are simple, flexible and self-calcu-
lating by plan participants. Approved plans are ones that can be administered in a
timely and cost-efficient manner, with minimal requirements for manual intervention.
• Management at all levels of the organization is committed to clearly communicating
the plans and to providing the support required to enable the salesforce to succeed
under the sales compensation plan.
understand the sales process (whether it has been formally docu-

mented or can be defined specifically based on case examples),
from developing and qualifying leads to persuading the customer
to buy, and then fulfilling the order.
A common question in some companies is: should jobs that
are service and fulfillment oriented be eligible for sales incentive
pay? In considering these roles, you should remember that one
key differential between sales incentive pay and other variable
pay is the degree to which target incentive pay is included in
the calculation for market-rate competitive pay. For many jobs,
the base wage, or base salary, is considered 100 percent of the
target pay for that position, and incentive earnings are added on.
As the HR expert on the team, your job may include the need to
challenge eligibility assumptions in order to ensure that jobs are
treated equitably, and are consistent with market/industry practice
and generally accepted principles of compensation plan design.
Three primary criteria for eligibility to be on either individual or
team sales plans are as follows:
1. T he primary responsibility of employees in designated sales jobs
is customer contact and persuading the customer to do business
with the company.
2. E mployees can affect sales results and may have assigned
sales goals.
3. S ales results can be tracked and accurately measured at the
employee level.
During challenging business periods, there is often pressure

within an organization to include some sales support or sales
administration roles in the sales compensation plans. This occurs
because these roles typically participate in corporate incentive
plans which tend to have a funding requirement based on corporate
business results. Sales compensation plans do not typically have
this funding mechanism, and therefore pay individuals for sales
results regardless of corporate business results. The above eligibility
criteria can help you defend against this request and protect the
principles that your company has established.
Target Earnings
Three key terms used in sales compensation are defined in Figure
2-3. The target cash compensation (TCC) for a job includes the base
pay that is available for “expected” or “acceptable” performance
(either a fixed base salary for the job or the midpoint of the job’s
salary range) plus the at-risk pay available for achieving expected
results (e.g., the quota). As you work with the sales organization,
it is important to remember that TCC is a broadly accepted term,
but specific industries may use different terms to describe it. Other
names used for TCC include the high-technology term on-target
earnings (OTE) and total target compensation (TTC), which is
frequently used in the services industry.
Possibly the single most critical factor to use in determining
the appropriate TCC for a job is confirmation of that job’s role,
not simply the title given to that job in your company. Titles vary
significantly from company to company, but the job role (e.g.,
telesales, counter sales, geographic sales, technical specialist) is
the designator used to match your company’s job to externally
available data about how companies pay jobs having the same role.
The process of confirming the TCC for a sales job is essentially
the same process used to benchmark other jobs in your company.
Once the job has been confirmed, both external market data and
internal structure and equity are used to establish the parameters
of the job value. “Pricing Sales Positions with Confidence,” Survey
FIGURE 2-3
Key Sales Compensation Terms and Definitions

• Target Cash Compensation (TCC): TCC is the total cash compensation (including
base salary and incentive compensation) available for achieving expected results.
• Salary/Incentive Mix: Salary/incentive mix is the relationship between the base
salary and the planned (or target) incentive amounts in the total cash compensa-
tion package at planned or expected performance. The two portions of the mix,
expressed as percentages, always equal 100 percent. For example, an 80/20 mix
means that 80 percent of the TCC is base salary and 20 percent is incentive pay at
target performance.
• Leverage: Leverage is the amount of increased or upside incentive opportunity — in
addition to target incentive pay — that management expects outstanding performers
to earn. Leverage may be expressed as a ratio of upside to target (e.g., 2:1), a
multiple of the target incentive (e.g., 2 times target) or as a total of the target incentive
opportunity plus the multiple of target at upside (e.g., triple leverage).
Best Practices: A Collection of Articles from WorldatWork provides

a helpful step-by-step process on how to obtain and use market
data. See Figure 2-4 for a brief summary of several factors you,
or the person on your team charged with market pay determina-
tion should consider. Some specific analyses for consideration of
market pay positioning are provided in Chapter 5.
The results of the competitive/market analysis will need to be
balanced against your own internal compensation structure and
programs as well as equity requirements across similar job levels
in different functions. This can be done on either a “base pay
plus” or “total cash compensation” basis, but is generally required
to ensure internal equity and consistency with legal requirements.
It is also a tool that is helpful during the dreaded “FLSA audit”
that you or someone in HR is typically responsible for periodi-
cally completing. It is sometimes quite a challenge to confirm or
determine the appropriate FLSA status for sales jobs, both inside
and outside; however, this should always be done in light of the
actual requirements of the job rather than a perceived lack of
internal standing if job status changes.
FIGURE 2-4
Using Survey Results

• The data must be available for the types of jobs you are pricing.
• Data must be collected at least annually.
• Data integrity is mandatory — data must be credible with your internal clients, reli-
able and valid.
• The right type of data (e,g,. total cash compensation, salary, incentive, mix, quota
or scope) must be available.
• The right comparators — the right industry, company, size participate.
• Use more than one survey to provide more data points and potentially increase the
credibility of the process and outcomes.
• Ensure that both actual earned cash compensation data and target compensation
for the year are available.
• It is preferable to have data by percentile available as many companies’ pay philos-
ophy is to establish pay at some percentile other than market median.
• For ease of use and reference, soft copy and Internet access are preferable.
Source: “Pricing Sales Positions with Confidence”, Mary S. Fiss and Jerome A. Colletti, Survey Best
Practices, A Collection of Articles from WorldatWork, 2013, pp. 95-103
Salary/Incentive Ratio and Target Upside

Sellers are willing to accept putting a degree of their pay at risk if
there is significant upside pay available for achieving or exceeding
expectations or average productivity. Several behavioral theories
underlie the concept of “risk and reward:”
• Achievement Need: David McClelland defined achievement need
as the desire to perform in terms of a standard of excellence or
as a desire to be successful in competitive situations.
• Reinforcement Theory: As demonstrated through many studies,
most notably those of B.F. Skinner, the frequency of a behavior is
likely to be increased when a valuable reward is directly linked
to that behavior.
• Expectancy Theory: This theory of employee motivation suggests
that the salesforce makes decisions based on the degree of
perceived attractiveness of the outcome.
These theories come into play for two important aspects of sales
compensation plan design: incentive mix and upside opportunity
(leverage). Setting them correctly is important to a successful process.
Salary/Incentive Ratio (Mix)

While the target cash compensation (TCC) for a job is, of course,
very important to the job incumbents, salary/incentive mix has at
least equal importance because it directly impacts take-home pay
and cash flow. Incentive mix is typically expressed as a ratio (e.g.,
50/50 or 70/30) in which the first number represents the percentage
of target pay in base salary and the second number represents
the percentage of target pay at risk for achieving expectations
or target performance. Some companies describe mix by stating
variable incentive as a percentage of base. While this is a fairly
simple mathematical calculation, it does not visibly express the
concept of at-risk pay as an element of the total cash opportunity.
Since mix indicates the proportion of pay at risk, a job with an
aggressive mix (50 percent or more of the TCC is incentive pay) has
less predictable cash flow, while a job with a less aggressive mix
(e.g., with 25 percent or less of the TCC as incentive) has a much
more predictable cash flow associated with it. Many of the same
factors that were used to help you determine the most appropriate
TCC for each job also apply as you consider the right mix of base
pay and at-risk or incentive pay as well as the amount of upside
(or above-target incentive pay) that should be available. Figure 2-5
provides an illustration of mix.
Competitive practice can guide your company’s decisions related
to mix, but should not be your only point of reference. Even in
similar industries and markets, your company may have distinct
practices that need to be considered. The review of these factors
can help you determine if you should have more or less pay at
FIGURE 2-5
Target Cash Compensation and Mix
Upside
Upside
Upside
Incentive Opportunity
at Target: $20,000 Incentive Opportunity
at Target: $40,000
TCC = $100,000
at Target: $80,000
Salary: $80,000
Salary: $60,000
Salary: $20,000
Lower Mix: 80/20 60/40 Mix Higher Mix: 20/80

Motivates but does not Advocates autonomy
mandate
Lower mix means less variable incentive. Lower variable incentive results in reduced
overall opportunity, although a higher portion of pay (base) is guaranteed.
risk compared to the market. Several job- and sales process-related

factors should be used to determine the proportion of pay that is
base and the proportion that is incentive pay, as shown Figure 2-6.
The most critical element is the role of the seller. The incentive
mix should reflect the degree of influence the sales professional
has over the purchase decision and the value of that transaction.
The more important and influential the seller, the higher the mix
(higher percentage put into variable compensation).
Industry surveys indicate that the overall market-average mix
for sales positions is 70/30. Therefore, a job with a 50/50 mix or
less implies that the role places significantly more emphasis on the
selling skills and influence of the seller as factors that cause the
customer to buy. A 90/10 mix would imply that the salesperson is
only one of many factors affecting the customer’s buying decision
or the absolute volume purchased.
Based on the factors shown in Figure 2-6, establishing or confirming
the mix applied to the TCC for each job requires an accurate and
current definition of the position. While input from sales and
other functions is useful to confirm roles and processes, as the HR
professional on the team, this task is likely to be your responsibility.
FIGURE 2-6
Factors That Impact Salary/Incentive Mix

Type of Product
Sales Process Role in the Process or Service
• Transactional • Team member • Commodity
(more pay at risk) (less pay at risk) (more pay at risk)
• Consultative • Key impact on decision • Specialty or custom
(less pay at risk) to buy (less pay at risk)
(more pay at risk)
• Product-focused • Sold on price
(more pay at risk) • Provides leads/access (more pay at risk)
or fulfillment only
• Relationship-focused • Sold on value
(less pay at risk)
(less pay at risk) (less pay at risk)
• Provides key expertise
• Many, frequent sales
in product, customers
(more pay at risk)
or segments
• Few, large sales (less pay at risk)
(less pay at risk)
• Limited expertise
• Long sales cycle required for sales
(less pay at risk) success
(more pay at risk)
One final consideration for mix is how it is expressed and the

effect of that on a merit pay increase. While mix is the proportion
of base vs. variable pay as proportions of 100, there are several
ways to implement the concept see Figure 2-7.
How mix is expressed for your sales organization has direct effects
on the way a merit increase is handled. As discussed previously,
merit pay is a useful financial tool for rewarding total performance;
however, merit pay increases may also have unforeseen conse-
quences. If these increases are used with your sales organization,
it is important to add dollars to salary while ensuring that this
change does not dilute the importance of the variable component
of the sales compensation plan. Therefore, increased dollars should
be spread across both base and incentive at the desired ratio to
ensure the intensity of focus on the sales results desired.
FIGURE 2-7
Implementing Mix
Description of Components Illustration

Method ($100,000 and
Salary Incentive 50/50 mix)
Uniform Base/ Uniform salary for Uniform incentive $50,000 base +

Uniform Incentive: all incumbents in opportunity as $50,000 incentive
Mix is actual and the same job a discrete dollar
uniform for all job amount for all
incumbents incumbents in the
same job
Base Range/ Salary range is Uniform incentive $40,000 –

Uniform Incentive: implemented opportunity as $60,000 base range,
Mix varies by consistent with a discrete dollar $50,0000 midpoint +
individual; less practice in other amount for all $50,000 incentive
aggressive (less functions; salary incumbents in the
pay at risk as a midpoint used to same job
percent of the determine mix
total) for those
higher in the range
Salary Plus Salary range is Incentive $50,0000 base +

Percentage implemented opportunity as the 100% of base
of Salary: Mix consistent with same percent of incentive
is actual and practice in other the individual’s
uniform for all functions salary for each
job incumbents incumbent in the
same job
Target Upside (Leverage)

Once the value of the incentive opportunity has been established
or verified — that is, the TCC and the mix have been confirmed —
the leverage (the amount of upside pay earned at some defined
level of performance above 100 percent) needs to be determined.
Mix and leverage are strongly linked in the minds of most sales
compensation plan participants. The reason is fairly logical and
simple — the more pay there is at risk, the greater the upside
opportunity. An important note: The definition of “leverage” does
not necessarily mean that a plan is “capped” (i.e., that earnings are
limited). However, determination of the additional pay available
at levels of performance above expected performance will help
immensely when it comes time to design the formulas in the plan.
While upside affects all individuals who overachieve target expec-
tations, the upside/leverage ratio reflects the opportunity available
for your sales organization’s top performers (typically the top 5
percent to 10 percent of your salesforce on a job-by-job basis).
The amount of upside available is based on the role of the sales
position, the ability to overachieve and financial affordability. For
example, sales teams, account managers with very large quotas
and senior sales managers have little opportunity to significantly
overachieve their target numbers. In these situations, the upside
ratios tend to be lower, which puts more pressure on setting more
aggressive target compensation levels for meeting expectations.
Figure 2-8 provides an overview of the relationships of role to the
upside/leverage ratio across industries.
FIGURE 2-8
Typical Relationship of Upside to Role/Sales Job

• Direct Seller Territory Highest
• Account Manager — Many Accounts Highest
• Account Manager — Single/Few Accounts High
• Outbound Telesales High
• Inbound Telesales Medium to low, based on job focus
• Channel Account Manager Medium
• Overlay Sales Specialists Medium
• First-line Sales Management Medium
• Second-line and Above Sales Management Low
There are several ways to express leverage: as a ratio of upside

to target (e.g., 2:1), as a multiple of target (e.g., 2 times target) or
as a total of the target incentive opportunity plus the multiple of
target at upside (e.g., triple leverage).
The term you should use is the one that has been used in your
company in the past — the one that your team finds easiest to use
and to explain to others. Figure 2-9 illustrates leverage and how
each term could be used to describe the same upside opportunity.
Figure 2-10 shows the impact of a change in leverage on total
upside opportunity.
Plan Measures and Performance Standards

Once the percentage or amount of variable compensation and upside
are determined, your company must then select the most financially
and strategically important measures for which to pay these dollars,
as well as the range of performance used in calculating payout.
Performance Measures
The following factors are used when deciding on the most appro-
priate performance measures:
• Job: Measures should reflect job accountabilities, and the sales-
person must be able to influence the outcomes.
• Business drivers: Measures should be consistent with the financial
drivers associated with successful achievement of the business plan.
• Focus: To ensure focus and meaningful payout opportunity for
each measure, it is best to use no more than three performance
measures in a sales compensation plan.
• System capabilities: If it cannot be tracked and measured today,
it does not belong in the sales compensation plan. Inaccurate or
late payouts and reports greatly diminish the motivational power
of sales incentive compensation.
Performance measures selected for use in calculating payouts

fall into two broad categories:
1. Financial: Since sales jobs are focused on top-line growth and,
in some cases, on profitable growth, one measure of success in
FIGURE 2-9
Leverage Illustration
Additional Incentive @
Triple leverage Defined Overachievement
or 2:1 (total Level: $80,000
opportunity =
$120,000, or 3
times target of
$40,000)
at Target: 40% of TCC
$40,000
TCC = $100,000
Salary: $60,000 60% of TCC

FIGURE 2-10
Impact of Upside on Earnings Opportunity
Triple leverage or 2:1

(2 x $40,000 = $80,000)
Double leverage or 1:1

(1 x $40,000 = $40,000)
Incentive Opportunity at Target: Incentive Opportunity at Target:
$40,000 $40,000
Salary: $60,000 Salary: $60,000
For every dollar of For every dollar of incentive

incentive at target, there is at target, there are
one dollar of upside two dollars of upside
these jobs must be financial. Financial measures are generally one

of two types: volume-based or profitability-based. Sales jobs may
be measured against expected productivity or quota. Your rule
of thumb should be that between 60 percent and 100 percent of
the sales compensation opportunity is based on a sales volume or
productivity component. Using this rule ensures that the focus of
the sellers is on meeting the company’s fiscal plan.
Examples of financial performance measures include the following:
• Sales revenue: overall, by segment or channel, for specific products
• Growth: overall, by customer, account, channel, segment
• Profit: gross profit dollars, sales contribution dollars (gross profit
minus selling costs) or net profit dollars.
• Units: a surrogate for a financial measure which looks at numbers
of products or transactions sold
Any dollars taken away from financial success reduce the impact
of the sales compensation plan on achievement of quantifiable
results and thus must be justified as secondary or strategic measures
that are critical to the “quality” or nature of financial achievement.
Examples of financial measure that address the quality of the above
financial volume measures include:
• Margin or profit percent
• Product mix (e.g., number of product quotas achieved)
• Account mix (e.g., new accounts, existing accounts)
2. Nonfinancial: Nonfinancial measures may be either quantita-

tive or qualitative. Quantitative measures such as market share or
share of account are relative rather than absolute and are used
in situations where growth is achieved by “taking business” from
competitors. Activity measures such as number of calls are quan-
titative in theory, but qualitative in practice, since only effective
activities lead to achievement of financial objectives.
Management by objectives (MBO), also known as key sales objec-
tives (KSO) or key performance objectives (KPO), are examples
of nonfinancial, potentially qualitative, objectives. This type of
component is usually point-based and relies on a manager to
develop or select from a menu of possible objectives for the seller
to achieve over a defined period of time (typically a quarter or

half-year). As a rule, these objectives create an averaging of pay for
all participants and thus fail to differentiate superior performance.
The larger the population for which they are utilized, the less effec-
tive and more administratively burdensome they become. They
can then be short-lived inside a well-designed sales compensation
plan for a large salesforce.
While there are several drawbacks to MBO-like measures, they
can be more effective with smaller teams in which the manager
is well-trained in objective- setting and evaluation. Further, they
force a conversation between the seller and the sales manager
about what strategic activities need to occur. They are best used
to reward for activities or results that have a high probability of
creating a booking or billing in a future period but for which the
seller will get no sales credit in the current period (e.g., design
wins in an OEM sales model).
Number of Measures
As stated earlier in this section, a rule of thumb is that no sales
compensation plan should have more than three components. Using
more than three detracts from the value of each measure and the
true driving impact of the plan on total sales results. As an adviser
to your company, you must always reflect on whether the dollars are
significant enough to support more than three measures (especially
when those dollars are divided by pay frequency and taxes are
subtracted). Too many measurements in a plan often indicate either
that a company is trying to design one plan for multiple-distinctive
roles or that management lacks agreement on the objectives of the
particular sales job. In your role, you should also be reluctant to
have the plan address all performance management issues in the
plan design. Remind the design team of the performance evalua-
tion process and how it can be used to address other performance
factors that cannot or should not be built into the current period’s
variable compensation.
You will learn more about selecting and prioritizing performance
measures in Chapter 4, as part of the design process.
Performance Standards
Another consideration for performance measures used in the
sales compensation plan is performance standards. As you will
see in Chapters 4 and 5, one important task in designing plans
is confirming expected performance and establishing two other
reference points: one below “expected performance,” and one
significantly above “expected performance.” These three achieve-
ment levels are as follows:
• Threshold: Threshold is the minimum level of performance that
must be achieved before an incentive can be paid.
• Target: Target is the expected level of sales results or individual
performance. (This is the point at which the target incentive
opportunity is earned.)
• Excellence: Excellence is the individual sales performance that
is in the 90th percentile (top 10 percent) of all performance
measured. (This is the point at which the defined “leverage,” or
upside, is earned.)
Once these three levels are established in a quota-based plan

(either bonus or commission), it is then possible to complete the
plan payout formula, as well as various analyses such as aggregate
plan cost and expected return on investment. Remember: Many
people new to sales compensation assume that a defined “excel-
lence” point means that a plan is capped. This is not the case! It
simply means that the value of each percent of achievement above
100 percent can have a defined value; it does not mean that there
is an achievement level above which people cannot earn more
sales compensation dollars. When you are working with a design
team, or with sales management, it sometimes helps the discussion
to refer to the “excellence” point as a “design reference point” that
is used for the purpose of developing a payout line and value.
Sales Crediting
One requirement for successful use of any volume measure in the
sales compensation plan is well-articulated and well-understood
crediting rules. To establish these rules, the sales management team
must first have a relatively clear understanding of what customer

segments and which products are required to meet the financial
plan. Using crediting rules ensures that results that are affected by
the salesperson and that support the achievement of your compa-
ny’s business objectives are being tracked and measured. Second,
management must take a look at the nature of sales transactions
by seller type and consciously determine if all aspects of the
transaction provide sales credit toward the volume achievement
objective as well as whether they should all be treated equally.
In an increasingly complex selling world, all transactions are not
alike, and may or may not include all products or services. Further,
some are one-time deals instead of ongoing business, which can
be paid all at once or over time. Companies thus must know what
they need to accomplish and must examine the range of deals that
exist in order to determine how to implement crediting toward
sales achievement in the core volume component of their plans.
Figure 2-11 provides definitions and typical applications of the
three kinds of sales credit.
FIGURE 2-11
Sales Crediting
Type Definition Application
Single One sales resource receives full One salesperson completes

credit: 100% credit to one person. the entire sales process.
Multiple Full credit provided to two or A team is required to complete

more sales resources; more than the sale; it is not possible to
100% is credited. distinguish the unique contri-
bution of a single resource;
the financial impact can be
predicted and managed.
Split The credit is divided in some Multiple resources or channels

way among two or more sales may be required to close a
resources; 100% credit in total sale, but it is relatively easy
is provided. to distinguish each resource’s
contribution; additional finan-
cial liability is not acceptable.
Partial A portion of the full credit is Resources involved in the sale

allocated to one or more sales did not contribute as required
resources; less than 100% credit and full credit is an unaccept-
is given in total. able financial liability.
Timing Considerations
Two timing considerations need to be confirmed for the sales
compensation plan. The first is the plan performance period,
the period of time for which the company assigns objectives
and measures performance for the purpose of earnings. A plan
performance period might be annual (with annual objectives),
semi-annual, quarterly, monthly or weekly. In general, the more
complex the selling activities and sales cycle, the longer the plan
period.
There are two alternative approaches to measurement: cumulative
and discrete. A performance measurement is cumulative when
the performance of the incumbent is measured over subsequent
performance periods. As an example: “While payouts are made
each month, performance is cumulative because it is measured
from the start of quarter to date.” Performance measurement is
discrete when the performance of the incumbent is limited to
a defined performance period without any connection to past
or future performance periods. As an example: “Each month is
discrete, because performance is measured for that month and
payout is made for that month independent of past or future
performance.”
The second timing consideration is payout frequency, or how
often a payout is made. Alternatives range from weekly (generally
for those jobs that have no base salary and therefore are paid
100-percent variable pay based on sales results) to less frequent
payouts (quarterly, for example). The decision to pay more or
less frequently should be made after a review of factors such as
length of sales cycle, motivational value and the ability of systems
to handle payout calculations. You will learn more about timing
considerations in Chapter 4.
Alternative Mechanics
The math or formulas used to calculate the payout under the
sales compensation plan can be as simple or as complex as the
designers wish. Of course, “simpler is better” is a cardinal rule.
However, there are many alternatives to consider as the formula
is developed. These include both the type of plan that is suitable

for the job and the formula modifiers that can be used to ensure
that the plan is motivational and financially viable.
Plan Types
The formula by which payout is delivered can be based on two
types of plan: commission or bonus. One or both types of plan
may be used in the incentive formula, based on the message that
management wants to deliver about performance requirements,
competitive practice and key business objectives.
A commission generally focuses on volume, while a bonus focuses
on achievement of one or more specific goals.
Commission is compensation paid as a percentage of sales,
measured in either dollars or units. A quota can be used with a
commission structure but is not required. The following approaches
can be used when designing a commission plan:
• Single or flat-rate commission: This is the simplest commission
to develop and explain. A fixed rate is applied to all relevant
sales in order to calculate the commission payout. For example,
4 percent of sales or $100 per unit. This type of commission is
most often used in new companies, companies with very small
sales organizations, companies with “open” territories (territories
that have no geographic boundaries) or for a new product for
which there is no sales history. The theme is, “ The more you
sell, the more you make.”
• Individual commission rate (ICR): This approach results in a
unique commission rate for each seller. It has two key charac-
teristics in common with a bonus-type plan: It has the effect of
“evening out” territories in terms of pay, and it is always used
with a quota. The theme is, “Every salesperson has the same
opportunity to earn their target incentive, no matter how large
or small the territory.”
• Tiered (or “ramped”) commission structure: A single rate is deter-
mined for “target” achievement, and different rates are provided
for sales below or above target. “Target” may be a specified sales
volume, or a percent of quota achievement. If a tiered commission
rate is used, the plan can be cumulative or each range can be

discrete. If the plan is cumulative, incentive paid vs. incentive
earned is recalculated at defined intervals. If the plan is discrete,
then the new rate is applied only to dollars associated with the
new range of achievement. The theme is, “Sales below target
are less valuable than sales at and above target.”
• Adjusted (or “variable”) commission rate: This approach to commis-
sion is used if several types of products or transactions will be
prioritized in the commission structure. The rate applied to each
transaction is adjusted based on the priority or importance of
the product or transaction. The theme is, “Some sales are more
important than others.”
Illustrations of each type of commission plan are provided in

Figure 2-12.
A bonus is a percent of base pay, or a fixed dollar amount, for
accomplishing objectives. A quota or some other kind of goal
is generally associated with this type of plan. The three basic
approaches to a bonus are as follows:
FIGURE 2-12
Types of Commissions
Type Examples
Flat Commission: Rate x • 3% x ($s)

Volume • $100/Unit
Individual Commission Rep 1: $100,000 incentive target / $1,000,000 quota =

Rate (ICR): Individual’s 10% rate applied to sales volume
Incentive Target divided Rep 2: $100,000 incentive target / $1,500,000 quota =
by Individual’s Quota 6.7% rate applied to sales volume
0% – 100% of quota
Ramped: Rate Adjusted 5% rate
achieved
Based on Achievement of
Sales Volume or Quota >100% of quota achieved 7.5% rate
Adjusted: Rate Varies Product A 5% base rate

Based on Characteristic
Other than Volume or 7.5% rate
Quota Products B and C
(base rate x 1.5)
• Single- or fixed-rate bonus plan: One incentive opportunity is

available for achieving the specified objective.
• Interpolated bonus plan: A formula to calculate a defined dollar
value for each percent of achievement is used.
• Step-rate bonus: A tiered bonus structure, with no interpolation
between tiers, is used; each tier is discrete.
Examples of each type of bonus plan are provided in Figure 2-13.
Modifiers
In addition to selecting the type of plan or plans that will be used
in the incentive formula, there are other tools that can be used
to adjust how payout is calculated. These include how measures
relate to each other for the purposes of payout and how payout is
modified (up or down).
Linkage is the factor that relates one measure to another. Measures
are linked if payout for one measure depends on attaining another
objective. Unlinked plans (i.e., plans in which payout for each
measure is discrete and has no relationship to achievement in other
areas) may indicate to salespeople that they should base their selling
priorities on their earnings expectations. Plan designers should
consider linking performance measures in the incentive formula
if it is desirable for the salesforce to focus on more than one key
FIGURE 2-13
Types of Bonus Plans
Type Examples
Fixed $25,000 for 100% achievement of quota
0% – 100% of quota achieved $250 per percent achieved

Interpolated
>100% of quota achieved $275 per percent achieved
$5,000 (no matter where

50% – 99% of quota achieved
achievement falls in the range)
Step
99.1% – 102% of quota
$20,000
achieved
FIGURE 2-14
Linkages
Hurdle
Sales vs. Quota Bonus

Achieve Strategic Not Achieve Strategic
Quota Achievement
Product Quota Product Quota
120% of Quota $40,000 $30,000
100% of Quota $30,000 $30,000
80% of Quota 0 0
Hurdle: 100% of strategic product quota must be achieved before total sales bonus
over target will be paid.
Multiplier
Strategic Product
Sales vs. Quota Bonus
Achievement Multiplier
120% of Quota $40,000 >100% of Quota 2.0

X
100% of Quota $30,000 100% of Quota 1.5
80% of Quota 0 <100% of Quota 1.0
Matrix
120% $20,000 $35,000 $40,000

Total Sales
100% $10,000 $30,000 $35,000
80% 0 $10,000 $20,000
80% 100% 120%
Strategic Product Sales
area and if they use metrics that compete (like market share vs.
profitability, etc.). Three mechanisms, as shown in Figure 2-14,
can do this:
1. A hurdle (also known as a gate) requires some defined level of
achievement in one performance measure before payout is made
for another measure.
2. A multiplier adjusts payout on one performance measure based
on some level of achievement of another measure. Positive adjust-
ment is generally preferred, although adjustment up or down can
be used to ensure financial viability of the plan.
3. A matrix is the most stringent mechanism, because performance

in two areas is used; achievement of one measure is mathematically
related to achievement of another to determine payout.
Modifiers include both payout accelerators and payout limiters.
While a plan formula could deliver payout on a linear scale, or,
with a single rate, most plan designers use both payout limitation
and payout acceleration tools to modify the incentive formula.
Payout limitation tools are used to manage cost relative to produc-
tivity and are frequently used when a company is new to using sales
compensation, setting business goals or allocating quota. The two
approaches to payout limitation are a decelerating payout rate (the
rate for achievement above some defined level decreases) or a cap
(there is a defined maximum payout available). If a cap is used,
it can be applied either to each transaction or to the total payout.
Payout acceleration tools are used to enhance payout above a
linear rate for defined levels of overachievement. Acceleration is
generally accomplished using specific multipliers against the target
incentive opportunity, including adjusted commission rates. In
practice, acceleration is the mathematical application of leverage
or upside.
Some modifiers may act as either a decelerator or accelerator
depending on achievement levels. For example, a multiplier may
adjust payout up or down, based on achievement of the related
performance measure. In some cases, additional acceleration is
available only if quota is achieved on another measure; payout
otherwise remains flat, or has less attractive acceleration. One
typical example of this approach is a plan with a financial measure
related to quota achievement and another milestone objective such
as new account Wins. The qualitative measure would have little
or no upside associated with it; however, if it is achieved, the
acceleration on overquota payout is greater.
Summing Up
Understanding how sales compensation fits into the total rewards
philosophy of your company is a very effective starting point in
your involvement in design or redesign efforts. As reinforced in
Chapter 4, the key concepts begin with a well-documented and

clearly communicated philosophy and guiding principles. The amount
of pay available, performance measures, plan formulas and timing
of payout are all elements that you will hear about and use in each
design process. Figure 2-15 gives you a series of questions that
provide a framework for structuring your understanding of how
the sales compensation plans at your company now work.
FIGURE 2-15
Questions to Ask About Your Company’s Sales

Compensation Plans
• Is everyone on the same sales compensation plan regardless of sales job?
• Do people in similar sales jobs have the same amount of target pay or different
amounts? If different, which parts differ — salary, target incentive or target total
compensation?
• Of the target compensation, how much is delivered through base salary versus
target incentive?
• How many different components or performance measures are used in the sales
compensation plan? What are they? What is the relative importance of each compo-
nent in each plan?
• What percentage of the sales compensation plan is based on sales volume? Is the
sales volume component based on quota achievement or absolute dollars?
• For other components, is payout based on quota achievement?
• Is there a minimum or maximum achievement level at which pay begins or is capped?
For which component or components?
• What type of plan (commission or bonus) is used to calculate payout for each
component?
• Are any of the plan components or measures linked? If so, how?
• How frequently is each component of the sales compensation plan paid?
Understanding Common Problems in Sales Compensation 57
3
Understanding Common
Problems in Sales
Compensation
A n effective sales compensation plan can make the difference

between top performance and lackluster performance. Companies
that operate with high-performing salesforces often report that the
sales compensation plan is a major factor in business success. This is
the case because these companies have developed the wherewithal
to effectively direct, motivate and reward members of the salesforce
by means of their sales compensation plans on a consistent, contin-
uous basis. Through good and bad economic times, top-performing
companies recognize that aligning the plan with their strategies will
increase the likelihood of achieving desired business results. However,
successfully maintaining an effective plan poses many challenges.
This chapter identifies seven common problems associated with
sales compensation plans and describes how to talk effectively
with sales leaders about taking action to resolve these problems if
they occur at your company. The list of problems is representative
and reflects the most critical challenges perceived by sales leaders,
HR/compensation, finance and other corporate functions involved
with sales compensation plan design.
The problems are described in the order of their prevalence. For
each issue, perspective is provided on why it is common, when
or how you are likely to encounter it in working with your sales
organizations and alternative approaches you can consider when
talking with sales leaders about corrective action. The specific
action required to resolve one or more of these problems in your
company depends, of course, on the business results that your
company has in mind when it revises or completely redesigns its
sales compensation plan. There is no one-size- fits-all answer to
the question of how one addresses these issues.
This chapter presents the problems in the following sections:

• Missed Financial Objectives
• Sales Employee Dissatisfaction
• Sales Management Frustration
• Exceptions
• Overuse of Sales Contests or SPIFFs
• Plan Framework Does Not Keep Pace With Strategy
• Inadequate Systems Support.
Missed Financial Objectives

A sales compensation plan’s principal objective is to direct a company’s
salespeople to effectively sell to and interact with customers. The
expected outcome of doing so is increased volume, a better mix of
customers or product sales, improved margins, account retention,
more new accounts or some combination of these five results. When
a significant percent of the salesforce falls short of achieving assigned
financial targets, that shortfall may be a sign that the sales compensa-
tion plan is misaligned with the required financial outcomes. Missed
financial targets are most commonly associated with an ineffective
plan because top managers look to the plan to communicate growth,
profit and strategic requirements to the salesforce. The greater the
amount of compensation at risk, through commission, bonus or
both, the higher the expectation that salesforce members will alter
their behavior to achieve stated financial and other targets. Thus,
when financial targets are not met, top managers think first of sales
compensation as the likely culprit.
There are, however, other factors that can contribute to missed
financial targets. These factors include the following:
• Overly ambitious sales-growth targets (e.g., quotas substantially
greater than those for the prior year, market growth or both) that
are not built on a clear understanding of sales potential and capacity
• Overassignment of the company’s targets (i.e., assigning addi-
tional points to each succeeding level of allocation, resulting in
an aggregate that is significantly higher than the company’s goal)
• Poor quota allocation that does not consider where growth is
likely to occur (customers and products)
• Product or service shortcomings such as lack of on-time delivery,

incomplete order fulfillment and out-of-stock/back-order situations
• Competitive price-cutting, whether through planned promotions
or discretionary discounts.
It is not unusual to encounter the problem of the sales compensa-

tion plan being blamed for missed financial targets in a sales culture
in which the plan functions as the “phantom manager.” Of course,
no plan can replace effective sales leadership. Therefore, when
the sales compensation plan is being blamed for missed financial
targets, it is important to understand how much of this problem
is actually the plan’s fault. One way to gain that understanding is
to engage sales leaders in a discussion about the circumstances
surrounding the missed financial targets. Figure 3-1 is a list of
discussion questions that you can use to initiate that conversation
with sales leaders in your company.
With information gleaned from discussing these questions, you
can help sales leaders appropriately determine how much of the
problem of missed financial targets is due to the sales compensa-
tion plan, and assist them in identifying specific plan elements
that should be reviewed and possibly changed.
Sales Employee Dissatisfaction

As a general rule, sales employees judge a sales compensation plan
by a single criterion: Can they make as much or more money under
the new plan as they did under the former plan if they change their
FIGURE 3-1
Missed Sales Financial Target Discussion Questions

• What are the factors that you believe are causing the salesforce to miss its
financial targets?
• Which of these factors are directly associated with the sales compensation plan?
• What changes in the compensation plan, if made, do you feel will direct, motivate
and reward for course-correcting sales results?
• What primary complaints do you hear from your sales team regarding the sales
compensation plan and its administration?
• What aspects of the sales compensation plan are working well?
• If you could have done any one thing differently with this year’s sales compensation
plan, what would that have been?
behavior consistent with the stated business strategy? However,

salespeople recognize that the competitive marketplace is dynamic
and that their companies must respond to the changing environ-
ment in order to sustain profitable growth. Thus, the majority of
salespeople expect that their sales compensation plans will undergo
at least some change on an annual basis. Assuming that the incen-
tive compensation opportunity is not decreased, plan change by
itself is not a principal source of sales employee dissatisfaction.
The principal sources of dissatisfaction with the compensation plan
are actually related to what is changed and how a company goes about
making those changes. The most common sources are as follows:
• Quota assignment, particularly when there is no explanation
about how it was determined
• Threshold performance, particularly when it is set so high (e.g.,
90+ percent) that a significant number of salespeople realize at
the outset of the year that they will not be “in the money”
• Overly complex incentive formulas that make performing self-
calculation difficult or impossible
• Inaccurate sales crediting that results in shadow accounting by
sellers, continual recalculation of results and inordinately late
payment of expected incentive earnings
• Significant delay (e.g., 90 days to 120 days after the year begins)
in communicating the new plan’s details so that members of the
salesforce can estimate or project their annual incentive earnings
based on their own performance scenarios
• Frequent changes to the plan during the business year without
a clear explanation of their meaning.
One way to determine if your company has a salesforce dissatisfaction
problem because of its sales compensation plan is to routinely survey
the salesforce about change. It is a wise practice to ask salespeople
how they feel about a plan shortly after they have received their first
payment under that new plan. Figure 3-2 on page 63 provides an
illustrative survey to obtain information about perceptions. It can be
used throughout the design process.
No doubt there are other questions that could be asked of
the salesforce through such a survey. However, these questions
FIGURE 3-2 Salesforce Survey Questions
INFORMATION ABOUT YOU

1. Your position: Regional Manager Account Manager Inside Sales Specialist
2. Your region: North Central Midwest South Central West East
YOUR OVERALL PERCEPTION OF THE NEW SALES COMPENSATION PLAN
Check One
Response
Questions Yes No Unsure
1. My immediate supervisor thoroughly explained to me
how I could earn commission under the new plan.
2. I understand my new compensation plan.
3. I understand the plan terms and conditions.
4. Generally speaking, I believe that the new sales
compensation plan is better than the prior year’s plan.
5. I see alignment between our business strategy and how
I am paid.
6. My sales goal (quota) for the year is realistic.
7. Generally speaking, achieving my sales goal for the year
is important to me.
8. I have a good understanding of how my commission is
calculated under the new compensation plan.
9. I believe that my pay is calculated correctly.
10. Top-performing members of the salesforce here earn
significantly more compensation.
11. Since the new compensation plan was introduced, I have
changed my selling behavior so I can optimize my payout
opportunity.
12. I expect to earn more compensation under the new plan
than I did under last year’s plan.
LIKES / DISLIKES ABOUT SPECIFIC PLAN FEATURES
13. What do you like MOST about the new compensation plan?
(Check only three choices)
Simplicity ize of incentive opportunity at target
S
and upside
(Fewer) performance measures Goals (quotas) more realistic
Threshold (lower than prior year) No cap
Other (write in)
14. What do you like LEAST about the new compensation plan?
(Check only three choices)
Simplicity ize of incentive opportunity at target
S
and upside
(Fewer) performance measures Goals (quotas) more realistic
Threshold (lower than prior year) No cap
Other (write in)
Use the space below to provide other comments or observations about the new
sales compensation plan that you would like to share with the leadership team.
represent a good starting point. Salesforce dissatisfaction with

compensation plan change is quite frequently based on hearsay
or anecdotes. With survey information in hand, you can help
sales leaders determine the extent to which dissatisfaction is a
problem and the best prospects for addressing the causes. This
approach enables both HR management and sales management to
verify that these areas of dissatisfaction are not merely attempts
to negotiate unjustifiably better terms or higher payouts.
Sales Management Frustration

A sales compensation plan should complement a company’s sales
management process. A common source of frustration among
field sales managers is a lack of alignment between what the
sales compensation plan pays for and what they believe sales-
force members must do to achieve sales success as defined by
the business strategy. A lack of alignment between the perfor-
mance measures used in salesforce and sales management plans
is another source of frustration. For example, if the current
sales compensation plan rewards for volume growth (i.e., if all
sales dollars are equal regardless of customers or products sold),
members of the salesforce will be indifferent to where and how
they achieve sales. However, when sales success for the year
requires profitable, balanced product-line selling, their selling
efforts and the efforts of their immediate sales managers must
be aligned. The compensation plan must support that strategy
for both the sellers and their managers. As sales managers well
know, members of the salesforce devote their time and energy
to the things that determine their pay. Some salespeople will
disregard the direction they are given if it is not reinforced
through the compensation plan.
You are likely to encounter this problem when a representa-
tive sample of field sales managers is not involved in the sales
compensation plan design process. In addition to involving field
sales managers in the design process, and before launching a
new or changed plan, it is a good idea to survey field managers
relative to any proposed change that is significant. Figure 3-3
FIGURE 3-3 Field Manager Perceptions of Sales Compensation Plans and

Administration Effectiveness (Rate 1-5, Disagree to Agree)
• I believe that I can explain the new plan correctly and show my people how to “win”
under it.
• I believe that the proposed plan is consistent with the sales direction given to my
people.
• The plan supports all of the behaviors we need for effective selling and customer-
relationship management.
• I believe that the plan will be effective in motivating and rewarding my people.
• The plan allows me to attract and retain the talent I need to compete in this market.
• Our plan communication materials are effective for new hires as well as existing
employees.
presents questions that field sales managers could be asked about

a new or revised plan before it is launched.
Responses to these questions provide information about field sales
managers’ support for the changed or new plan. The resulting insight
is particularly important because research shows that how field
sales managers feel about the sales compensation plan materially
impacts the salesforce’s attitudes toward the plan. To minimize or
eliminate the problem of sales manager frustration with the plan,
the design team should seek the involvement of field sales managers
in the design process. Their support for the new or changed plan
should be confirmed prior to plan launch.
Exceptions
There is no perfect sales compensation plan. The business situa-
tion in which a company finds itself largely contributes to a plan’s
effectiveness. It is not unusual for an organization to make excep-
tions to plan rules from time to time when the business situation
changes. For example, when a major economic downturn occurs
and business forecasts are adjusted downward, a company might
make an exception to the plan with an adjustment of quotas. If the
business unit is given “plan relief,” the salesforce in turn is given
“quota relief.” This type of exception is not regarded as a problem.
Problem exceptions are those that involve the failure to apply
consistent rules to the calculation of sales incentive compensation
(either commission or bonus). The result of such an exception is
generally payment that is out of alignment with performance. The

functional department charged with the responsibility of calcu-
lating sales incentive payments typically keeps track of exceptions
made in the payment process. The number, frequency and types
of exceptions made to plan rules compared to that of prior years
should be examined regularly.
For example, an increase in the percentage of the salesforce
that has been affected by exceptions over a period of a few years
is a clear signal that the sales compensation plan, or a related
process such as sales crediting, may be failing.
You are likely to observe the problem of numerous exceptions
when the plan includes measures that are not aligned with the sales
cycle, measures that are not supported by systems, very high quotas
or calculations and crediting rules that are either not supported or
not understood by sales management and the salesforce.
Overuse of Sales Contests or SPIFFs

Sales contests are short-term incentive programs designed to
motivate members of the salesforce to accomplish specific sales
objectives. Some companies refer to these programs as SPIFFs
(special performance incentive for the field force). Essentially, sales
contests are a supplement to a company’s compensation plan. As
such, they should be a complement to the salesforce’s primary
performance objectives, not a distraction. Common sales contest
objectives include the following:
• Stimulate specific, existing product sales
• Introduce new products
• Acquire new customers
• Emphasize higher-profit products
• Overcome a seasonal slump
• Take advantage of a competitor’s temporary market weakness
• Stimulate overall volume early in a quarter or year.
Like any motivational sales tool, sales contests are effective when
used correctly. Effectiveness is measured by determining whether
sales results — as a direct result of the contest — exceed previous
projections. However, there are situations where contests are

overused and, in effect, compete with or overtake the economic
value of the sales incentive compensation plan. When the number
of contests conducted during a year increases substantially over
the prior year, or when the percent of incentive earnings from
contest winning becomes a significant percent of sales incentive
compensation (e.g., greater than 10 percent of W-2 earnings), the
compensation plan itself may be failing.
Plan Framework Does Not Keep Pace with Strategy

A plan framework is the structure of a sales compensation plan
prior to the final determination of payout rates, sales credit defi-
nitions and so forth. Generally speaking, four elements define a
sales compensation plan’s framework: total cash compensation,
salary/incentive ratio or mix (and thus the amount of the incen-
tive opportunity), leverage (the upside compensation opportunity
associated with performance overachievement) and the perfor-
mance measures and standards. When a company alters its sales
strategy (e.g., customers it markets to, the products it offers, the
sales channels and jobs deployed), there are likely to be implica-
tions for one or more elements of the compensation framework.
In such a circumstance, not changing the framework of the plan
can be a problem that contributes to its failure.
Inadequate Systems Support

For the salesforce, the sales compensation plan is all about cash
flow. This means that being paid accurately and on time for what
is sold is of vital importance to salespeople. The inability of a
company to pay members of the salesforce correctly and on time
is frequently due to inadequate IT systems support for payment
calculation. Essentially, the problem is that plan designers have
not carefully determined what performance measures can or
cannot be tracked and credited through automated systems for
the purpose of incentive compensation determination. The result
is that calculation must then rely on manual processes. These
processes result in increased administrative expense as well as
errors that are not caught until after members of the salesforce are
paid. The result is that salespeople are either underpaid or overpaid.
You are likely to encounter the problem of inadequate systems
support for the sales compensation plan in situations where there may
have been numerous changes in the sales organization structure. This
is typically the result of business acquisitions/mergers, new product
acquisition or development, implementation of new sales channels or
some combination of all of these changes. The problem of inadequate
support often occurs when existing or legacy systems cannot properly
credit the salesforce under the new structure. Avoiding or resolving
problems of inadequate support requires a strong collaborative effort
by several functions, including sales, finance, HR/compensation and IT.
Software companies specializing in administration of sales compensa-
tion plans have recently appeared in the market, but some companies
have encountered new problems associated with their use. Choose
carefully (interview references, etc.) when selecting an outside vendor
to help your company solve its systems support problems.
Helping Sales Leaders Overcome Common Problems

When one or more of these seven common problems are in play
within a salesforce, the sales compensation plan’s effectiveness may be
substantially at risk. It is thus important for sales leaders to act quickly
and decisively to resolve problems before it is too late. Unfortunately,
sales management is often too slow to act because it fears the conse-
quences of an unplanned change in the sales compensation plan.
The most common concerns of sales leaders are that: 1) the company
will lose top-producing sales representatives, 2) the salesforce will
become confused over the business’ direction and 3) salespeople will
lose motivation and productivity during the transition period (the
period during which they try to figure out what the new plan directs
them to do and how it rewards them). These are legitimate concerns
that provide an opportunity for the HR/compensation professional to
work with sales leaders to help them define the problem (actual vs.
perceived in many cases) and develop a plan of action.
Summing Up
There are many potential problems associated with sales compensa-
tion, ranging from missed business targets to inadequate systems.
As we described in this chapter, many typical problems are actually
caused by multiple factors and are not simply the result of having
“the wrong plan” or misapplying the plan. However, in order to
address and resolve perceived problems with the plan, you must
understand where the problems have occurred, to what degree
they are problems with plan design or implementation and what
other functions should be involved in their resolution.
Participating in the Design Process 71
4
Participating in the
Design Process
S ales compensation is a dynamic and valuable management

tool. In Chapter 3, we described common problems associated
with sales compensation plans. In your role as the HR professional,
you may be asked to work with a team to address such problems
or to participate in the design of a new sales compensation plan.
Depending on the traditions in your company, other resources
that are available, stakeholders in the process and management
requirements, your role may vary from team member to subject-
matter expert to process leader. However, whatever your role, a key
factor to design success is following a thoughtful, well-structured
and well-facilitated design process. Doing so ensures that the
company’s business objectives are appropriately reflected in the
compensation plan. Because the design process follows gener-
ally accepted principles and best practices in sales compensation
design, it provides assurance that deliverables are effective and
well-aligned with company needs. The key steps in this process
and the role an HR professional should play are described in the
following sections:
• Process Importance and Benefits
• Process Participants
• The Design Process.
Process Importance and Benefits

Sales compensation is by its very nature extremely tactical. This
is because the plan defines and communicates what members of
the salesforce have to do to earn their pay. As such, it is critical to
ensuring alignment between the company’s key strategic objectives
and the sales organization’s required behaviors. The success of the

program requires agreement on concepts, principles and plan details
among those subject to the plan and other critical stakeholders —
particularly sales management, finance, human resources and product
marketing. Using a well-structured design process provides a plat-
form for gaining agreement across and within these crucial decision
makers and users. It also creates a foundation for plan-design work
that can be readily referenced and replicated in the future.
The process can also provide motivation and rationale for teaming
between functions and staff members that may not have worked
together on the sales compensation plan in prior periods. A design
process brings together multidisciplinary skills and experiences
with a well-defined road map that considers current issues, future
needs and the application of generally accepted principles of effec-
tive design. Companies that are the most satisfied with their sales
compensation plans ensure that shortcuts are not taken in the plan-
design process. When shortcuts are used because of insufficient
time, inexperienced participants or incomplete knowledge of jobs,
the result is often a flawed plan that does not help management
achieve desired business results.
Process Participants
The design team may be either an ad hoc team or a permanent,
standing sales compensation team that is accountable for the process
of plan review, new plan design, plan modeling and costing, and plan
communication. Membership on the team is typically not a full-time
assignment. The team includes representatives from all functions
that could be considered stakeholders (i.e., all functions that are
accountable for achievement of the business plan). Team members
also include those who are accountable for various aspects of plan
design, analysis, communication, administration and documentation.
In some companies, the responsibility for assembling the team and
managing the design process is a key HR responsibility. In others,
HR is a valued member of the team. If neither is the case in your
company, lack of participation could be due to one or more of the
factors described in Chapter 1. Regardless of the reason, the lack
of HR involvement in the process has significant drawbacks for the

organization. Human resources key accountabilities typically include
both benefits and compensation programs, so the function generally
includes knowledgeable compensation professionals. In addition, HR is
the function that is the custodian of employee data (such as compen-
sation levels), consistency with corporate policies and philosophy,
legal requirements and industry regulations and practices. HR there-
fore represents a critical center of responsibility within the process.
Experience in process development and facilitation is crucial to the
success of the design team, and these are skills that the HR profes-
sional can provide. Finally, the sales organization is the company’s
point of contact with its customers and, as such, HR should serve to
ensure that the compensation plan contributes to both an appropriate
sales culture and compliance with business ethics.
Whether HR or compensation’s role is that of process leader or
team member, it is important that other core functional areas are
represented on the team, either throughout the process or as ad
hoc members for key tasks and deliverables.
The design and process teams should be cross-functional and
include representatives from the following departments (in addi-
tion to HR):
• Sales management (first- or second-line). Team members should
ensure that the plan is appropriate for the jobs covered by it,
that it motivates and rewards the correct behaviors, that it is a
useful management tool and that it supports achievement of
business objectives.
• Finance. Team members should be accountable for assessing the
financial viability of the plan and its consistency with corporate
objectives. Finance may also assist with plan analytics such as
assessment (on the front end) and costing (to finalize the design).
• Sales administration. Team members may complete plan assess-
ments and ensure that sales crediting, tracking, reporting and
results-analysis systems are in place.
• Marketing. Team members may participate as ad hoc members
based on requirements for specific product or customer-segment
plan components.
• IT. Team members working with sales administration should

ensure that tracking, measurement and reporting systems are
tested and verified prior to plan rollout and that they provide
adequate support for the new plan. These members may also be
actively involved in evaluating internally developed or externally
provided tools or services used to ensure this capability.
Because of the strategic and tactical importance of the design
process and outcomes, a frequent question is, “Shouldn’t key execu-
tives participate as members of the design team?” The answer is
that executives at the “C” level (chief sales officer, chief financial
officer, chief HR officer) are more typically members of a steering
committee that reviews the recommendations of the design team.
When the team puts forth significant plan changes, you should
consider the option of forming a steering committee that has the
responsibility of organizing the team and determining objectives
for it to address, providing strategic direction at critical points in
the process and making decisions about key issues or questions.
The entire design team and the steering committee should also be
chartered to represent both their own positions and the specific
strategies and objectives of the sales organization.
The Design Process

After management has chartered a design team and selected its
members, the team can turn its attention to the actual design process.
An important first step is explaining the design process’ structure
and importance, the company’s total rewards philosophy, the design
team’s chartered objectives, the time frame for the process and the
key deliverables. HR should take responsibility for this presentation.
The entire design process may take weeks or months; the length
of time needed depends on the extent and significance of the
changes. However, the process described here is applicable when
the current plan needs to be only tweaked (i.e., relatively minor
changes need to be made); when a plan is being developed for
the first time; and when significant change is required because of
new jobs, new strategies, market changes or corporate changes
such as mergers or acquisitions.
Step 1: Clarify Business Objectives and Strategic Initiatives

The primary goal of any sales compensation plan is to support the
achievement of key business objectives and the strategic initiatives
of the organization for the plan year. Therefore, the critical first step
is clarification of crucial financial, product, market and strategic
goals. The steering committee is the resource that will provide
leadership and guidance to the design team in this area. The team
should have a good understanding of the current plan and the
primary objectives the plan was designed to support. Questions
that the design team should ask the steering committee must be
specific and to-the-point as illustrated with the following questions:
• What is our growth plan for next year? In what markets or with
which products?
• What are the expectations of the sales organization, and of each
job in the organization, for achieving those goals?
• Do we have strategic, nonfinancial objectives that will be given
to the salesforce?
Step 2: Assess Current Plans

When the design initiative is not focused on developing a plan for
the first time, the design team should allocate time to qualitatively
and quantitatively assessing the current plan. You will learn more
about this step in Chapter 5, which provides you with concepts,
tools and techniques associated with plan assessment. As a process
leader or participant, you may be asked (or you may ask others) to
play key roles in that assessment. As the HR professional on the
team, it will be your responsibility to (1) review and assess target
pay levels, (2) review and assess the terms and conditions of the
plan and (3) ensure consistency with legal regulations, corporate
policies and other related practices. It will also be your responsibility
to provide advice to the team, based on your previous experience
in plan design, on recommended design approaches.
Step 3: Define Objectives of the Sales Compensation Plan

In some organizations, it is important to carefully consider both
what the sales compensation plan should do and what it should not
do. Compensation plans are a key management tool, but they do not
take the place of management assessment, personnel development
and training. Thoughtful consideration must be given to developing
and documenting the most significant objectives that the plan will be
designed to meet. These objectives are supplemental to the generic
(but important) “attract, retain and motivate members of the sales-
force” and “be consistent with competitive practice,” but are just as
important. Specific financial goals such as “support profitable growth”
or “motivate achievement of new product introduction goals,” and
qualitative goals such as “reward entry into key market segments,”
should be clearly defined and documented. See Figure 4-1 for an
example of a statement of plan objectives. Additional information
about defining plan objectives is provided in Chapter 6.
Step 4: Assess Eligibility of Jobs

As described in Chapter 2, the design process should always include
an assessment (or reassessment) of eligibility to participate in
the sales compensation plan. While sales management may view
this step as a straightforward task, the following factors must be
considered when determining eligibility:
• Changes in the sales process
• Addition or subtraction of jobs
• Change in job accountabilities.
Step 5: Establish Compensation Levels

As an HR professional, you are in an ideal position to provide
direct and valuable input into this very critical step in the design
FIGURE 4-1
One Company’s Statement of Commission Plan Objectives

The purpose of this program is to attract, retain, motivate and reward key contribu-
tors relative to the accomplishment of goals and objectives in support of the overall
business plan and strategy. The commission plan is designed to establish a direct link
between the achievement of our aggressive sales targets (for key products A and B)
and individual rewards. The plan will recognize and reward individuals that successfully
collaborate with team members to achieve their sales targets within specific markets.
By design, the commission plan will provide opportunities for market-competitive
rewards for achievement of sales and margin-performance targets, and above-market
rewards for outstanding performance that exceeds the target objectives.
process. Because sales compensation terms can vary from company

to company, you should ensure that the design team is “speaking
the same language” when you provide recommendations in this
area. Key terms were defined and discussed in Chapter 2. However,
it is important to use the terminology that is acceptable in your
company and your industry (e.g., your company may refer to target
earnings as OTE rather than TCC).
This step requires an objective and balanced approach to deter-
mining both the target earnings (target cash compensation) for
each job and the amount of that pay that is at risk. In addition, the
amount of extra earnings that are available for overtarget perfor-
mance must be determined. You should ensure that all factors are
considered in establishing or confirming compensation. To do
so, you should develop your recommendations sequentially: TCC,
mix, upside. Chapter 5 provides significant details about tools and
resources for completing this task.
Step 6: Select Performance Measures and Determine Weighting

Once you have helped the team determine how much to pay,
you need to help it determine what to pay for. Selection of key
performance measures is always a balancing act, but one rule of
thumb is “no more than three is optimal, five is the maximum.” A
second rule of thumb is that the plan must use measures that can
be accurately tracked and measured, or that result in outcomes
that are consistently and objectively observable and can be docu-
mented. Use of multiple, disparate, low-value measures significantly
dilutes the motivational and directional aspects of the plan, and
should therefore be avoided. A typical plea is, “Let’s add it to the
incentive plan to be sure the members of the salesforce focus on
it.” Questions that need to be answered in this case are as follows:
1. Does it belong in the incentive plan or in a total sales-performance
management assessment?
2. C an we track, measure and report results accurately at the
required frequency?
3. W ill inclusion dilute the effectiveness of other (priority) perfor-
mance measures?
As described in Chapter 2, several types of measures can be

considered for the sales compensation plan. However, the single
most important measure should be financial — volume or profit in
dollars or as a percent of quota. Secondary measures can include
productivity or strategic metrics that focus the salesforce on quali-
tative or longer-term objectives. A simple way to think about the
categories of measures is as follows:
1. Volume: at the most relevant level of measurement — individual,
team, company
2. Profitability: to fund the plan, e.g., gross margin, gross profit,
mix of business only at appropriate levels of the organization
3. Productivity: to measure improvement in return on sales investment
4. Strategic objectives: for jobs where quantitative results are hard to
measure due to lack of history or lack of systems, or for jobs that
must focus primarily or exclusively on long-term strategic efforts.
Once measures have been selected, they must be prioritized

according to importance — the most visible way to do so is by
weighting the measures, i.e., assigning each a value as a proportion
of 100, or 100 percent of the incentive opportunity at target. An
illustration of weighting is provided in Figure 4-2.
A rule of thumb is that no measure should ever be worth less
than 10 percent of the incentive opportunity. The reason for this
rule is easily illustrated by performing a calculation of the amount
of pay designated by 10 percent of target incentive, dividing it
by the payout frequency and then subtracting taxes. The amount
typically is not meaningful enough to motivate behavior.
FIGURE 4-2
Weighted Performance Measures
Performance Measure Weight Opportunity at Target*

Territory Volume vs. Quota 60 $24,000
Team Volume vs. Quota 20 $ 8,000
Strategic Objectives 20 $ 8,000
Total: 100 $40,000
Step 7: Develop the Plan Formula

Chapter 2 explained the fundamentals of sales compensation design,
including alternative mechanics. It is at this point in the design
process that those alternatives will be considered for each plan
component. For each relevant job, the team now knows what
performance measures will be the basis for payout and how much
each is worth. The mechanics are the delivery mechanism used
to calculate payout for each component and in total, based on
whether measures are linked or unlinked. The plan formula is
likely to go through several versions, based on plan modeling. Key
plan decisions will need to address the following:
• Incentive plan type for each plan component: bonus or commis-
sion, and what type
• Performance range: target, threshold, excellence
• Formula modifiers: accelerators, caps, linkages.
The HR representative on the team is typically charged with

ensuring that the measures are consistent with corporate philosophy;
that they are aligned with the type of behavior that the plan seeks
to motivate and reward; and that they meet legal and ethical require-
ments. The sales leaders are generally responsible for determining
that the measures are aligned with the year’s business objectives,
that they accurately reflect job responsibilities and that they are
consistent with the salesforce members’ ability to achieve results.
Established guiding principles, as discussed in Chapter 2, will
assist HR and the sales leaders in these activities.
Step 8: Determine Performance Measurement and

Payout Periods
As discussed in Chapter 2, the plan performance period is the
time period over which sales results are measured and credited.
Payout frequency is the time period for which the company makes
a payout. These two periods (performance and payout) may or
may not be the same. For example, many sales compensation
plans in the business-to-business sales world are annual plans with
year-to-date performance and payout calculations. In the retail
world, or in other highly transactional selling environments, the

performance period could be monthly or even weekly, and payout
occurs at the end of the performance period for results delivered
during that period alone.
To determine the preferred performance period, various criteria
are considered, including the following:
• Type of job, including number of sales transactions, size of sales
transactions and length of sales cycle
• Type and maturity of product, including ability to forecast accu-
rately and build reliable quotas
• Desired salesforce behavior.
Once the performance period has been confirmed, the payout
period/payout frequency is the next design decision. While several
factors impact this decision as well, perhaps the single most impor-
tant criterion for the salesforce is cash flow. Frequent payout meets
this need, as does the motivational principle that payout close to
the event is a stronger positive reinforcement than delayed payout.
High-paying sales jobs (>$100,000) and low-mix roles (<80/20)
typically have less concern about cash flow than lower-paying
jobs with high mixes (inside sales, etc.). However, it is also critical
to establish payout frequency that truly reflects performance, as
well. Therefore, many companies with long-term plan-performance
periods (e.g., annual year-to-date plans) provide for a monthly or
quarterly “progress” payment against year-to-date performance.
Step 9: Complete Cost Analysis and Determine Earnings Impact

The plan cannot be considered final until the design has been
financially tested. Therefore, a cost analysis and individual impact
analysis must be completed, because design features such as
performance ranges and formula details may need to be changed.
Key team members for these analyses are representatives from
sales administration and finance; HR assistance is likely to be
needed to ensure complete and current employee data is avail-
able for the analyses.
The first set of analyses to complete is plan costing, which esti-
mates combined overall plan cost using the new plan formula and
the projected participant count for each plan for the plan year. This
analysis determines whether the payout curve, related results and
probable return are consistent with the plan objectives as agreed
to by the design team and steering committee. To complete this
activity, a financial impact or costing model should be developed.
This model estimates payout vs. productivity while keeping most
variables (e.g., base pay, target incentive pay) constant. The basis
used for the analysis is frequently either history (the performance
distribution for the previous year for this group of incumbents) or
market practice (the market expectation for distribution of perfor-
mance in a particular job). Based on your company’s needs, more
complex models that consider variables in addition to headcount,
quota and past performance may also be developed.
Individual plan modeling generally compares payout under the
old plan to payout under the new plan on a person-by-person
basis using each person’s historical performance. This approach
is also sometimes used to cost a plan, but it requires that all plan
components remain essentially similar to the previous year’s plan
and that target compensation levels are not significantly changed.
Another approach to individual plan modeling, particularly for new
jobs, involves alternative scenario modeling, in which a person’s
achievement of X means payment of Y. Whatever approach is used,
this analysis is important for the process of determining the impact
of plan change on each employee.
Step 10: Finalize and Launch Plan

The plan is done, that is, the design has been completed, tested,
perhaps revised, and appears to support everything required by
the steering committee. At this point, the design team must deal
with administrative accountabilities, if they have not previously
been addressed. That is, the company function, and what roles
in that function, that will be responsible for plan administration,
including performance tracking, measuring and reporting, sales
crediting, payout calculations and payouts, must be determined.
If your organization does not have a formal approval process
for the sales compensation plan, establishing one now should be
seriously considered. Having such a process provides for one final

opportunity for input and to ask questions about the plan. In the
current business climate of increased corporate regulation and
oversight (i.e., Sarbanes-Oxley), it is important to make clear who
in the company has the responsibility for the approval of the sales
compensation plan. Chapter 9 covers plan governance guidelines
and principles. However, a key rule of thumb is this: Because a
sales compensation plan can have a direct and material impact
on a company’s financial statements, it is imperative that approval
authority is explicitly stated.
For example, your design team could present the plans and
related costing to the steering committee one more time, along
with a summary of the expected benefits, and a risk assessment
of the plan. Additionally, contemporary practice indicates that a
sales compensation plan requires the approval of the chief sales
officer, the CFO, legal counsel and the chief HR officer (or that
person’s corporate compensation delegate).
After the plan has received formal approval from top management,
it is typically the responsibility of HR to take the lead in preparing
plan documentation. Other departments — finance, legal and sales
operations — often are involved in the review and finalization
of the documentation effort. The documentation should include
the terms and conditions (T&Cs), as well as a clear description
of the sales compensation plan components and how they work
(including payout examples). The paperwork may be prepared
as two separate documents. Particularly in organizations with
several jobs eligible for sales compensation, one T&C document
can describe the employment, crediting and other policies that
influence plan participation and payout.
When the plan is launched, documentation is important, but
does not represent the only tools and communication media that
will help the plan succeed. Top-down communication is essential
and starts with a leadership message (e.g., in a memo, Webcast
or blanket email) to set the stage for the plan. Additional tools
may include Frequently Asked Questions (FAQs) and answers for
managers to use; a “management cheat sheet” that summarizes the
most important changes from the previous plan (or, for new plans,
the most important points about the plan); and several examples
of how the plan works (e.g., using a “payout estimator” in Excel).
Best practices actually provide managers with the data and indi-
vidual earnings differential results for their direct reports. This
helps managers avoid doing that work themselves and prevents
salespeople from spending valuable selling time on creating their
own comparison.
Summing Up
A well-defined and effectively facilitated sales compensation design
process is critical to ensuring that the plan reflects alignment
between the goals of the business and the mechanics used to
reward the salesforce for achieving results. Whether the role of
human resources is as a team member or the process leader, there
are several significant tasks for which the HR professional should
take the lead. First, the HR professional should encourage the use
of a multifunctional approach to the design of the sales compensa-
tion plan. This is important not only because of the requirement
of Sarbanes-Oxley, but because such an approach provides the
opportunity to integrate important marketing, sales and financial
goals within the plan.
Next, HR should take the lead on or actively participate in the
development and use of a design process. This chapter suggested a
practical, action-oriented process that the HR professional or another
process owner can tailor and modify according to the needs of a
particular company. Finally, HR should help make clear the roles
of various functions — for example, sales, marketing, finance — in
the design process. While it is important that everyone understands
that the sales department is accountable for an effective sales
compensation plan, other functions have a responsibility to weigh
in on the plan to ensure that it contributes to the achievement of
agreed-upon company objectives.
Assessing Current Plan Effectiveness 87
5
Assessing Current Plan
Effectiveness
C hapter 3 explained why and how sales compensation plans

become obsolete over time. Because they do become obsolete,
companies that have an existing plan in place should perform a
complete assessment of it before designing a new one. The common
sales compensation plan problems discussed in Chapter 3 may be
self-evident when they are uncovered, but in most cases, their root
causes are not easily identified and documented. It is common for
companies to set out to correct a behavioral or strategic issue by
changing the compensation plan when the cause of the problem
exists “upstream” from where the salesforce operates. For example,
shortcomings in the articulation of strategy, fundamental definition
of market segments, approach to product launch or description and
staffing of sales roles may have more to do with a failing compensation
plan than the plan design itself. Chapter 4 described a process that
uses well-defined roles that may go off track if not based on a clear,
complete assessment. A clear process and role-based framework is
not just key to speed and efficiency; it is a road map for balancing
cross-functional challenges. The assessment of your current sales
compensation plan is the time and place to set out on the right
foot for any redesign effort. This chapter describes the following
elements related to assessing an existing sales compensation plan:
• Preparing for the Assessment
• Internal Quantitative Assessment — Data and Analytics
• External Quantitative Assessment — Surveys and Benchmarking
Analysis
• Internal Qualitative Assessment — Interviews and Surveys
• Administrative Assessment.
Preparing for the Assessment

One of the first decisions to make in preparing for a complete sales
compensation assessment concerns timing. As the HR professional
working with the sales team, you should recommend beginning at
least five months prior to the new plan year. Doing this provides
first half-year sales data for performance evaluation and typically
more insight into the following year’s sales model and objectives
than the team would receive in starting earlier. For a company on
a calendar year, this implies that the summer is spent examining
performance to date and contemplating the next year’s business
plan, go-to-market model and organizational structure.
It is also critical to secure the necessary time commitment from internal
and external resources for the sales compensation plan assessment.
The assessment team should have 60 percent to 80 percent overlap
(consistent membership) with the team that will go forward later in
the design process. It should have representation from finance, sales
management and HR (potentially also including IT, legal, marketing
and sales operations), and membership should be capped at eight to
10 people. You may find it hard to limit this group given the topic,
and should ask for senior management’s support in determining
the final team. Another strategy might be to have key stakeholder
groups select/nominate representatives to serve on the team. Once
the assessment team is appointed and everyone understands his or
her role, you are ready to pull together a data request.
Internal Quantitative Assessment — Data and Analytics

Objective, quantitative performance and pay data are extremely
important to the assessment process. The rule of thumb is that one
full year of historical incumbent data is a minimum requirement for
a sound assessment. Depending on the time of year the assessment
commences and the history of plan changes, this may mean the
last 12 months of data, the previous full fiscal year, annualized
current-year data or more. In businesses with long sales cycles
(greater than six months), it is typically more important to have a
full fiscal year of data than it would be for transactional businesses
due to the uneven nature of contract signings and revenue flow.
If a midyear plan change took place in the previous fiscal year, it

could be a challenge to piece together representative performance
and pay data so that the current plans can be assessed.
Incumbent pay and performance data, quota data and employment
data should be collected at the beginning of the sales compensa-
tion plan assessment process. Figure 5-1 describes the data fields
that should be included in the file of each incumbent who held
an eligible sales role in the previous year.
Several calculated fields should be added to the data fields.
First, previous-year performance percentage should be derived
by dividing previous-year actual performance by previous-year
goals. A field for previous-year pay percentage should be created
by dividing previous-year total actual compensation by previous-
year target total compensation. These first two calculated fields
support your first assessment analytic — pay:performance correla-
tion (see Figure 5-2). Performed on a job-by-job basis where there
is sufficient full-year incumbent population to create a meaningful
analysis, this analysis helps the plan-design team understand the
integrity of the formula mechanics your company has had in place
under previous plans.
FIGURE 5-1
Incumbent Pay and Performance Data

• Sales Representative Name • Previous-Year Goals (revenue, profit,
units, etc.)
• Sales Representative ID#
• Previous-Year Actual Attainment
• Location
(revenue, profit, units, etc.)
• Supervisor
• Previous-Year Actual Base Salary Paid
• Job Title/Plan Title
• Previous-Year Actual Commissions
• Date of Hire (important if there is a or Bonuses Paid (by measure or
question about the impact of seniority program)
on performance and pay)
• Previous-Year Total Actual Cash
• Termination Date (important if there is Compensation (W-2)
a fundamental question about turnover
• Current-Year Base Salary
and sales compensation’s impact on
employee retention) • Current-Year Target Commissions or
Bonuses (by measure or program)
• Previous-Year Base Salary
• Current-Year TTC
• Previous-Year Target Commissions or
Bonuses (by measure or program) • Current-Year Goals (revenue, profit,
units, etc.)
• Previous-Year Target Total
Compensation (TTC)
FIGURE 5-2
Example of Pay:Performance Correlation

Global Account Rep Pay:Performance
400%
350%
y = 1.0130 x + 0.1076
R 2 = 0.8957
300%
250%
Pay %
200%
150%
100%
50%
0%
0% 50% 100% 150% 200% 250% 300% 350%
Performance %
Pay:performance correlation is most easily accomplished through

a scatter plot in Microsoft Excel with performance percent as
the X-axis and pay percent as the Y-axis. The scatter plot can be
reviewed for a number of observations:
1. Best-fit Line R 2 — This is the square of the correlation R, which
describes how well performance percent actually predicts pay
percent. (Depending on your statistical background, you may
seek support in calculating and interpreting these data points.)
This correlation, in a strong sales compensation plan, should
fall between 60 percent and 90 percent. Higher is better. The
more performance measures, formula complexities and plan
exceptions that exist in a sales compensation plan, the lower
the R 2 tends to be.
2. Outliers — You can perform a quick visual scan of each scatter
plot to determine which points are outliers. These would typically
be situations where one incumbent in a sales role performed
much lower than others, but received a higher payout, or vice
versa. Some of these outliers may have innocent explanations
(for example, partial-year plan participants in the data can occa-
sionally show up as outliers), but often this process identifies
situations where the plan is breaking down. Stories about payouts
like this tend to make their way through the grapevine at your
company and may erode the perception of fairness of the sales
compensation plan, and therefore also erode its motivational
capacity.
3. Slope of the Best-fit Line — This slope will show, in effect,
the average improvement in payout percent for every percent
increase in performance. Typically, to deliver motivational upside
for individual contributor front-line sales resources, the slope of
this line should be just over 1.0.
There is another important piece of analysis to perform with the
calculated field previous-year actual performance percentage. This
information for full-year incumbents should be assembled into
performance histograms for each role with sufficient population (at
least 20 full-year participants), as illustrated in Figure 5-3. These
performance curves will tell you three things: whether the goals
and territories assigned in the previous year were “fair;” where the
excellence point for upside delivery should be going forward (unless
territory design, quota allocation or other processes also change
significantly); and whether there are any other factors affecting an
individual’s ability to perform under the sales compensation plan.
As a standard for the first observation, you should expect to see 65
percent of sales professionals meet or exceed their quotas or goals
FIGURE 5-3
Quota Performance Distribution Example

Direct Rep Performance Distribution
60
50
40
Number
30
20
10
0
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
190%
200%
More
Quota Performance
in a given year when the company hits its overall business plan. In
a normal distribution, you would expect half of the population to
be below the “fair” goal (or median) and half above. Due to the
human spirit and the motivational nature of the plan/goal combina-
tion, you should expect 15 percent more to make the extra effort
to get over their goal. Numbers that are lower than 65 percent may
reflect a downward economic cycle. (We have seen the number of
sales people achieving quota as low as 40 percent during recent
recessions.) If such a cycle does not exist, low numbers would then
indicate overaggressive goal-setting or productivity problems due
to subpar talent recruitment, sales- process obstacles or products
that are properly positioned for their target market demographic.
Numbers higher than 65 percent may represent “softball” goals
for the salesforce, crediting loopholes or the lack of inclusion of
expected new products in the total goal.
The second observation from quota-performance distribution
analysis is the appropriate definition of the excellence point for
each sales role. Typically, this is the achievement level of the
90th-percentile performer in each role. Many sales organizations
establish a compensation philosophy that guides the design of
payout formulae so that this 90th-percentile performer is targeted
to receive some multiple of target incentive (for example, upside
of 2:1 or 3:1). As part of this assessment, you will want to docu-
ment the amount of upside the 90th-percentile performer actually
received under the current plan and performance distribution.
This last observation may require additional analysis. Typically,
if the histograms do not appear to be a smooth curve with a
slight tail to the right (overachievement) side, there is some addi-
tional analysis to understand what is occurring and why. There are
standard explanations for certain common phenomena. Bimodal
distributions (as illustrated in Figure 5-4), with two distinct “humps”
of performers, can often indicate two subpopulations within the
role that are not treated consistently. For example, senior and
junior sales people, large accounts and smaller accounts, favored
employees and out-of-favor employees. The distributions also can
indicate two distinct sales jobs hidden within one title. It can also
FIGURE 5-4
Bimodal Performance Distribution
Bimodal Performance Distribution
14
12
10
Number
0
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
190%
200%
More
Performance
be indicative of a selling environment in which there is significant

pay at risk, but the sales transactions are large enough for a single
transaction to make the difference between 50 percent of quota
and 150 percent of quota achievement.
A slight spin on this data produces yet another analytic with
different implications. “Differentiation” analysis takes the pay numbers
for full-year plan participants and stack-ranks them. The analyst
then assigns percentiles to each person. These stack-ranked pay
amounts are divided by the median pay to display each incumbent,
stack-ranked, as a percentage of median actual pay. A graph of this
analysis helps portray key observations about upside and downside
of the current plans, as illustrated in Figure 5-5. Differentiation
analysis can be performed based on variable compensation only,
or it can be performed on total cash compensation. The differences
will depend on the pay mix for each role.
A final piece of standard analysis derived from internal, historical
incumbent pay and performance data is compensation cost of sales
analysis. The analyst takes the file of incumbent data and sums
the previous-year actual total compensation and then divides this
number by the reported revenue for the same organization for
the previous year. This will typically yield a number between 1
percent and 10 percent, with most business-to-business companies
FIGURE 5-5
Differentiation Analysis Example
350%
300%
250%
Pay Percent of Median
200%
150%
100%
50%
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentile
falling between 4 percent and 8 percent. Companies that come in

below 4 percent are often heavily dependent on indirect channels
or OEM partnerships to get their products to market. Exceptions
arise in the form of large capital-equipment manufacturers who
sell directly to extremely large accounts (e.g., a telecom switch
manufacturer selling to a carrier or a wafer-fabrication equip-
ment provider selling to semiconductor companies). These types
of companies can approach the 1-percent bottom limit.
Conversely, businesses that exceed 8 percent are typically orga-
nizations with a complex coverage model and selling processes
that require multiple overlay resources to execute a sale. These
companies are prime candidates for sales-process reengineering
or coverage model redesign if compensation levels cannot be
reduced without adversely affecting talent attraction, motivation
and retention. A rare company that has established a premium
talent strategy in the sales organization may pay much higher
than market to attract top talent from competitors, thereby estab-
lishing a competitive advantage. These companies typically fund
this added expense with higher profit margins than the average
industry competitor. Occasionally, this results in incrementally
higher sales productivity. Certain industries (e.g., software) skew
high on this benchmark as well.
At the same time, the team may also want to sum up all of the
previous-year actual revenue credits and assignments from the
incumbent data and divide this number by the actual reported
revenue from the same organization for the previous year. This will
give an overlay factor, or roughly the number of people credited
with each dollar of revenue. (A review of Chapter 2’s discussion
of sales- crediting approaches may be helpful at this point.) The
overlay factor counts credit given to territory salesforce members,
global-account salesforce members, sales-support resources, tele-
sales, channel managers, multiple layers of sales management and
occasionally even customer-service personnel. Multiple crediting
is a lightning-rod issue, but few senior executives simplify sales
processes to the point necessary to reduce this phenomenon.
However, the common alternative of split crediting may create
in-fighting, internally focused conversation and administrative
difficulties.
External Quantitative Assessment — Surveys and

Benchmarking Analysis
Market competitiveness is the aspect of sales compensation that
receives the most attention, sometimes inappropriately. Almost all
companies over a certain size subscribe to compensation surveys.
They do so to support an annual compensation-review process
(including merit increases, market adjustments, cost-of-living
adjustments, etc.) for the entire workforce. A high-quality sales
compensation survey can raise the importance and value of the
benchmarking exercise to the sales organization.
Benchmarking pay levels and plan practices is an integral part of
the sales compensation plan assessment. This analysis will support
observations about the competitiveness and appropriateness of
target cash compensation (TCC), pay mix, upside and quota size.
High-quality sales compensation surveys will also provide impor-
tant information about job content, geographical indexing and
candidate experience to support the sales recruiting and staffing
functions that involve HR. The value of these sales compensation
surveys, however, is a controversial topic.
There are many survey providers in the market, but not all of
them have structured their surveys to provide deep, meaningful
information on sales. A worthwhile survey starts with a provider that
offers a sales-only survey. It should have at least 30 different types
of sales roles, specialized by channel, product, strategy, segment,
process focus and level. HR should work with the survey provider
to purchase a special cut, populated only with the data of 20 or so
comparable companies that are considered direct market or labor
competitors. Additionally, if offered, HR should participate in job-
matching sessions. These sessions are helpful for your benchmarking
process and are likely to improve the quality of the data used in
the job-pricing exercise. Surveys that do not include a job-matching
session create suspect data at the outset. Similarly, you should pay
close attention to the quality of data you submit, because sloppy
data submission degrades the quality of the survey over time. Many
companies participate in two to three surveys so that they can
triangulate on particularly tricky jobs.
When you have received the survey output, outline your platform
jobs and match them to the survey jobs, as applicable. Not all posi-
tions will be a strong match, and those that are moderate or weak
matches should be noted as such. Focus on channel, management
responsibility, sales strategy (for example, “hunters” and “farmers”),
account types and years of experience to improve match quality.
When matches are weak, the company may choose to fit the role into
a particular band that positions it relative to comparable jobs with
stronger matches. The analyst should pull TCC, base salary, quota,
actual revenue and actual compensation data into the market-pricing
model. The analyst should also bracket the specified compensation-
benchmarking philosophy of the company. That is, if the company
professes to pay at the 60th percentile of the market, the analyst
should also pull the data for the 50th and 75th percentiles. As an
aside, this stated philosophy should also be derived from a structured
discussion of talent scarcity, goal aggressiveness, support provided
and other factors deemed critical at your company.
This data should be aged from the effective date of the survey to
the current date (aging methodology is often offered in the survey
itself; usually a number between 2.0 percent and 4.0 percent is

applied per year of aging). The compensation assessment team can
then determine the degree to which the company underpays or
overpays relative to the market. Before making any recommenda-
tions on pay levels, there is a layer of art to place over the scientific
analysis conducted to this point. The strategic value of specific
roles should be taken into account for the specific company. For
example, a telesales role may have a significantly higher strategic
value to a company like Dell Computer or Dun & Bradstreet than
a company like Pfizer or Caterpillar. That value (or lack of value)
can be reflected in a premium or discount to the survey values.
Geographical indices can be applied in the same way to provide a
national or global framework of sales compensation benchmarks.
A completed model (or excerpts) should be supplied to the team.
Sales quotas/goals and actual revenue productivity numbers
should be collected, because they are useful data points for making
observations about both the effectiveness of a sales compensation
plan and the overall fiscal health of the salesforce as a revenue-
producing engine.
Some companies will pull 90th-percentile actual compensation
data and compare it to the excellence points from their quota-
distribution histograms. In situations where a sales role may be
new or there is no historical performance data for a job, this piece
of benchmark data can be used to shape the upside curve of the
formula mechanics.
Internal Qualitative Assessment — Interviews and Surveys

To augment the internal and external quantitative data fed into the
sales compensation assessment, many companies will seek qualitative
feedback on the sales compensation plans from the field salesforce
and executive stakeholders. These observations are equally important
and are especially pertinent to the strategic and role-alignment aspects
of the sales compensation assessment. Surveys or interviews can be
used for this information-gathering exercise; however, surveys have
the benefit of providing statistically significant results from more
complete coverage of the organization. The drawback of surveys
is the reduced ability of the assessor to probe particular responses

and uncover root causes. Ideally, a short survey is supplemented
with selected interviews to provide the deepest, richest picture of
current sales compensation plan performance.
Developing and deploying an effective internal sales compensa-
tion assessment survey (and interviews, for that matter) is not a
matter of asking incumbents if they like the plans. The questions
for an effective survey must be designed to get at information
that is important to the assessor without necessarily revealing the
intent to the survey participant. The logical sequence to the survey
questions is illustrated in Figure 5-6.
The results of this kind of survey provide insight and validation
to the assessment process (especially if there were hypotheses or
political agendas leaning toward certain preconceived solutions in the
first implementation). This survey becomes a truly useful tool when
conducted in a consistent manner in consecutive years to provide
trend analysis and validation of change-management initiatives.
Executive interviews build upon this approach to provide deeper
insight into the organizational underpinnings of the salesforce. As
part of the strategic alignment aspect of sales compensation plan
assessment, executive interviews should delve into the following topics:
• What are the goals of the company for the next year? The sales
organization?
• How does the structure of the organization support these goals?
• What products will be emphasized in the upcoming periods?
• What customers offer the most potential?
• What buying criteria are most important?
• What parts of the sales process are most important in delivering
value to the customer and executing the strategy of the organization?
• What sales roles are the most important to successfully execute
the sales strategy?
• Is the organization able to recruit sufficient talent to succeed?
Which sales roles are the most difficult to recruit?
• How well does the current sales compensation plan support the
company’s initiatives?
• What issues exist with the sales compensation plan?
Administrative Assessment
An assessment of administrative practices and processes associated
with the sales compensation plan is important for understanding
how effectively the plan is performing. In many organizations,
this is a frequently ignored piece of assessment. However, unless
members of the salesforce are paid correctly and on time, the plan
loses the ability to motivate and reward successfully.
FIGURE 5-6
Internal Assessment Questions

1. Test for understanding of the company strategy and sales strategy — “How well
on a scale of 1- 10 do you understand the company’s strategy?”
2. Test for comprehension of the sales compensation plans — “How well on a scale
of 1-10 do you understand your sales compensation plan?” Studies have shown that
plan participants who do not understand the plan are rarely motivated by the plan.
3. Test for comprehension of the goal-development process — “How well on a scale

of 1-10 do you understand the process by which your quota is developed?” This
is an indicator of commitment to the goal and is considered a primary driver of the
20-percent productivity uplift that goals provide.
4. Test for line of sight — “How much control on a scale of 1-10 do you have over the
performance measures included in your plan?”
5. Test for alignment of the plan with the sales role — “How well on a scale of 1-10
do you feel your sales compensation plan fits your job responsibilities?”
6. Test for competitiveness — “How well on a scale of 1-10 does your sales
compensation plan compare to others you have seen for comparable industries
and positions?”
7. Test for differentiation — “How true on a scale of 1-10 is this statement: If I

achieve high levels of performance, I will receive high levels of compensation?” This
question can be paired with the quantitative analysis of differentiation to provide
additional perspective.
8. Test for motivation — “How much motivation on a scale of 1-10 does your sales
compensation plan provide?”
9. Test for confidence in data and administration — “How confident on a scale of

1-10 are you that the data used to calculate your sales compensation is accurate?”
We typically see a drop-off in motivation as accuracy of sales compensation data
drops below the low- to mid-90-percent range.
10. Test for results — “How often on a scale of 1-10 has the sales compensation plan
encouraged you to perform at a higher level?”
11. Test for satisfaction — “How satisfied on a scale of 1-10 are you with your current
sales compensation plan?”
12. Test for retention — “If you were ever to leave this company, how much of a
contributor to your departure would sales compensation be on a scale of 1-10?”
Solicit additional qualitative feedback — “What other issues do you have with the sales
compensation plans?”
Key factors to review include the following:

• Administrative processes and responsibilities: Are they clearly
defined and adhered to?
• Administrative systems: For each performance measure, where
is the data tracked, measured and reported?
• Payout: Are there numerous requests for exceptions? Are issues
uncovered frequently about the accuracy of payouts? Are payouts
made on time?
Tools that help this part of the assessment include data-flow

charts, as available through IT, and in-depth interviews with those
personnel involved in all aspects of sales compensation administra-
tion. In addition, it’s likely that you and your team will have gained
valuable insights into the efficiency and accuracy of administration
through the interviews or surveys you have completed with the
sales organization. As a byproduct of this assessment, you should
be able to document the administrative processes if they have not
already been explicitly recorded.
Sales performance management systems have evolved in recent
years from being purely administrative tools to also supporting the
assessment process with analytics modules and regular reporting
of key statistics. The critical elements of a company’s administra-
tive assessment (and other key metrics) should be factored into
the requirements and implementation of the system to make the
assessment process easier and more meaningful.
Summing Up
You will produce several kinds of findings in the assessment process.
Because both quantitative data analysis and qualitative assessment
tasks have provided the information used in the assessment, the
team will have findings that reflect both the perceptions and actual
practices that exist in the organization. Qualitatively, the team will
be able to determine if the plan supports the company’s strategic
goals, and whether appropriate emphasis has been placed on
measures and approaches that are consistent with each role’s strategic
impact. Findings will also provide the team with information on
the extent to which the plans reward the selling behaviors required,
or if intended/undesirable behaviors have occurred.
Rigorous data analysis will verify the degree to which pay levels,
productivity expectations and practices are competitive. Data will
also be available to answer questions about cost of sales and the
degree to which required top-line and bottom-line results are being
achieved. Finally, the team will know if plans are being paid out
accurately and on time, or if there is an acceptable number of
exceptions and issues.
Successful completion of a thorough assessment process is a
critical element in the design process. It provides the design team
with the information needed to ensure that any negative aspects
of the current plan exist in fact and can be addressed so that they
are not repeated in a new or redesigned plan.
Designing a New Sales Compensation Plan 105
6
Designing a New Sales
Compensation Plan
D esigning a new sales compensation plan, or just tweaking the

old one, means that the plan your company currently uses will
be changed. This is a critically important concept, because when
a company designs and implements a new sales compensation
plan, it means not only that the plan will change, but that some
members of the salesforce may earn more and some may earn less
based on their results. Before implementing the process of plan
design or redesign, it is essential for management to support the
possibility and direction of change. Also, the design team and you,
as the HR professional, must be knowledgeable about the current
plan and its supporting programs, based on the assessment work
described in Chapter 5. It is critical to be aware of both the degree
of change that is required and acceptable to your company. This is
especially true because your solicitation of feedback on the plan
will create organizational expectations of future change or action.
The following sections in this chapter will help you understand
some of the business drivers of potential change and guide you
through the plan-design process:
• Preparing for the New Plan-design Process
• Defining Sales Compensation Plan Change Objectives
• Building Plan Designs
• Costing the New Sales Compensation Plan Design
• Types of Costing Analyses.
The chapter also includes a discussion of aspects of your sales

compensation plan that might change and the degree of possible
modifications. Finally, it provides guidance designed to ensure that
the recommended changes have the desired business impact while
remaining within the range of management tolerance for change.
Preparing for the New Plan-design Process

The optimal plan-design process was explained in Chapter 4. As
indicated in both Chapters 1 and 4, the HR professional may
serve in many different roles relative to this process. Preparation
for any of the roles described requires that you fully understand
your company’s sales compensation plan as well as the practices
and terminology related to the sales process and sales jobs that
your company uses. Although this book presents terminology and
generally accepted principles that are technically correct, both
vocabulary and practice may be different at your company. Taking
the time to learn how your company thinks and talks about sales
programs and practices will give you a stronger professional pres-
ence at the table during the sales compensation design process.
Whether your role in the design team is process leader, subject-
matter expert or team member, you will also need to ensure that
an effective assessment of the current plan has been completed. As
discussed in Chapter 5, the assessment should be based on business
objectives and issues identified throughout the plan year. These
issues should guide the development of a preferred approach for
your formal sales compensation plan evaluation — both quantitative
and qualitative. The assessment will provide you with data, observa-
tions and potential issues for the sales compensation design team to
address. Each component of the assessment will help you to answer
critical questions related to plan change, such as the following:
1. What behaviors, actions or results do we want the plan to reward
(or drive) or continue to reward or drive?
2. W hat behaviors, actions or results do we not want the plan to
reward (or drive) or to discontinue rewarding?
3. A re these consistent with the job roles we have in place?
4. I s our pay competitive with the market for the talent we need?
5. Does the data help us understand the potential impact of continuing
with the current plan or changing the plan design?
6. C an the possible changes be cost-effectively administered?
The results of the assessment should be presented to the design
team and ultimately to management for its support of plan change
objectives. As an HR representative, you should develop your own
understanding of the answers to these questions and provide support

in the evaluation process to ensure that it is providing the team and
management with an understanding of the current situation and
requirements of the plan, regardless of your role in plan design.
Defining Sales Compensation Plan Change Objectives

The plan has been assessed, and you or other members of the
team have talked with senior management about what is needed
for next year. As described in Chapter 4, the first key step in any
design process is the development of plan objectives. It is critical
to agree on why change is needed and why it’s needed now.
Requirements for a change in the sales compensation plan can
be the result of several factors, including the following:
• Talent acquisition and retention (for example, your company
experiences high levels of voluntary turnover, or you have
difficulty hiring qualified talent)
• Technical issues with design (for example, things you learned
during your quantitative assessment that suggest that the plan
is not structured to support key selling objectives)
• Organizational biases (for example, differing management agendas
or objectives for directing the salesforce through the compensation
plan).
While these issues need to be addressed, perhaps the most signifi-

cant and overriding reason to alter the plan is a change in the
strategic direction of the business. This issue and examples are
provided in the following sections.
The Impact of Sales and Business Changes on Sales

Compensation Success
Because sales compensation should support the achievement
of a sales organization’s strategies and objectives, a change in
your selling environment or a change in your business direction
should cause you to evaluate whether your plan still supports
the required results you seek from your salesforce. This section
provides an overview of six major change factors as well as
implications for sales compensation design, particularly related to

selecting performance measures and allocating the financial quota
or quotas used in the plan.
1. New Products. New products, whether they are line extensions
or entirely new, can have significant impact on the productivity of
your salesforce. First, with these products come some expectation
of sales results, and thus a typical increase of the total objectives
of the salesforce. However, that increase must take into account
the possible cannibalization of existing products or the possibility
that existing products won’t sell because of anticipation for the
new product. Second, the salesforce must be comfortable with the
features, benefits and impact of the new product on its customers
and may require time to prepare new sales approaches for the
new products.
Key issues that must be addressed as you plan for total and
product-specific results (and thus, the performance measures and
productivity expectations reflected in the sales compensation plan)
include: (1) The time and effort to assimilate the new products
and to sell them may displace time spent on existing products so
that new product sales may not be totally incremental; and (2) a
different sales approach for the new products, either a longer sales
cycle and/or a focus on additional or separate buyers within the
accounts. Therefore, the organization must again assess the impact of
these requirements on total and product-specific productivity. If new
products are dramatically different in their required sales approach,
the company should determine if special emphasis should be placed
on new product sales achievement. It should do this by carving out
either part of the at-risk pay for those products or by enhancing
upside within the plan for achievement of new product sales.
2. New Types of Transactions. New types of transactions indi-
cate a change in the way a sale might occur. These can include a
shift from a one-time invoice and payment to annual or monthly
payments or subscription fees over an agreed upon timeframe.
Allowing product leasing or providing seller financing of the
purchase represent other examples of changed transaction types.
This change in transaction type means the recognized value of the
sales may be less or more than is currently recognized as revenue

or sales credit for the purposes of sales compensation calculation.
This situation may be the case for different products or for some
types of initial transactions before a full deal closes (such as a
product trial or a technical assessment). In such a circumstance,
the company must determine if it wants to motivate or reward
different types of transactions or to treat all transactions the same.
Either decision should be reflected in sales crediting rules and
in the measures used in the sales compensation plan.
3. Competition or Competitive Action. Competitive new products,
alliances or even deep price discounting can require a product and
sales management reaction to the competitive event, which may
result in the need to address the situation in the sales compensation
plan. Many companies learn that the need to increase discounts
to compete effectively can actually create erosion in a revenue
base and create a stronger burden on achieving each salesforce
member’s objectives. This means that practices such as aggressive
thresholds (for example, an account manager might have to surpass
the past year’s sales to receive payout) or a component based on
price realization or margin-percent achievement may punish sales-
force members for a market condition and could lead to reduce
sales force morale, increased turnover or both. Therefore, using
these types of measures in the sales compensation plan should
be considered carefully and tested against realistic achievement
scenarios if there is agreement that they could support achieve-
ment of the company’s objectives.
4. Degree of Growth/Profitability Required. A successful sales
compensation plan starts with an achievable set of sales objectives.
Many a head of sales has pushed back when the CEO promises
“double the market growth rate” or “significant increases in gross
margin” without the products and market differential to support the
outcome. This is sometimes seen when companies build “stretch”
objectives into the quotas allocated but not into the business plan.
This in essence results in a reduction in earnings for the salesforce,
because sales objectives are unachievable. However, if significant
but achievable stretch is built into the objectives, the result should
be additional pay/upside for the salesforce, not a reduction. Any

significant change in the overall objectives requires sales manage-
ment to support the change and be able to make the case for how
results can be accomplished. Management should also ensure that
it is held to the same numbers as the sales teams.
5. Mergers, Acquisitions and Spinoffs. Even the companies touted
as the best at managing business combinations or divestitures
often fail to think through the sales implications of these changes.
These business combinations result in the addition or elimination
of potential customer segments or buyers as well as the expansion
or contraction of products/services within the portfolio available
to the salesforce to sell. First and foremost in this arena, there is a
need for transition periods. Companies in these situations seek to
ensure consistency and support for the transaction. Mutual sales
coverage and the need for sales-teaming must be assessed. Some
members of the salesforce may move from a lead sales role to sales
support or specialist depending on the situation. In such cases,
team objectives and/or cross-sell incentive plans may be justified.
Alternatively, some members of the salesforce may lose products
to sell, be reassigned or worse, have pay reduced. In the latter
case, the scarcity of talent and its impact on total results must be
considered as you develop the ultimate coverage model and related
sales compensation plans and transition strategies.
6. New Partners or Third-party Channels for Selling or Fulfillment.
Companies looking to develop efficiencies in sales coverage and
fulfillment often look toward third parties or channel partners to
provide representation or complete some steps within the sales-service
continuum. Typically, these third parties have existing relationships
within the market the company is targeting or have experience in
executing the fulfillment activities. They may even be involved in
some aspect of assembly, bundling, or packaging. Examples of these
types of third parties are agents, resellers, distributors and assembly
or subassembly/contract- manufacturing organizations.
In some cases, these relationships are intended to displace current
sales activity. In other cases, they are intended to allow the seller
more sales leverage and extended coverage. In displacement, the
key issue is the reassignment of customers away from the direct

seller to the third party and the assignment of a role to manage the
partner relationship. In the leverage model, the most significant issue
is a question of crediting and data availability. The concern here is
whether the salesforce member gets full or partial credit for these
sales (third-party sales often are at lower prices in order to allow
the third party some margin) and whether a third party will provide
data that tracks sales volume to the customers with whom the direct
seller still maintains relationships. To resolve crediting issues, it is
important to determine at the outset if management expects the
utilization of new channels to drive down sales compensation costs.
Plan-Change Objectives
Once the primary drivers for change have been identified, you
and the design team will be able to define plan-change objectives.
Plan-change objectives are statements of the business impact the
company is attempting to achieve. The sales compensation plan
must support the objectives, which can include the following:
• Drive the achievement of new product revenue
• Ensure channel neutrality that allows customers to buy through
their desired sources
• Reinforce profitable selling
• Support new account acquisition
• Ensure the retention of top-achieving talent
• Provide overall cost neutrality, except for higher results
• Attract top talent to open positions.
As a participant in the plan-design process, your goal is to iden-

tify both the pay implications that may result from these change
objectives and alternative plan design approaches to address those
implications. The alternatives can be presented to the steering
committee for a test of whether it is really ready to accept the
type of change implied by the objectives. In some cases, the plan
change may have some implications for sales coverage/job design,
total costs, administrative processes, systems requirements and
reporting that are either unachievable or that may require additional
cross-functional input. In these cases, management may seek to

evaluate the decision-making and approval process for plan change
to ensure that the appropriate input is in place before it provides
commitment to and approval of the plan changes.
Building Plan Designs

In Chapters 4 and 5, we identified a preferred approach for the
design team to follow and the possible implications of short-
circuiting that process. This section describes the following
components that can be used when you are working on a change
in plan design:
• Eligibility
• Target Cash Compensation (TCC)
• Incentive Mix and Upside
• Sales Credit
• Performance Measures
• Measurement and Payment Cycles
• Plan Types and Incentive Formulas.
It is important for the plan-design team to consider each compo-

nent, the degree of change that is required and acceptable, and
the indicators that suggest a need to move from your current plan
in a certain direction.
Eligibility. CEOs and other senior managers increasingly indicate
that it is the responsibility of all employees having contact with
customers to help the company grow revenues. The practical reality,
however, is that not all employees are in a position to influence
customer-buying decisions. This fact raises the question of how
to determine the jobs that should be eligible to participate in the
sales compensation plan. Before embarking on a plan redesign, the
positions eligible for participation in the plan should be confirmed.
Companies typically use at least three criteria for establishing or
confirming eligibility for participation, as described in Chapter 2:
1. T he primary responsibility of employees in designated sales jobs
is customer contact and persuading the customer to do business
with the company.
2. E mployees can affect sales results and may have assigned

sales goals.
3. S ales results can be tracked and accurately measured at the
individual employee level.
In general, it is these requirements that are used to identify the jobs
that should be eligible for a sales compensation plan. While there
are often other jobs that have customer-contact responsibility — for
example, customer-service representative jobs — unless the job
meets the criteria, it should not be eligible for participation in the
sales compensation plan.
Target Cash Compensation (TCC). TCC represents the amount of
cash compensation provided to a sales job for the accomplishment
of target performance. Again, target performance can be based
on individual quota or on average productivity requirements of
similar sales roles within an organization. As noted previously, TCC
can take many formats. The key consideration relevant to change
is the degree to which your company is providing a pay package
that will attract, motivate and retain the caliber of talent needed
to achieve your sales objectives. Primary indicators of a need to
address TCC are turnover and performance.
Too much turnover, especially of new hires and top performers,
implies that there is not enough compensation available within the
pay plan. Too much turnover may also be indicative of other plan-
design issues, but the key to knowing if the problem is caused by too
little TCC is if the company can recruit quality talent to replace the
lost talent. If it can attract new talent, the package is attractive and
the answer lies elsewhere in the employee value proposition (EVP).
The other reason for considering TCC change is whether your
company has the talent to achieve the sales results required. If
your sales organization has low turnover but is not able to achieve
objectives (either total volume or other strategic objectives), it is
possible that the TCC is too low to attract the quality of talent
needed. In such a circumstance, you would need to upgrade your
salesforce, and increasing TCC would be a critical part of that effort.
Increasing TCC for existing populations is not an automatic fix for
talent- management issues. While funding is likely to be a potential
issue, you’ll find that more money does not necessarily increase current
talent levels. Most companies start by restating the desired range
of TCC to attract and retain the appropriate talent. Restating range
does not mean changing individual pay levels. Instead, companies
should ask the sales management team to rank-order performers
based on skills and achievement, both current and expected future
potential. The total salesforce should then be evaluated individually
to determine which employees get increases and which stay at their
current level. Staying at the current level may appear inequitable,
but in fact the approach is consistent with a pay-for- performance
culture. Thus, companies should establish new standards and put
the salesforce on a performance plan with the awareness of the fact
that they now have new TCC ranges with which to hire new talent.
While changing TCC is a straightforward approach, when
companies are paying too low (either at target or at upside),
sales management is often afraid to manage over-par or subpar
performers. The reason for this is that the absence of a salesforce
member (and therefore the presence of an undercovered territory
or accounts) when management is trying to hit its numbers limits
its ability to do so more than carrying a moderate performer,
because it is not guaranteed that a new and better performer
can be hired. In such a scenario, the result is often a continuing
cycle of sub-par performance.
If a company determines that it is in fact overpaying, the problem
is typically handled by either increasing average quotas or targets
or by establishing new pay levels for new hires. Over time, pay
is managed down to cost-effective levels, and any talent beyond
that of the company’s current requirements either is moved into
management or moves itself out of the organization. The key lesson
here is that dramatic changes in compensation levels should rarely
be applied across the board and should be implemented over time.
Incentive Mix and Upside. Incentive mix represents the ratio
between base salary and target-incentive compensation as a
percentage of TCC. Upside represents the amount of pay provided
to top performers and is typically expressed as a ratio of the
number of dollars of overtarget earnings the company will provide

for each dollar of at-risk incentive. (See Chapter 2, Figure 2-5.)
Incentive mix and upside do not need to exactly match the
market; however, you do need to be able to sell your mix and top
earnings opportunities to recruits and current employees being
faced with competitive offers from other firms.
The following approaches (and their indicators) may be useful
when considering changing mix:
1. Increasing Incentive Mix — “Putting more money at risk.” An
example would be taking an account manager from a 70/30 plan
with a 2:1 upside (resulting in total payout of 160 percent of TCC
for top earners) to a 60/40 plan with a 2:1 upside (resulting in
total payout of 180 percent of TCC). This would be what some
managers call “getting more skin in the game.” Indicators of this
need would arise from the following comments or symptoms:
• Members of the salesforce appear too complacent about hitting
their numbers.
• Members of the salesforce complain that there is not enough earn-
ings differentiation between top performers and par performers.
• Members of the salesforce are reluctant to focus on a certain
part of the plan.
• Managers feel that the salesforce starts sandbagging (holding
back) sales toward the end of a performance period.
• Top performers are leaving for competitors who offer higher
total-earnings opportunities.
Typically, these factors should be tested. But should you choose to

move in this direction, you have some decisions to make. First, do
you make the change all in one period or over multiple performance
periods? A change of up to 10 percent can typically be handled in
a single period. Second, you must ask if you are willing to reduce
salary. In many companies, lowering salary is “taboo.” Whether
or not you choose to change salaries, you should at least make
sure that you do not increase them through a merit process only
to later reverse the process in order to shift the balance. Holding
back merits for one or two periods and putting dollars into the
target incentive is one way of moving toward the desired outcome.

Another approach is to transition through a guarantee of the old
salary but force the seller to re-earn those dollars during the period.
If you do this, their sales results will need to produce payouts up
to the old salary value before they receive any additional dollars.
In this case, the salary is reduced, but the salesforce is generally
given a separate monthly check for the difference, and incentive
earnings are netted against that amount before they are disbursed.
Such a transition requires only one performance period.
To ensure that upside is increased for top performers, the accel-
eration rate must be applied to new total-target incentives; thus
a larger dollar amount is being accelerated. Getting more dollars
to top performers can also be accomplished by increasing the
acceleration for those truly in the top tier of performance. With
the increased risk, you’ll have some funding to support this action.
2. D ecreasing Incentive Mix — “Putting more money in salary.”
In this example, you might take an account manager from a
50/50 plan with a 2:1 upside to a 70/30 plan with a 2:1 upside.
Indicators of this need include the following:
• Some sales roles may be teamed, with little control over total
sales results.
• You are losing talent to companies offering higher salaries.
• Some members of the salesforce are not spending enough time
on deals with a longer sales cycle for fear of being short of cash
in the current period.
• Members of the salesforce move off of opportunities too quickly
and excessively rely on post-sales support personnel to complete
the deal.
• The amount of earnings of top performers seems to cause payouts
that are too rich and may not be cost-effective.
Shifting to a reduced risk is clearly easier, because you are

increasing security for members of the salesforce. But you are
also sending a message to top performers that they may have
some earnings limitation (less upside). Additionally, you may
be sending a message to lower performers that they can relax.
With a reduced risk, it is generally best to readdress the topic

of TCC in order to ensure that you’ve got your better players
in the higher ranges of pay. You should not be afraid to reduce
TCC for those who should also be put on performance-plan
evaluation status. One alternative for accomplishing this is to
hold salary constant, but reduce the target incentive amount to
represent the new incentive mix.
From a cost perspective, reducing TCC for selected members of
the salesforce may reduce the variability of costs, but it also puts
more pressure on fixed costs. The total effect should be modeled
so that you can achieve the right balance for the entire group.
Sales Credit. Sales-credit policies and procedures are essential to
the success of a sales compensation plan. Specifically, sales credit
represents the point in time at which a salesforce member is given
credit and the amount of credit received for a specific transaction.
The goal of credit timing is to balance the proximity of the activi-
ties and results leading to the transaction with the need to ensure
the salesforce member remains engaged throughout the customer
relationship. Classically, most companies provide sales credit for
transactions either at the time the order is booked or closed (thus
providing closeness to a customer’s buying decision) or at the
time of invoicing (also referred to as shipment), which is when the
transaction becomes financially an asset (that is, revenue and a
receivable) of the company. Some companies will split sales credit
between these two events (booking and shipment or booking and
revenue recognition) when the time between them is significantly
long. Other companies, although very few, provide total or partial
crediting at the time the customer actually pays for the products
or services. Those companies paying on collection support their
actions by saying it helps the company balance cash flow, but
highly experienced compensation plan designers believe it to be a
poor balancing method because it puts the onus on the salesforce.
In fact, it may actually take the salesforce away from incremental
selling and motivate them to function as collections agents!
Sales-crediting challenges and changes occur most often when
the company experiences changes in products, transactions or
sales-channel partners. An example of such a change is selling

multiple-year deals that are either prepaid or paid annually. Similarly,
issues occur when a company provides a pre-transaction service
such as a proof of concept. A payment is made for that service,
but there is not a guarantee that the traditional deal will occur.
Lastly, these issues arise when multiple sellers touch a transac-
tion, such as when a headquarters salesforce member works with
buyers, but the sale is delivered to a site in a separate location
and is covered by a second geography-salesforce member, or when
the sale is delivered by a channel partner who is covered by a
channel-account manager.
The most critical aspect of changing sales crediting based on
these types of changes is ensuring that the credit supports the
desired selling efforts and results. Split crediting (for example,
50 percent to the headquarters salesforce member, 25 percent to
the geography-salesforce member and 25 percent to the channel-
account manager) often results in decreased cooperation in a
complex selling model. The result can be unintended behaviors
such as not communicating with the geography-salesforce member
or discounting to undercut the channel partner and thus the account
manager. Providing 100-percent credit to all players can create that
cooperation, but it also creates (in the just-mentioned example) as
much as 300-percent crediting to the sales team. This fact implies
that either a lower commission rate must be paid for the deals in
order to make them affordable or that these deals and crediting
must be built into the overall quota allocation and then later
removed from revenue recognition to ensure financial results are
in line with sales results.
Changes to crediting require significant upfront timing for testing
of administrative, reporting and other operational aspects of the
plan. Further, they require significant communications and finan-
cial modeling to sell to the field and to senior executives within
your organization.
Performance Measures. As discussed in previous chapters, most
plans should contain no more than three performance measures. A
financial sales volume or production measure is typically assigned
the primary performance weight in the plan. It is often assigned a

weight of 60 percent or more. The remaining 40 percent (or less)
weight is distributed between the other one to two measures, but
no measure should have a weight of less than 15 percent. A lower
weight dilutes the motivational impact of the measure, therefore
decreasing the likelihood that the component will receive adequate
salesforce attention.
In a plan change, measures may be added or removed. The latter
is perhaps the more difficult of the two. If plans for your salesforce
have four or more components, you should consider reducing the
number and ensuring that there is sufficient focus on the sales
volume component. This means that your company needs to rely
on total performance management and sales manager effective-
ness to support those other measures, not variable compensation.
However, removing a measure can create concern, particularly if
payout for the component has been on or above target, or if the
measure has been in place for several plan generations. Adding
measures or components represents the most typical change to an
existing sales compensation plan. This change is usually reflec-
tive of a change in sales focus or strategic direction, such as new
products, new customers or better profitability.
Two key considerations should be taken into account when intro-
ducing an additional measure or component. First, the measure and
its weighting should not detract from the overall results desired (typi-
cally, total volume achievement). To ensure this does not occur, the
weighting of the component and the ability to overearn on it should
be limited to 30 percent (and can be less if there is a large amount of
pay at risk or if the design is linked to total volume). The weighting
can also affect the cash flow of the individual salesforce members
if the component is not paid as frequently as the one it is replacing.
Second, the data must be easily available, well-understood and
auditable. In addition, the range of potential performance must
be relatively stable. Untested measurements in a new plan are the
most common causes for its failure (and the necessary reversion
to the prior plan). A conservative rule of thumb is that a new
measure should be tracked for six months (to validate accuracy and
timely availability) before the organization uses it for compensation.

Salesforce members and sales managers who do not trust the data
or the fairness of the new component will be very vocal about
the possible impact on their time and any perceptions they have
about the inequities in the plan. Inequities must be caught early
and addressed effectively in order to save any new measurement
and restore salesforce morale.
Measurements and Payment Cycles. These cycles represent the
period of time over which performance is measured for one or
more plan components and how frequently there is some interim
payout in advance of the close of the performance cycle. Once
developed, they are the least likely components to change within an
existing plan. The exceptions occur if there are preceding changes
to incentive mix and/or to plan measurements and components.
The design team should ask if increased or decreased incentive
mix and upside would result in significant changes to cash flow
or whether the payout amounts are too big or too small to have
the desired effect. Increasing the payout cycle length (resulting in
less-frequent payouts) assumes that the average payout in the new
plan will be larger and thus have more impact. Decreasing the
payout cycle (and thus increasing the frequency of payout) implies
smaller payouts and might be considered where waiting too long
for cash might cause undesired cash-flow strain. For example, a
shift in mix to 60/40 from 80/20 might imply you need to change
payouts from quarterly to monthly. Figure 6-1 presents guidelines
relative to these cycles.
Plan Types and Incentive Formulas. As described in Chapter 2,
there are two basic types of sales incentive plans: commission
and bonus. Some companies will use both in the same plan, thus
implementing a combination plan. However, regardless of the type
FIGURE 6-1
Impact of Mix on Payout Cycle/Frequency
Incentive Mix <= 25/75 30/70 – 65/35 70/30 – 80/20 85/15 – 100/+
Prescribed Weekly or Monthly or Quarterly or
Monthly
Payout Cycle Monthly Quarterly Annually
of plan a company uses to pay its salesforce, many companies find

that it is useful to maintain the same type of plan year over year.
However, they might adjust or tweak the incentive rates within
the plan formulas to reflect the need for a change in sales focus.
Both the use of plan types and the incentive formula mechanics
have a predictable pattern of change that is related to how a
company grows and matures in its business. That pattern can be
described as “generational;” that is, moving from one level of sales
compensation plan sophistication to the next based on the depth
and breadth of the organization’s product portfolio, the markets/
customers served and management’s focus for the business.
The successive generations of sales compensations plans, particu-
larly the incentive plan arrangement, can be described as follows:
First Generation — Commission plan for all sales resources, both
sellers and their managers. The business rationale is relatively
simple and straightforward: All business is good business.
Second Generation — Ramped (or “tiered”) commission plan
with accelerator based on total volume or products’ volume. The
business rationale: More business is good business.
Third Generation — Commission plan plus some simple bonus.
As the company begins to mature through the introduction of
product-line extension, new products or both, one or more bonuses
may be added to the incentive plan in order to direct strategic
selling. The business rationale is: Some kinds of business are more
valuable than others.
Fourth Generation — Quota-based bonus for managers, commis-
sion plan with bonuses for sellers. A realization that field sales
managers need to be more strategic in their roles and actions
related to the business sets in at this level. While the salesforce’s
incentive plan may be continued from the third generation, the
managers’ plan shifts in focus from being largely a reflection of the
salesforce’s plan to being one that includes more strategic measures.
Such measures may include focus on sales profitability, expense
management and sales productivity (for example, the number of
members of the salesforce who meet or exceed their assigned sales
quota). The business rationale is: Only quality business is good
business, and to achieve this realization, front-line managers must

be more proactive in managing for profitability and productivity.
Fifth Generation — Quota-based bonus plan for all. Ultimately,
companies come to the realization that there is a need for alignment
throughout the sales organization. This alignment is achieved through
the implementation of quota-based bonus plans (for all salesforce and
sales management positions) that are based on increased knowledge
of the company’s markets and the resident potential in accounts
and territories. The business rationale is: Top-to-bottom alignment
to optimize specific business achievement is good business.
As with any conceptual guideline, companies may move faster or
slower through this progression based on changes in their markets,
competition and their own management maturity. While some may
begin with a quota-based bonus for all roles, and some may never
move beyond a ramped commission plan, the important point is
that plans must fit with what senior management is striving to
accomplish with the business at a particular point in time. There
will occasionally be emotional attachment (or rejection) of specific
mathematical formulas. If, as a design team, you cannot get around
these blockages, rest assured that there is another mathematical
method to arrive at your desired state that will not require you to
use terminology with “baggage.” There are, however, some common
objectives in terms of what is important to the business and what an
incentive plan design that addresses those objectives might look like.
Illustrative plan designs that address the most common objec-
tives of a company when changing its sales compensation plan
include the following:
• How to incent balanced product-line selling (Figure 6-2)
• How to incent profitable selling (Figure 6-3)
• How to incent new product selling (Figure 6-4)
• How to incent sales managers to improve the sales performance
of all territories so that there is an incentive to fill all territories
and develop members of the salesforce (Figure 6-5).
Whatever the change, analyses on cost and earnings impact must

be completed. As mentioned earlier, the company must ensure that
FIGURE 6-2 Incentive Plan Illustration — Incenting Balanced Product-

Line Selling
• Target Total Compensation: $100,000 Plan Component Weight Value

• Mix: 60% / 40% Total Sales vs.
80% $32,000
Quota
• Salary Range Midpoint: $ 60,000
Product Mix
20% $8,000
• Target Incentive Amount: $ 40,000 Multiplier
Total Sales vs Quota Bonus

(Rate per point, or dollar value of each 1 percent achieved)
1% – 100% of quota 1% or $320 per percent achieved

2% or $640 for each additional percent
Over 100%
achieved
Product Mix Multiplier (Based on Number of Product Quotas Achieved);

(additional incentive paid as percent of total bonus earned year-to-date.)
Percent Bonus
Number of Product Quotas
(Times Total Bonuses Earned)
5 of 5 75%
4 of 5 50%
3 of 5 25%
2 of 5 15%
FIGURE 6-3
Incentive Plan Illustration — Incenting Profitable Selling

(Sales Rep)

• Mix: 60% / 40% Revenue vs. 100% $40,000
Quota
• Salary Range Midpoint: $60,000
Gross-Margin If the Gross-Margin
• Target Incentive Amount: $40,000 Hurdle Hurdle of 20% is
achieved, then
payout at or above
the 51% revenue
commission rate is
available. Otherwise,
the payout rate
remains at 2.0%.
Revenue Commission
Percent of Quotas Rate

0% – 50% 3.0%
51% – 100% 5.0%
101% – 125% 6.0%
126% and greater 8.0%
FIGURE 6-4
Incentive Plan Illustration — Incenting New Product Selling

• Mix: 60% / 40% Total Volume vs. 75% $30,000
Quota
Product-Launch
• Target Incentive Amount: $40,000 Commission 25% $10,000
Total Volume vs. Quota Bonus
Percent of Quota Achieved Annual Payout Per %

1% – 100% 1% or $300
Above 100% 2% or $600
Product-Launch Commission
Volume to $100,000 10%

Volume over $100,000 15%
FIGURE 6-5
Incentive Plan Illustration — Incenting Improvement in Sales

Performance of All Sales Territories (Sales Manager Plan)

• Mix: 60% / 40% Region Revenue 75% $30,000
vs. Quota
Performance of
• Target Incentive Amount: $40,000 Territories 25% $10,000
Region Revenue vs. Quota Bonus
Percent of Quota Achieved Payout Rate Per Percent Achieved

0% – 75% $0
76% – 100% $1,200
101% – 110% $2,250
111% and greater $2,400
Performance of Territories (assume 12 territories)
Territories @ or > Plan Annual Payout

4 or fewer territories $0
5 – 6 territories $5,000
7 – 10 territories $10,000*
11 – 12 territories $15,000
* Target achievement
the new plan measurements and components are well-understood

and that potential volatility is managed. Techniques for managing
the predictability of payouts in aggressive sales compensation
environments include the following:
1. Establish a separate payout with an easy entry level or threshold
but a limited or capped payout.
2. E stablish a second payout, but ensure it only occurs if the
salesforce member overachieves a specified gate or hurdle
(for example, 95 percent total quota achievement) before any
payout is provided. Such a technique might also include some
cap or limited top-end payout for the component.
3. Promote the second measure so that it only goes to those who
achieve total quotas by utilizing one plan accelerator (overquota
rate) for achievement over 100 percent but a higher plan accel-
erator for being above 100 percent and achieving the target
amount of the second measure. Doing this ensures the best
payouts go to those who have done both, but strongly links the
total payout to the achievement of total quota. This technique
reduces the downside risk of the new measure for the sellers
while providing increased upside for those who perform.
Costing the New Sales Compensation Plan Design

If designing a new sales compensation plan is a combination of
behavioral, strategic and financial architecture, costing the new
design is half the battle. While HR and sales are often given the lead
in the behavioral aspect (due to experience in behavioral science
and a more detailed knowledge of exactly which behaviors are
desired, respectively), that is rarely the case for the cost-analysis
and budgetary projections for the proposed plan design. While
finance will often have this responsibility, it is important that HR
and sales be fluent in the structure and language of the process.
All who are involved in the design, review and administration of
the sales compensation plan should understand the cost drivers,
key assumptions and relative benchmarks.
The cost drivers for sales compensation are more complex
than they appear at first glance. If compensation cost of selling
(CCOS) is an ultimate performance metric for a sales compensation

plan, it is a logical exercise to break down the drivers. Actual cash
compensation cost for eligible sales resources is the numerator. As
the numerator goes up, CCOS increases. The denominator in the
calculation of CCOS is revenue. As the denominator goes down,
CCOS increases. See Figure 6-6 for factors that can drive CCOS.
Not all potential factors need to be included in sales compensation
plan cost modeling. Some companies use only headcount times
target-pay level. Most include some assumption of different levels
of performance. The important thing is to recognize that you are
in essence stating, “We assume all of these things will remain the
same next year” when you choose not to include factors.
Assumptions are a fact of life when cost-modeling sales compensa-
tion. No one should expect to foresee the future with 100-percent
accuracy. You do, however, want to equip the steering committee
and the salesforce with the ability to make the most intelligent
managerial decisions possible in the approval and administration
FIGURE 6-6
Factors Affecting CCOS as a Percent of Revenue
Factors Affecting Driving Up

Actual CCOS Factors Affecting Decreasing Revenue
• “Inclusive” eligibility (although this is • Extending the sales cycle
really just moving costs around, into
• Increases in workload
and out of the sales function)
• Reduction of time allocated to
• TCC pay levels
selling activities
• Overall headcount
• Employee turnover (due to uncov-
• Performance levels and productivity ered accounts and productivity
expectations ramp for new resources)
• Pay mix (in an overachieving • Reduction in transaction size
organization)
• Decrease in average account size
• Plan upside or acceleration
• Decrease in close rates
• Standard deviation of performance
• Decrease in lead flow
distribution (breadth of performance
in an accelerated or ramped plan) • Decrease in product availability
• Shift of transactions to or from

direct channels
• Credit duplication if not allowed for
in quota allocation
• Design mistakes, unintended loop-
holes or fraud
of the plan. Several of the factors listed would not be assumptions,

because they would have been explicitly included in the design
decisions themselves (e.g., pay levels, pay mix, accelerators, etc.).
These drivers are design factors that can be revisited should the
forecasted cost of the proposed plan exceed budgets/constraints.
Many of the other factors may be assumptions that should be
documented in the cost analysis. For example, if you assume that
bundling a new product into proposed solutions will increase both
the close rate and transaction size, and this assumed increase is
included in the quotas assigned, you would expect that CCOS would
come down. Revenue would increase, but achievement should not.
The numerator stays flat and the denominator goes up. If costing
of the plan then returns a CCOS higher than the previous year’s,
the design team should investigate what other factors counteracted
the assumed increase in productivity. The goal is completeness
of the analysis, but you will need to recognize when you have
passed a point of declining returns on your cost-analysis effort.
If the current plan assessment included a complete quantitative
analysis, it will be useful to retain the spreadsheets supporting that
work for the costing of the new sales compensation plan. One of
the most popular methodologies for plan-cost comparison takes the
assessment’s current list of incumbents and actual distributions of
performance and applies them against the new pay levels, new pay
mixes and new pay formulas. This method provides a cost analysis
that is very good for an “apples-to-apples” comparison of the new plan
relative to the previous years, but may not be exact for budgeting (if
headcount goes up or down the following year, for example, you will
need to understand how many, what types, the composition of their
offer packages and what productivity to expect from any new hires).
Types of Costing Analyses

This section describes three key cost analyses:
• Change in Total Cost
• Change in Individual Earnings
• Total Cost Compared to Budget.
Change in Total Cost. This change looks at the total projected cost
of the new plan for the same people that were on the plan in the
previous year. In this analysis, any differences are due to changes
in TCC, mix and upside, and other tools implemented within the
plan design. These include hurdles, gates, new accelerators and new
mechanics. By using the previous year’s data or the current year’s
projected data, the analysis is actually an apples-to-apples comparison.
Cost analysis can also isolate various decisions you have made in
the plan change process. For example, if you have chosen to change
TCC or modify the incentive mix, you can model the impact of the
changes to the plan mechanics or formulas using prior base and
incentive amounts, and then again with the new base and incentive
amounts. This enables you to modify each specific element as you
work to finalize the plans.
The analysis may also alter the past performance for overall increased
achievement and overall decreased achievement to test the sensitivity
of the plan changes on total cost. For example, if the company achieves
5 percent more than last year, will more or less than 5 percent be
spent on compensation, and what percent of revenue will be spent
on incremental results? This work is done to finalize the formulas in
order to ensure the variability is within an acceptable range.
Change in Individual Earnings. Here, the new plan designs and
decisions are applied to the population on the plan to identify, at
least conceptually, the “winners” and “losers” (in terms of earned
incentive compensation) on the new plan. First, it is important to
confirm that a change in the plan is meant to alter behaviors and
results. Since the old plan did not reward that way, the new plan
will pay differently, both for those that did well under the old
plan with behaviors and results that are no longer acceptable, and
for those who were doing the right thing but have not yet been
rewarded for their results.
In this exercise, the population is rank-ordered by job type, from
top change in positive earnings to top decrease in earnings. These
rankings are reviewed for anomalies and then reviewed by the
steering committee, which will inform the design team whether it
is willing to live with these results or if the change is too dramatic.
Once this decision is made, plans may be remodeled before being

finalized. The final model will serve as a tool for management
during implementation, because it will help explain the differences
and the opportunities for shifts in sales activities and results.
Total Cost Compared to Budget. To complete this process, the
incumbent model is used with any nonexisting salesforce members
removed, any projected new salesforce members added and total-
target cash earnings summarized. This amount must be compared
to budget. If it is greater than budget, there is a basic planning
problem, because TCC per individual has been increased beyond
initial planning assumptions.
With an appropriate population (either projected or actual), the
next step is to apply the historic and potential performance distribu-
tions with expected quotas/volumes for the coming fiscal year. As a
rule, approximately 60 percent – 65 percent of your salesforce must
hit or overachieve its target performance levels for your company
or sales team to hit its total number. If that occurs, one-third will
be earning less than target and approximately two-thirds will be
overachieving and hitting accelerators. It is with this assumption
that the comparison to budget must be made. This typically means
you will need to budget and may be spending somewhere between
105 percent and 110 percent of the summation of the total TCC
for the team. At this point, your company must address the fact
that sales compensation spending and the budget must vary with
achievement levels. Hence, the sensitivity analysis presented earlier
must also be done so that payout volatility and totals can be built
into budgets, forecasting and expense accruals in order to avoid
financial surprises at fiscal year-end.
An illustrative costing scenario summary worksheet is provided in
Figure 6-7. The worksheet provides the results of several achieve-
ment scenarios so that the cost of the new plan relative to revenue
achievement can be appropriately assessed.
Summing Up
Throughout the design process, you and the design team will be
applying the data collected during your fact-finding, assessment and
FIGURE 6-7
Illustrative Costing Summary

Background Numbers:
Prior-Year Goal $ 1,200,000,000
Prior-Year Actual Sales $ 1,150,000,000 88% of goal
New-Plan Goal $ 1,250,000,000
Revenue Impact
Revenue Revenue Revenue as
Annual
New-Plan Scenarios Change from as a % of a % of Prior-
Revenue
Prior Year New Goal Year Goal
1. N
ew-Plan Sales = $1,150,000,000 $ 0 92% 95.8%
Prior-Year Sales
2. New-Plan “Target” $1,250,000,000 $100,000,000 100% 104.2%
3. New-Plan “Base” $1,125,000,000 ($ 25,000,000) 90% 93.8%
4. B
etween New-Plan “Base” $1,187,500,000 $ 37,500,000 95% 99.0%
and New-Plan “Target”
5. A bove New-Plan Goal,
but Below New-Plan $1,312,500,000 $162,500,000 105% 109.4%
Excellence
6. New-Plan “Excellence”
$1,375,000,000 $225,000,000 110% 114.6%
7. A bove New-Plan
“Excellence” $1,437,500,000 $ 287,500,000 115% 119.8%
Compensation Costs Impact
Prior-Year Total New-Plan Total $ %
New-Plan Scenarios
Compensation Compensation Difference Difference
1. N
ew-Plan Sales = $ 9,000,000 $ 7,611,675 ($1,388,325) -15.4%
Prior-Year Sales
2. New-Plan “Target” $ 8,500,000 $ 9,472,703 $ 972,703 11.4%
3. New-Plan “Base” $ 7,400,000 $ 7,500,000 $ 100,000 1.4%
4. B
etween New-Plan “Base” $ 7,570,755 $ 8,200,000 $ 629,245 8.3%
and New-Plan “Target”
5. A bove New-Plan Goal,
but Below New-Plan $ 8,600,000 $ 11,200,000 $2,600,000 30.2%
Excellence
6. New-Plan “Excellence”
$ 9,200,000 $ 11,800,000 $2,600,000 28.3%
7. A bove New-Plan
“Excellence” $ 9,500,000 $ 12,600,000 $3,100,000 32.6%
testing of your solutions with the management steering committee.

The drivers come from multiple sources, and the degree of change
must fit within the acceptable range of change for your company.
Any resulting redesign decisions should go through the same process
as the original design decisions. (Don’t forget your objectives for
the design — that is, what did you originally set out to do?)
The final cost assessment should be summarized for the steering
committee (no small challenge) and filed with the design deci-
sions. One of the most important things to remember is to make
the process closed-looped. Come back at the end of the year, dig
up the cost estimates and perform a detailed comparison of the
results (often as part of the next year’s assessment). Questions you
should ask at that point include the following:
• What changed? Why?
• How much impact did it have?
• What can we do to make our assumptions stronger this year?
Implementing a New Plan 135
7
Implementing a New Plan
E ven the best-designed plans will fail if they are not implemented
properly. Organizations with successful sales compensation
plans devote the time and resources necessary to ensure that the
new plan is fully tested and has gained support throughout the
organization. They will educate the company, plan participants
and management, and limit transition difficulties.
HR is frequently charged with developing the tools and programs
related to implementing a new or revised sales compensation plan.
Also, it may be asked by sales executives to assist with assessing
the effectiveness of a new plan shortly after it is implemented.
This chapter describes processes, tools and concepts related to
effective implementation of new or revised sales compensation plans:
• Common Transition Issues
• Developing the Implementation Plan
• Implementation-Process Roles
• Plan Modeling
• Implementation Tools
• Monitoring Change and Measuring Success.
Mastering the use of these implementation tools and processes

will enable you to help your company increase the likelihood that
the new sales compensation plan will achieve its desired objectives.
Common Transition Issues

No matter how small or how significant the change is in the sales
compensation plan, there are five common transition issues that
may become obstacles to success: (1) resistance to new a or changed
sales role (see Chapter 6 for details on the drivers for this kind of
change); (2) lack of front-line sales managers’ support for change;

(3) objections to the new incentive strategy and plan mechanics;
(4) change in cash flow; and, (5) failure of administrative systems.
How these transition issues are addressed will have a major impact
on the effectiveness of the new plan.
Resistance to a New Role

A new or revised sales compensation plan is frequently one result
of a change in the sales job or implementation of a new role. As the
HR professional working with the design team, you will want to be
proactive in order to ensure that resistance is minimized when a new
role is introduced. Frequently, that resistance may be the result of
fear of the unknown (“What am I supposed to do in this new job?”
or “How will this new job impact my career?”). Particularly with
long-tenured employees, there is inherent disinterest in changing how
they perform their jobs, especially if their approach to their jobs has
been reinforced over time. Staffers, especially those that have been
successful under the previous work and job models, often require a
significant change-management effort to overcome that inertia.
To diffuse this potential challenge, you should work with sales
management to provide affected employees with an advance orienta-
tion to the change. If the new role is one that will be staffed with
current employees, there should be a well-defined development
plan to help them gain the skills that are needed to succeed. You
will also want to be sure there is sufficient time for learning to take
place before the sales compensation plan used to reward success in
the new role is implemented. Often an individually tailored vision
of success under the new model and clear communication that the
old model has been retired are the final pieces of the equation to
create incentive for change.
Lack of Support from Managers

You probably have heard many times that the cornerstone to a
successful plan is the support of the front-line managers. “If our
managers don’t like the plan, it will never succeed” is the basic
belief in many companies. However, if front-line managers are not
involved in the process of developing the plan and formulating the

implementation process, it is quite likely that there will be field-
management resistance. Two ways to help overcome that resistance
are to involve selected front-line sales managers throughout the
process, either as team members or team advisors, and to conduct
“focus groups” on change with a broad group of managers. Both
techniques provide meaningful opportunities for input. However,
for either or both to succeed, the recommendations of the managers
must be both acknowledged and used appropriately for whatever
aspect of plan design or implementation their input has been
solicited (including enforcement).
Objections to Measures or Mechanics

Possibly the single most common issue you will see is an objec-
tion to new measures or mechanics. Objections may be caused by
concerns about the ability to succeed, the appropriateness of a new
measure or the ease with which the members of the salesforce can
estimate their earnings. However, beneath all these concerns is
the perception that new measures or mechanics will have a nega-
tive impact on pay. This potential issue is unique, because it can
occur even when the salesforce is willing to change. As part of the
implementation process, you will need to work with finance and
sales management to address these concerns. One very effective way
to do this is by illustrating “old” vs. “new” plan payout for similar
performance. These illustrations should be part of presentations,
FAQs and management training that are designed to ensure that
the intent and expected results of the new plan are made clear to
the salesforce. As you build these communication tools, keep an
informal tally of “concessions” to the salesforce and “take-aways”
so that you know first whether salespeople are in a net negative or
net positive situation under the new design. Use your knowledge
of these factors to craft effective messages.
Change in Cash Flow

Even if the target payout remains the same or is greater than in the
past, salesforce members’ total cash compensation (W-2 earnings) is
based on both the actual payout of the incentive or variable portion

of their compensation package and the timing of that payout. A
change that seems simple, such as changing a component of the
incentive plan from a monthly payout to a quarterly payout, may
have a dramatic impact on the ability of plan participants to meet
their basic financial obligations. Therefore, if the change will have
an immediate and significant impact on cash flow for participants,
a transition plan may be required before rollout. It may include
financial planning assistance to help the salesforce member budget
and pay recurring expenses, a transition guarantee for the first pay
period or some other financial “safety net” based on performance.
Helping the salesforce in this way is often an uphill battle, because
skeptical or cynical salespeople may assume that any change is
designed to benefit the company at their expense.
Failure of Administrative Systems

As discussed in Chapter 4, it is critically important to ensure that
results can be measured, credited and reported accurately and
on time before a measure is selected to be included in the sales
compensation plan. Crediting rules must be in place and reflected
in whatever system is used to measure and credit results, as well
as link those results to the formula used to calculate payout. There
are many steps from the sale to receiving payout for the sale (or
other results required by the sales compensation plan), and each
step in this critical process must be reviewed for accuracy and
efficiency. While a plan may be well-designed, and the sales
organization may be well-positioned for change, late or inaccurate
payouts are significant obstacles to success.
Developing the Implementation Plan

Once potential challenges are recognized, and the degree of change
has been assessed, a structured process should be used to guide
the implementation of a new sales compensation plan. The process
will address the following:
• Accountabilities: Who is responsible for each aspect of plan imple-
mentation — documenting the plan, creating payout examples,
developing internal and field-training materials, scheduling

rollout meetings?
• Specific changes: What has changed? What do the changes look
like? How should they be explained? How can they be illustrated?
What will the likely impact be on behaviors? On participant
perceptions?
• How to determine whether desired benefits and improvements are
being achieved: What are the expected behavioral changes? What
financial and market results was the plan designed to support?
How can the team best communicate these expectations? How
can effectiveness be assessed and measured?
To develop an implementation plan that answers those ques-

tions and meets the needs of your organization, four factors need
to be considered: adult learning, degree of change, timing and
involvement of field managers.
Adult Learning. When you are working on the implementa-
tion of a new or revised compensation plan, you should bear in
mind that this is an opportunity for learning. Not only must plan
participants understand the plan and what it means for them in
terms of behavior and expected results, but managers also need
to learn how to manage with the new plan. Understanding the
following principles of adult learning will help you effectively
influence the process of communicating and implementing a new
sales compensation plan:
• Motivation: Adults are goal-oriented and want to see the benefit
of learning what is being taught. A sales compensation plan is
relevant to the financial security and emotional sense of self-
worth of the members of the salesforce. Their success under the
plan has immediate relevance to their lives, and they are highly
motivated to understand it. Thus, the method used to present,
explain and illustrate the plan should be one that allows the
salesforce to easily understand and internalize the plan.
• Reinforcement: Media and other tools should ensure that the
message the company intends to convey by the plan is consistently
and positively reinforced.
• Retention: Adults must see a purpose for what is being commu-

nicated so that what is learned is retained. The materials and
media should include “practice” sessions to ensure that participants
have direct experience in how the plan works and how they can
affect the payout.
• Transference: The information that the media and materials
convey must be transferred into positive action on the part of
participants. The participants should be excited and want to use
the information to enhance their opportunities.
Because there are many ways in which learning occurs, the full
implementation plan should use materials and approaches that
stimulate as many routes of knowledge acquisition as possible,
such as visual stimulation through the use of slides and plan
documentation, reinforcement through audible/spoken stimulation
(e.g., presentation, Q&A , one-on-ones) and written reinforcement
through practice sessions.
Degree of Change. If you are introducing a plan that is very
different from past practices, all available resources should be used
to ensure that it is understood and accepted. Typical reasons for
plan failure all focus around lack of understanding of the need
for change; that is, why new strategies are required or how new
plan mechanics support those strategies. Ample time must be allo-
cated to developing whatever materials and programs are needed.
While practical considerations frequently take precedence over
optimal implementation processes, you and the team chartered
with implementation will need to confirm the financial, competency
and headcount requirements associated with the implementation
process. As a helpful tool in assessing those requirements, Figure 7-1
summarizes the degree of change in the plan and the related timing
and tools needed for successful introduction.
Timing. Several aspects will affect how much or how little detail
should or can be addressed in the implementation process. If this
is a midyear plan change, a full-scale implementation process is
probably not practical or possible. However, key tools such as
FAQs and plan documentation need to be revised to effectively
address transition concerns and issues. If the design process has
FIGURE 7-1 Degree of Change and Requirements
Implementation Implementation
Degree of Change Changed Elements
Time* Tools
Minor “Tweak” Small change in 30 – 45 days Revised plan
mix or TCC document
Small change Revised payout
in quota or estimator
performance -
measurement
definition
Moderate “Tactical” Additional jobs 45 – 90 days All above
eligible New management
Significant change and participant
in mix reports
New performance New performance
measure(s) measure(s)
Modified formula Leadership
message
Management
presentation FAQs
Major “Strategic” New organization 90 – 120 days All above
New compensation New measurement
structure and reporting
New measurement system
methodology and
structure
New formula
* Implementation Time is the time required to ensure that systems are in place to
support the plan, that the plan has been effectively introduced to the sales organiza-
tion, that the plan is understood and that monitoring processes are in place.
taken longer than anticipated and the new plan year has begun,
large-scale training may be difficult to schedule and complete.
However, the importance of a successful sales compensation plan
is directly proportional to the focus and resources brought to bear
on introducing and explaining it to all stakeholders.
Involvement of Field Managers. Despite the need for flexibility
in functional and executive ownership of the sales compensa-
tion plan, it is imperative that front-line managers outwardly and
explicitly embrace the plan as their own and that they do not
describe it as “HR’s plan” or “their plan” to their direct reports. The
sales compensation plan is an important sales management tool,
and there is no one better qualified than front-line management
to provide information and direction about the communication/
explanation of detail that will be needed. Front-line managers can

help you develop relevant and accurate questions and answers
(FAQs); realistic scenarios that can be used to help members of
the salesforce understand how the plan works; and other materials
that will help them explain the plan.
Implementation-process Roles
As described in Chapter 4, the design team includes members from
several critical functions across the company. Even when the new
plan has been approved, however, the team’s job is not yet complete.
To effectively implement and communicate the sales compensation
plan, both headquarters and field resources are needed. Members
of the design team will have a leadership role in communicating
the plan’s rationale and design.
The following plan communication and implementation roles
are required, particularly if the plan changes are extensive or are
likely to result in significant transition challenges:
• Sales Management: Senior sales management develops and delivers
the change message — why change, why change now, how the
new plan supports our strategy for the future. Field management
ensures that direct reports understand the plan; confirm how it
can use the plan as a management and recruiting tool; and then
works with the implementation team to ensure that materials for
rollout meet the needs of the field.
• Other Staff: HR ensures that the plan is consistent with corporate
policies and competitive practice; works with legal and other
resources on the development of plan documents and communica-
tion materials; participates in training sessions as needed; and
works with other internal resources on ongoing monitoring and
assessment. Sales administration is responsible for managing and
administering the sales compensation plan and field measurement
system, frequently in partnership with IT, finance and payroll.
Systems/IT develops, assesses and maintains the tracking and
measurement systems based on requirements defined by finance,
sales management and sales administration. Finance works with
sales administration and IT to ensure that measurement systems
are in place, and leads the process of periodic assessment of

plan effectiveness.
Plan Modeling
As described in Chapters 4 and 6, plan costing and modeling is
an important task that the design team and other resources will
complete as part of the design process. The results of the individual
modeling are particularly useful as a tool in the implementation
process, because the model can be used in training and individual
sessions to illustrate the following important factors:
• How the plan works; that is, the formula and mechanics that are
used to calculate payout
• The impact of various performance scenarios on payout
• Any differences between the former plan and the new plan.
As described earlier, this is particularly important when the new

plan has changed significantly. Participant concerns about the
impact of the change on their pay, their career and their future
can be most realistically addressed by showing them exactly how
the plan now works. In addition, the plan-modeling exercises are
useful tools when training field management in how the plan works
and the results they should expect under it. There are several
approaches to modeling, with inputs that range from simple to
complex. The simplest models may use only headcount and target
pay levels as inputs. More sophisticated models will include actual
and hypothetical performance distributions, quotas, pay mix and
period linearity assumptions or inputs in order to deliver more
accurate and more sophisticated estimations of pay/expense so
that finance can properly address the fully implemented plan in
budgets.
In addition to addressing financial requirements, individual plan
modeling is a process that will identify the potential impact on
each individual year over year. To complete this level of individual-
impact analysis, individual actual performance from the previous
year is run through the proposed plan in the model, and payouts
are compared to those of the previous year.
An aggregate of individual plan modeling can produce a displace-

ment analysis that will help determine the total impact, positive or
negative, on the salesforce. Displacement analysis sums the absolute
value of each individual’s change for the whole organization and
divides it by the total sales compensation payout for the previous
year. Displacement indices greater than 20 percent are viewed as
significant changes with potentially catastrophic results, no matter
how skilled your implementation team is. Even with a displacement
index below 20 percent, sales management will typically want to
see a list of the top 20 winners and top 20 losers under the new
plan. It is important that these populations are accurate in terms
of both role models and low performers.
Implementation Tools
As explained earlier, people learn in different ways. Especially in
widely dispersed organizations, as many channels and media as
possible should be considered in plan implementation. Figure 7-2
provides a summary of potential media.
While many templates may be in place for you to use, you and the
design team should consider all the possibilities when developing
or revising the tools that support an effective plan implementation.
These tools include documentation and programs that clearly explain
the plan and the business objectives it has been designed to support.
Plan Documentation
Clear and accurate plan documentation must achieve the following
objectives:
• Showing participants how the plan works; that is, shows them
the details of performance measures and mechanics that are
used to calculate payout
• Providing details about the various employment, measurement
and legal policies and procedures associated with the plan.
Because of these two different objectives, plan documentation

in many organizations may include two documents: (1) A short
boilerplate plan description that includes the incentive opportunity,
FIGURE 7-2 Communication Media
COST TURN-
AROUND
MEDIA 1 2 3 TIME TO
SOURCE EFFECTIVE USES EXAMPLES Low Medium High COMPLETE
PRINT • Conveys complex and • Memorandum/
X 1 week
detailed information email
• Reaches a wide audience
• Letters to
• Can be used in conjunction X 1-2 weeks
employees
with other media
• Handbook X X X 6-8 weeks
• Provides a written reference
source • Program-summary
X X 2-4 weeks
• Excellent resource for description
training • Brochures X X 6-8 weeks
• Can generate program
• Payroll stuffers X X 2-3 weeks
interest with a wide range of
individuals • Informational flyers X X 1-2 weeks
COST TURN-
AROUND
MEDIA 1 2 3 TIME TO
SOURCE EFFECTIVE USES EXAMPLES Low Medium High COMPLETE
INTRANET/ • Can be excellent source for • Organizational X X 6-12 weeks
INTERNET organizations with multiple Websites
locations • Intranet communi- X X Varies
• Provides factual information cation networks
• Can be interactive and • Email X X 1-2 weeks
allows participants to if in place
comment about the recogni-
tion program
• Geared to the modern
employee who values
technology
• Reaches a wide audience
• Can provide graphical
representation
GENERAL • Can be used to present the • Slide presentations X 4-6 weeks
COMMUNI- program to employees • CD-ROM X X 6-8 weeks
CATION • Can be used in conjunction • Slides or other X X 1-2 weeks
TOOLS with other media software presenta-
• Can be customized to the tion approaches
audience or location (e.g. Power Point)
• Facilitates discussion and
interaction
Source: Recognition at Work: Crafting a Value-Added Rewards Program (WorldatWork, 2006)
measures, goals and mechanics, and (2) a terms-and-conditions

document that can be used for participants in many different
plans. Because these are legal documents, the approval process
must include review by legal. Figure 7-3 provides a checklist of the
factors that must be addressed in plan documentation regardless
of the number of documents used in your company.
Once the formal plan documentation has been written (or revised,
based on last year’s plan), you should consider what other materials
will be needed and who will be responsible for building those
materials. For example, field sales management might work with
you to develop a standard list of likely questions that will be asked
as the plan is rolled out. The design team members will provide
the answers, and the FAQs will then be available for the training
sessions, workshops and other implementation sessions as needed.
A plan calculator is another tool that can help the salesforce under-
stand the plan quickly. How often have you heard that members of
the salesforce have created their own worksheets, complete with
complicated formulas, to estimate what their payout will be under
the new plan, given various performance scenarios? Thus, a very
attractive implementation tool to offer the sales organization is a plan
calculator or payout estimator. This tool is usually in a spreadsheet
application and allows salesforce members and sales managers to
create their own performance and payout scenarios. Providing this
kind of tool to the salesforce typically results in a significant savings
of time that translates into more time available for selling.
Training for Managers and Internal Resources

Often overlooked in plan implementation is the development of
training sessions for internal staff and field-based managers. Training
provides a learning environment for those responsible for all aspects
of administration and those who will use the plan. Why is this so
critical? Managers need to be equipped to explain the plan and
to use it effectively as a management tool. Internal resources that
will be responsible for plan administration need to understand the
details of the plan, including the performance measures, level of
measurement, crediting rules and formula used to calculate payout.
Consistency of the message is important here; presentation materials
and the notes used by the trainers must support the message the
plan has been designed to deliver.
Internal training should be done well in advance of actual plan
introduction so that all associated resources are equipped to execute
their roles in plan communication and administration. Internal training
FIGURE 7-3 Plan Documentation Checklist
Plan Mechanics Terms and Conditions Employee Relations

Plan effective dates Account retention and Benefit program impact
movement
Performance measures Ethics violations
Audit procedures
Performance standards Expense reimbursement
Bad debt, late receivables program
Formula mechanics
Dispute resolution Employment status:
Quota determination and new hires, terminations,
adjustments Plan exceptions promotions, transfers
Thresholds, caps, other Sales crediting Salary administration
limitations treatment adjustments
Territory definition
Time off impact
One final term is generally included in plan documentation: “The plan is not a guar-
antee of employment to any plan participant.”
is a task that is assigned to functional-area experts on the design

team. These team members have the most detailed information about
the plan, and they know the requirements for tracking, measuring
and reporting performance. The same people may also be charged
with actually conducting training sessions for employees who are
responsible for day-to-day activities related to plan administration.
In order to develop materials and provide training to internal
resources who support plan success, your organization must do a
good job of training sales managers in how to manage the salesforce
under the new plan. Sales management members of the design
team and steering committee should be asked about the approach
and amount of detail needed for this training. However, a training
session for front-line managers generally covers the following topics:
• How to use sales compensation as a sales management tool
• The organization’s business objectives and sales strategies for
the plan year
• Rationale for changing the old plan
• The new plan — objectives, key features, plan-calculation formula
and how it works (with practice examples)
• Performance objectives or goals and how they are assigned
• How to answer likely questions, including puts and takes for
various roles relative to the old plan.
Venue Choices for Plan Introduction

Based on the extent of change in the sales compensation plan,
potential transition issues and the time available, there are several
alternative approaches to plan introduction. However, no matter how
small or significant the alteration, broad and focused communication
of the leadership message about change is critical to success —
what is different, why and how it may impact plan participants.
That message and the related training/learning and discussion
should be delivered in the venue that is most appropriate for the
degree of change, as follows:
• For major plan changes, everyone should hear the same message
at the same time — for example, at the national sales meeting
or at a series of world region meetings. A high-visibility rollout
should include a general session in which the senior sales leader
delivers the leadership message about the change. Breakout sessions
for further discussion in smaller groups can also be held. This
large-scale introduction should always be preceded by front-line
and staff training on the new plan so that questions asked in
breakout sessions can be answered immediately and accurately.
Plan participants should leave the large-scale session with a
good understanding of the new plan, why it is important and
how they can succeed under it.
• For widely dispersed sales organizations, or in those cases where
the plan changes are essentially tactical and easily explained, using
alternative media (webcast or online training) can be effective.
Because the opportunity for dialogue is limited in this approach,
a very tightly scripted slide presentation accompanied by very
clearly articulated talking points is required. Helpful materials
to provide to the participants include the plan documentation,
FAQs and several illustrative scenarios.
Whether the introduction is at a national meeting or at local

sales meetings, personalized management discussions with the
salesforce after a more formal presentation will help ensure that
the message is clear, the plan details are understood and each
individual knows what he or she must do to succeed.
Monitoring Change and Measuring Success

After a new sales compensation plan is implemented, management
is interested in knowing about its effectiveness in contributing to
desired results so that any design problems can be caught early and
fixed. Thus, a well-defined process for monitoring the results of
change and assessing whether the intended results are being achieved
is an important element of the implementation plan. Examining
business success under a new sales compensation plan is, in fact,
a subset of analysis and evaluation that is typically associated with
plan assessment. Thus, an HR professional has the opportunity to
once again apply the knowledge and skills described in Chapter
5 to assist sales executives with post-implementation assessment.
Measuring the success of a new sales compensation plan typically
involves looking at the following two areas:
• Financial Results: Most companies are interested in improving the
sales return on dollars spent on sales incentive compensation.
In the past several years, many companies have successfully
shifted from thinking about sales compensation as an expense
to thinking about it as an investment. For this reason, both sales
executives and financial executives are interested in knowing
about financial performance under the new plan. Typical questions
include: Is the compensation cost under the plan appropriate for
the level of expected sales results? In general, are sales employees
more productive? That is, is the average sales per salesperson
improving compared to the previous year? Are the top producers
doing as well under the new plan as they did in past years? Is
the company growing its business as expected? Is the company
achieving its revenue and profit goals?
• Employee Acceptance: Essentially, sales executives are interested
in knowing about the plan’s effectiveness in retaining talent
and redirecting and/or reshaping salesforce selling behavior and
performance. The most typical questions they are likely to ask
are: Is the plan viewed as competitive and equitable? Do the field
sales managers feel it is effectively supporting and rewarding
desired behaviors and results? Is it motivating the salesforce to
alter its sales behavior in the desired manner? Were members
of the salesforce enthusiastic about the new plan when it was

announced, and were they still enthusiastic after the first payment
under the plan? These questions are the ones that the HR profes-
sional should anticipate sales executives will ask. However, if
these questions are not posed, a company should think seriously
about asking them after the new plan is in place.
As part of the implementation process, there should be a defined
approach and set time frame established for measuring success under
the new plan. Measurement should be performed both initially and
on a regular basis throughout the year. The HR professional should
encourage and work with sales executives to map out how the
company will measure success under the new sales compensation
plan based on the objectives the plan was designed to support.
Failure to measure success may mean that important inconsistencies
or drawbacks in the new plan are not recognized and addressed
in time to make a difference in sales behavior and business results
during the plan year.
The HR professional can help the company focus on the following
aspects of measuring success:
• Facilitating the assessment of plan effectiveness in achieving
desired objectives
• Surveying sales employees’ attitudes about the new plan.
Facilitating the Assessment of Plan Effectiveness in Achieving

Desired Objectives
When assessing the impact of a new sales compensation plan, it is
important to understand plan objectives; that is, to answer the ques-
tion: Why was the plan changed? Ideally, the answer to that question
will be contained in the new plan description and the presentation
materials used to launch the plan. The objectives for the plan and
expectations for results have already been agreed to as part of the
design process and confirmed when the plan was finalized.
Increasingly, companies are changing their sales compensation
plans to focus salesforce attention on one or more or the following
objectives: revenue growth, customer retention and expansion,
new product sales, sales profitability (for example, either gross
margin or product mix) and cost/productivity improvement. The

specific objectives of a particular plan will determine both the
effectiveness metrics and the types of analyses that should be
performed. However, at a high level, the goals of assessing effec-
tiveness within 30 to 90 days of launch are as follows:
• Determine whether management’s expectations for the new plan
are or are not being achieved.
• Measure to what extent or degree the expectations are or have
been realized.
• Identify potential problems areas in the plan that may have come
to light after the first payment under the new plan.
One area of plan assessment that is attracting a great deal of atten-
tion is sales compensation ROI. Top management is interested in the
extent to which sales compensation dollars, particularly variable pay,
are being paid for the same business sold last year or incrementally
new business sales. Therefore, compensation cost of sales (CCOS)
analysis is important. In particular, variable pay expense — commis-
sion, bonus or both — should be compared to gains in the following:
• Revenue (or revenue vs. plan)
• Margin — dollars, percent or both
• Other business plan goals; for example, customer mix, product mix
• Personal (salesforce member) productivity
• Retention of top performers (that is, lower than competitive
turnover).
Key diagnostic tests, should be performed using year-over-year

data to determine if sales compensation dollars are being spent
wisely. Those tests should include the following analyses:
• Percent achievement of (sales) financial goals — revenue and margin
• Pay dispersion
• Differentiation between top and marginal performers
• Pay: financial performance correlation; and pay: appraisal scores
correlation
• Year-over-year compensation variability, particularly for top
performers
• Quota performance distribution vs. desired or projected distribution.
The HR professional can provide guidance to the plan-assess-

ment process by ensuring that metrics are tailored to the plan’s
specific objectives and that data required for analysis is available
for measurement in future periods on an ongoing basis.
Surveying Salesforce and Manager Attitudes About the New Plan

After the plan has been introduced to the sales organization, it
is helpful to confirm that the message received was the message
intended and that participants understand the details and require-
ments. The best time to assess this is after the first payout under
the plan. An effective way to assess perceptions and determine
the degree to which the plan is impacting behavior is to conduct a
relatively short survey. Whether the survey is conducted online, by
email or by some other method commonly used in your company,
its effectiveness will be greater if the respondents are assured of
a reasonable degree of anonymity.
Sales management and the design team can use survey results
to assess the following:
• The degree to which participants understand the new plan
• The organization units and employees that may need additional
training
• Elements of the plan that are perceived positively and those that
may become problems
• Implementation issues that have been overlooked.
Conducting the survey year over year can help you and others on the
design team assess the degree to which plan changes are understood
and working as intended. The sample questionnaire provided in Chapter
3 can easily be tailored to your specific plan details and changes.
First-line sales managers should also be included in such survey
efforts. In addition to asking them the same questions asked of the
salesforce, two other sets of questions should be considered. First,
it would be helpful to know if front-line managers believe members
of the salesforce have changed their behavior as a result of the new
plan, and if so, whether they believe that the change is consistent
with desired results. Second, it would be helpful to know if front-line

managers believe that they would have benefited from additional
information or help in launching the new plan. Knowing if managers
feel additional help would have been beneficial is useful when plan-
ning for implementation training in subsequent years. Figure 7-4 is a
sample of the additional questions that could be asked of front-line
sales managers.
Midcourse Reviews and Corrections

While changing a plan during the year may cause some disruption
and consternation among participants, it is important for the design
team to focus on results at the end of each payout or performance
period. Rather than allowing issues and problems to accumulate
throughout the year, periodic reviews provide the opportunity to
correct critical errors. Finance and sales management should design
analytics and reports that provide senior management with the
information needed to assess results in a timely manner based on the
objectives the plan was designed to support. An example of a first-
period and ongoing-assessment checklist is presented in Figure 7-5.
Companies generally do not expect to make midyear changes to
the sales compensation plan. However, from time to time, changes
to the business or erratic economies cause companies to consider
midyear change because they are concerned about the loss of
talented people, important customers or both. In many businesses,
first-half results are often a clear indictor of whether a company
and its salesforce are on track with meeting plan goals.
Consider this case: Only 25 percent of XYZ company’s salesforce
was at or above the year-to-date revenue plan compared to 60
percent who were at or above the year-to-date plan in the same
period in the previous year. This result was during a period of
an erratic economy, and thus management was concerned about
what action to take. Ultimately, management decided to lower the
performance threshold to enable more members of the salesforce
to gain entry into the incentive plan. However, how they reached
that conclusion is as important as the decision itself. Their thought
process included the following points:
FIGURE 7-4
Salesforce Survey — Front-line Managers Supplemental

Questions
Check One Response

Questions
Yes No Unsure
The salesforce’s behavior has changed as a result of the
new sales compensation plan.
If you checked “Yes” to the previous question, has the
change been positive?
Please briefly explain your response.
Areas Where You Would Like Additional Help or Information

(Rate each statement, where 5 is the highest importance and 1 is the lowest, by
placing an “X” in the appropriate box)
Statement 5 4 3 2 1
The labor market(s) information our company uses to
set incentive pay rates
Base salary ranges and incentive targets for each field
sales job
How performance weights (individual vs. team) are
determined; and why they are what they are
The fundamentals of managing with incentive pay, e.g.,
how to talk with the salesforce about the plan, how to
answer questions
Communications, e.g., what to say/what not to say
How to explain why various performance measures
were selected for the plans
Performance planning, e.g., how to set objectives
Career-planning and incentive opportunities, i.e., how
to talk about what the salesforce can look forward to in
higher-level position(s)
Other (write in)
Additional Comments
Please share with us any additional comments that you have about the incentive
plan(s) that you believe will be helpful to us.
• Don’t overreact. Changing the sales compensation plan prematurely

sets a bad precedent.
• Revalidate growth goals; for example, where growth will come
from and whether the size of the goal is realistic relative to
market opportunity.
• Examine the history of business results. Q3 and Q4 in many
industries represent a significant proportion of the business. It
is wise to examine how business is trending as Q2 draws to a
close. If it appears that business is rebounding, even slowly, a
change in the compensation plan may not be required.
• Examine payout history. For example, what percent of the salesforce
was “in the game” in the same period during the previous year?
• Examine productivity, particularly of top performers. What is the
percent of top performers this year compared to the previous year?
The HR professional can serve as the voice of reason in situa-

tions where midyear plan change is being considered. Because
FIGURE 7-5
Initial Assessment Checklist
Yes No Question for Analysis (Financial, Survey, Performance) to Answer

Do the members of the salesforce fully understand the structure of
their compensation plan and their expected performance on the plan?
Is the organization performing as expected on the compensation plan?
Is payout correlated to performance? (Are par performers earning
target or above, “best” performers earning upside as anticipated and
marginal performers earning significantly less than target?)
Are all components of the plan operating as expected?
Are total pay levels and incentive pay levels positively correlated with
business (revenue, volume, profit, market share) performance?
Do all members of the salesforce fully understand their performance
expectations? Do they understand how these expectations relate to
their compensation plan and to the company’s total goals?
Is the company performing as expected with regard to attaining its
sales goals?
Does goal attainment significantly differentiate top performers from
average and marginal performers? Is performance distributed as
expected across the organization?
Has the company provided accurate monthly performance data on
each measure to corporate? To each participant?
Has the company performed as expected on market, customer and
financial metrics?
most companies are committed to not compromising their sales

pay-for-performance culture, management needs assurance that
midyear plan change is the right action to take. For that reason,
the HR professional should play an informed and active role in
midyear plan-change discussions.
Summing Up
No sales compensation plan is complete until the company imple-
ments it and evaluates the results it hopes to achieve. Was the plan
launched effectively? And is it doing what the company wants it
to do? The only way to authoritatively know the answers to these
two important questions is to ensure that a carefully thought-out
implementation plan is developed and used to launch and evaluate
the new plan.
Understanding why a plan was changed and what results are
desired from it are key considerations when evaluating its success.
It is important to know whether members of the salesforce are
being motivated and rewarded to achieve the results desired under
the new plan. And in situations where the expected outcomes are
not being achieved, it is important that the company acts quickly
to take corrective action. As explained throughout this chapter, the
HR professional can make important contributions to the success
of a new sales compensation plan by playing an active role in
developing implementation tools and materials and by suggesting
approaches to measure the plan’s success.
Aligning Other Rewards and Recognition Programs 159
8
Aligning Other Rewards
and Recognition Programs
S ales compensation is a critical link in the business-management

chain. However, it is not the only link. Well-defined performance
objectives, positive feedback based on a formal assessment process,
and formal and informal recognition programs can be used by sales
leaders to create and foster a positive and productive salesforce
culture. While the sales compensation plan may provide the most
immediately visible feedback on performance, companies frequently
find that the plan alone cannot do the whole job of rewarding and
recognizing contributions. Thus, there are other programs that are
used to direct, motivate and reward the salesforce.
HR usually is the function responsible for both base pay and
other corporate rewards programs. You are therefore likely to be
involved in contributing to the design of other programs for the
salesforce, as well as assessing the impact of such programs on
the salesforce and advising management on the recommended
ways to use them. In the following sections, this chapter describes
those programs and also provides suggestions about how they can
be integrated with and complement the sales compensation plan:
• Tie to Total Rewards
• Pay Increases
• Formal and Informal Add-on Programs
• What Can Possibly Go Wrong?
Tie to Total Rewards

As described in Chapter 2, sales compensation is likely to be only
one element of the total rewards offered to the salesforce by your
company. The total compensation package for the salesforce may
include one or all of the elements that are available for nonsales-
force employees in a company.
With few exceptions, members of the salesforce are eligible for

direct and indirect financial rewards, including benefits, some
type of base pay and incentive/variable pay (also known as sales
compensation). Base pay and benefits are typically designed to
provide a level of financial security to the salesforce; however,
these may be provided at a somewhat discounted rate because
the salesforce is eligible for sales incentive compensation. Formal
or informal add-on programs may also be components of the
total rewards system for these jobs. Such programs are typically
designed to recognize and reward skills, achievement, tenure or
a variety of other factors that contribute to the company’s success.
While base pay, variable pay and benefits are critical elements in
the total rewards picture for the salesforce, other programs may
be important to provide support for affiliation needs/recognition
and to provide positive reinforcement related to work content.
The other incentive programs described in this chapter are used
as complements to the sales compensation plan. They include
formal programs such as base pay increases, short-term contests
(quarterly), long-term recognition programs (annually) and informal
practices. The HR professional should be familiar with these and
should be prepared to help sales executives properly align them
to the sales compensation plan.
Pay Increases
The “100-percent commission” sales job still exists in some industries,
including insurance and stock brokerage, as well as transaction-selling
businesses that are conducted over the telephone or online and in
retail-mall kiosks. However, the cash compensation package for most
sales jobs includes an element of fixed pay — either wage or salary —
depending on the type of sales job and its FLSA status. Historically,
many sales jobs have been paid a uniform salary (that is, the same
fixed pay was available for each sales job in a company, so no salary
range or band was used for those jobs). This fixed pay approach has
become less dominant, and sales jobs generally are paid based on
the wage or salary structure available for jobs at similar levels and
with the same exemption status within the company.
Salary is a fixed payment made with defined frequency; it may be

adjusted to reflect the cost of labor, skills, seniority and performance.
A wage is the money rate, expressed in dollars and cents, paid to an
employee per hour. Whichever type of payment is used, base pay
provides some financial security to the salesforce, and a base pay
increase can be the most predominant additional program available
to motivate and reward performance of a salesforce, particularly if
it is adjusted based on specific drivers.
Base salary is earned through the satisfactory performance of
the primary duties of a job and any additional (secondary) activi-
ties required by a company’s management and/or customers. Each
person’s base salary is typically structured to compensate for the
level of skill, experience and dedication brought to the job. Several
drivers are associated with a change in base pay: company initiatives,
changes in the job, new market realities, incumbent performance
or tenure. Whatever the driver, base pay delivers a message to the
salesforce that should complement the message associated with the
sales compensation program: “This is the performance and these
are the behaviors we need from you in this job.”
As the HR professional working with sales, you may be charged
with the responsibility of ensuring that pay levels are competitive
and that the range of pay is appropriate for the job. As described
in Chapters 4 and 5, you will need to confirm the charter of the job
and the factors used to price the job to the market. Once the salary
or wage program is defined for the sales jobs in your organizations,
the process and tools used to determine any pay adjustment must
also be aligned with the requirements of the jobs.
In nonmerit-oriented cultures, base pay may only reflect the tenure
of individuals and cost-of-living adjustments (COLA). However, in merit
pay plans, a merit increase in base salary is generally based on a formal
performance-review process that factors in the primary aspects of the
job. This program frequently includes performance measures outside
the incentive plan such as “how” the results are achieved. Through
appropriate factors or objectives, the program should accurately reflect
the differences between sales jobs and other jobs at the same level in
the organization. If you are responsible for performance-management
programs at your company, you will need to confirm that the process,
definitions and program details reflect the expectations for the sales
job, and truly reflect the right performance standards.
Formal and Informal Add-on Programs

As described in Chapter 2, the elements of total cash compensation
for the salesforce are base pay and an incentive compensation oppor-
tunity. Based on company and market practice, a benefits plan may
also be available. These components will meet the financial security
needs of the salesforce. There are, however, work experience needs
such as affiliation and work content that can be best supported by
other formal or informal recognition practices and programs. Two
such types of programs commonly used with a sales organization are
contests and recognition programs. Figure 8-1 provides a summary
of the differences between these two types of programs.
Contests
Sales contests are used to stimulate the achievement of short-term
sales objectives. Contests and special performance incentives for
field force (SPIFFs) typically are developed with sales and marketing
and may focus on a particular product, market or type of customer.
Sales contests are an effective tool for focusing salesforce efforts
and can be useful in recognizing specific achievements that are
FIGURE 8-1
Contests and Recognition Programs
Informal Recognition Contest Formal Recognition

Program
Other Names Pat on back (also SPIFF Rewards and
(AKA) known as, “Atta recognition
boys/girls!”) spot
awards
Time Frame Immediate Shorter term Longer term (annual
(1-6 months) or multiple years/
consistency)
Objective Provide immediate Reward specific Reward-balanced
positive reinforce- achievement of performance over a
ment of contribution short-term objectives longer period of time
through acknowl- to drive consistency
edgement and praise and support culture
not rewarded through the sales compensation plan. Examples of

contest objectives are provided in Figure 8-2.
Although cash is the most typical reward for contests, payment
may also be in the form of prizes, plaques or public commendation.
Unlike earnings under the sales compensation plan, this compensation
should always be considered add-on rather than at-risk compensa-
tion. It is generally funded from outside the sales department. For
this reason, SPIFFs or contests are typically not included in salary
benchmark data by the large survey houses. However, some survey
houses have started to collect this information in order to report
on practices, policy or total cash compensation components.
As described in Chapter 3, overuse of SPIFFs or contests is a
potential problem. While they are considered an effective motivator,
as the HR professional you will want to ensure the following:
• SPIFFs are not being used as a sales management safety net when
the sales compensation plan does not appear to be paying top
performers appropriately (for example, when sales quotas are
considered unreachable but contests can deliver incentive payout
regardless of quota achievement).
• Overuse of contests is not diluting focus on the key measures
in the incentive plan (for example, when product marketing
introduces several SPIFFs for new products or products under
competitive threat, even though the products are not critical to
achievement of the business plan).
FIGURE 8-2
Illustrative Contest Objectives and Parameters
Contest Measures for This Year

• Q1: Stimulate sales of Product A and Product X
• Q2: Increase market penetration in defined urban geographies
• Q3: Introduce Product Line CD extensions
• Q4: Convert competitive accounts
Eligibility
• Inside and field salesforce, customer-service reps
• Sales and customer service front-line managers
Award
• Cash awards, based on level of achievement
• “Everyone can win”
• Members of the salesforce are not frequently forced to choose

between where they should spend their time — contest or sales
compensation plan measures (for example, acquiring new customers
or selling new products vs. retaining and growing current accounts).
• A correct balance is struck in targeting the right number of
“winners” (achievable but exclusive) and the significance of the
reward (attractive but not distracting) in order to support behavioral
motivation best practices.
• The contest measures are aligned with the philosophy, ethics
and business focus of the organization.
Sales contests and SPIFFs have proven to be tools that are used
too frequently or for inappropriate reasons (such as delivering
pay in a down year) by some companies. Organizations should
therefore strive to keep the total payout for SPIFFs at or below 10
percent of the total sales compensation budget.
Rewards and Recognition Programs

Recognition programs or rewards and recognition (R&R) programs are
widely used in many industries. Many types exist; the most common
ones used by customer-facing organizations are listed in Figure 8-3.
Within the sales organization, you are likely to see highly regarded
R&R programs such as the trip or quota club, which are designed
specifically to reward the highest sales achievers and thus those that
have significant sales compensation earnings. However, there are
other reasons to design and implement a recognition program that
acknowledges and recognizes the contributions of many members of
the salesforce. Recognition and praise, whether informally given or
as part of a formal program, offer many positive benefits, including
increased engagement, higher satisfaction and greater loyalty. They
also frequently increase productivity in the long run. These programs
are critical elements in the total rewards picture because they meet
specific needs beyond financial security and are useful in motivating,
rewarding and retaining valued employees.
Rewards and recognition programs are generally chartered at the
corporate level and may be developed and administered at that
FIGURE 8-3
Types and Examples of Recognition*
Type and Description Examples

Formal: Financial Awards: Programs Lump-sum bonus
A structured that provide either a fixed Additional cash incentive,
program designed cash award or are based on a e.g., contests
to reward and percent of the employee’s pay. Additional paid time off
recognize Some cash awards programs
Stock options
individuals for can provide additional
high levels of employee benefits that have a Paid trip, e.g., quota trip
achievement stipulated dollar value. Stock award program
according to Gift certificate
specific criteria. These may be short-term
Specialized training
contests or longer-term
recognition programs.
Symbolic Awards: Plaques and trophies, e.g.,
Recognition programs president’s club,
designed to provide a Tenure or service awards,
tangible award or memento e.g., 10-year club
that is valued by the Achievement awards, e.g.,
recipient. rep of the year, 1005 club
Type and Description Examples

Informal: Verbal Recognition: Management thanks in
An expectation Provides praise directly to public or private
of managers/ the individual or team. Thank-you card
supervisors to give Testimonial from senior
praise in public leadership
or private, with or
Customer feedback
without a tangible
award. Public recognition
Spot Award: Paid meal
Low or minimal cost, Tickets
no formal document or Gift card
extensive administration;
provides immediate
recognition.
*Recognition at Work: Crafting a Value-Added Rewards Program (WorldatWork, 2006)
level or at lower organizational and/or geographic levels. Members

of the salesforce may therefore participate in R&R programs that
are companywide; specifically designed for customer-facing jobs; or
developed and administered for their team, specialty or geography.
Whichever the case, recognition programs, like the sales compensation
plan, must provide a reward that is based on performance. However,
these programs focus on long-term objectives and continuity. They
may use objective or subjective performance measurements, or both.
Unlike the sales compensation program, there are several types of

rewards that can be offered: cash, prizes, intangibles (such as time
off), plaques and other visible awards. You may be asked to weigh in
on the most appropriate type of award for these programs. In order
to provide awards that are valued by the recipient, fact-finding should
be completed to determine what would be most valued by eligible
participants. A rule of thumb is that the award should be both valued
and visible. That is, there should be some ability to receive acknowl-
edgement from others for having received it by having the award
made publicly, or by being externally visible in some other manner.
While management may believe that cash is the most valued reward
and the easiest to implement, rewards need not be financial to be
valued. Providing even more cash incentives has several disadvan-
tages: it dilutes the message of the sales compensation program and
limits the “external message” value of the award because it is not
visible to others. Other tangible awards, such as trips or merchan-
dise, provide high visibility without diluting the sales compensation
plan objectives. An alternative is PTO (paid time off), which may
be considered as “extra pay,” but retains the advantages of other
tangible awards — visibility (without divulging the monetary value)
and the ability to share the award with loved ones.
Nontangible awards can include participation in a valued meeting
or seminar, or public acknowledgement of the person’s contribution.
For example, verbal and public recognition of an individual’s contri-
bution by someone “two levels up” (for example, the second-level
manager recognizes a sales representative) is generally consid-
ered highly motivational. In fact, in many studies, employees cite
nonmonetary recognition as having a longer-lasting impact than
monetary rewards.
Budgeting and forecasting should be reasonably accurate, or
management might endanger the motivational power of the recogni-
tion program by retroactively trimming the eligible population to
stay within budget. Companies planning the budgets for intangible
recognition programs like trips tend to use 1 percent to 2 percent
of the total sales compensation budget as a guideline. This would
represent approximately 20 percent of the salesforce achieving the
recognition level and a prize value of 5 percent to 10 percent of

target sales compensation for the achieving population.
Informal Recognition
Informal recognition can take the form of a spot award or a simple
personal and verbal statement of appreciation. While spot-award
programs are less commonly used in sales organizations, there
are several advantages to using this type of less-formal recogni-
tion: the cost is generally low, the benefits of immediate positive
reinforcement are high and the possible negative consequence
of monetary or career envy is low. While this type of program
should have guidelines and a budget, it is typically not considered
a formal recognition program and can be used very successfully
by managers of customer-facing employees to reinforce desired
behaviors or outcomes.
Possibly the most important factor for retaining key members of the
salesforce is the relationship with the front-line manager. Thus, in your
organization, one of the most critical practices you can reinforce is
the value of informal, immediate praise and recognition. Your front-
line managers should be expected to acknowledge and recognize the
contribution of the salesforce in all aspects of the job — not simply
volume or quota achievement. This is truly informal recognition and
may be the most effective tool your managers possess for acknowl-
edging their employees’ value and contributions.
To be successful, you will need to ensure that the contributions
rewarded by a thank-you card or a spot award are consistent with
company philosophy, job requirements, and the standards set forth
in your performance appraisal system. While extensive training
may not be required for managers, a consistent set of guidelines
and periodic assessments will help ensure that your salesforce
is being recognized for contributions that cannot be rewarded
through the sales compensation plan.
What Can Possibly Go Wrong?

Additional reward programs such as merit pay increases, contests
and recognition programs can be very positive reinforcers and
motivators. However, unless feedback is clear and objectives are

well-defined and do not compete from program to program, prob-
lems can develop. Symptoms to watch for include the following:
• Disregard for company policies (“Win at all costs”)
• Friction between management and the salesforce (“I want to win
this award, not focus on your objectives”)
• Motivational let-down (“I expected a good raise”)
• Confusion (“What is it they want us to do?”)
• Lack of team cooperation (“If you win, I lose”).
Summing Up
Pay increases and reward programs are useful management tools
for recognizing and rewarding skills, behaviors and achievements
not rewarded through sales compensation, or for reinforcing the
behaviors required to succeed. To be successful, programs must
support your company’s culture and philosophy, and align with the
business strategy. (For example, rewarding for tenure may be at odds
with the “pay for performance” objectives of sales compensation.)
It is critical to ensure that contests and other reward programs do
not deliver a conflicting message to the salesforce about desired
behaviors and results.
Governance of Sales Compensation Programs 171
9
Governance of Sales
Compensation Programs
he fox is guarding the henhouse.” This cliché captures

some of the concerns of both HR and finance regarding
the effectiveness of sales compensation plans. Sales is often the
only organization that fully understands how corporate strategy
will be translated into sales strategy, selling processes, sales roles
and ultimately the sales compensation plan. If other functions or
resources come into the picture after these decisions have been
made and attempt to influence compensation design and adminis-
tration with insight and authority, they could be buried within the
compensation plan. Crediting issues, gaming opportunities, pay
inflation and extra expense can be interwoven so tightly in the
final sales compensation plan that it is almost impossible to address
and resolve them after the fact. On top of this, shareholders and
lawmakers impact the process through recent legislation such as
Sarbanes-Oxley. Technically, the CEO and CFO can go to prison if
errors that are deemed unethical occur in the sales compensation
plans and it is found that there was knowledge of these errors or
“inadequate controls.” That fact alone has driven management to
exert increased control and governance over sales compensation.
While terms and conditions (T&Cs) have always been a fundamental
element of a well-designed sales compensation plan, they focus
primarily on explaining various administrative and employment
aspects and are often not enough by themselves to support gover-
nance. Governance implies that a system for authoritative control is
in place related to the program. While some sales executives may
perceive governance as excessive control, in fact a good governance
model can be applied to sales compensation without robbing the
organization of its flexibility to respond to labor markets, customer
needs and competitive opportunities. In some cases, it may even

benefit sales employees, as T&Cs are beefed up to include formally
documented dispute and exception processes.
With that in mind, this chapter has two objectives presented in
the following sections:
• Compensation Governance
• Communication and Process Gaps
• Common Sales Compensation-related Governance Problems
• Demystifying Sarbanes-Oxley
• A Detailed Governance Model
• Leadership
• Central vs. Local Control
• Meetings, Voting, Notes, Documentation.
First, this chapter describes the challenges associated with effective

sales compensation governance. Second, it explains how you can
address and resolve those challenges at your company. Examples
and techniques are provided that have been successfully used by
leading companies.
Compensation Governance
Governance associated with compensation programs begins at
the highest level of control. Board governance is essentially the
checks, balances and due diligence necessary to ensure that C-level
(CEO, COO, CFO, CXO, etc.) executives do not make short-sighted
decisions that benefit themselves at the expense of shareholder
value. Because of the complex legal, accounting and reporting
issues that must be considered, the compensation committee of
the board of directors typically handles executive compensation
packages for top executives.
Sales compensation plans are short-term and cash-based (as
opposed to long- term and equity-based) and do not typically
come before the board compensation committee for approval. It
is generally believed that the CEO, COO, CFO, head of HR and
head of sales have enough counterbalances among them to come
to a win-win solution. However, because this is not always the
case, there are several aspects of sales compensation plans that

require sound governance principles.
As discussed in earlier chapters, sales compensation design and
administration is a complex cross-functional exercise. If any one
participant becomes too strong in the process, or if ideological
gaps exist between participants, governance becomes even more
important to sales compensation.
Communication and Process Gaps

There are four basic gaps that a sound governance model helps to
overcome. Because these are the places where corporate strategy
and policies can lose their meaning and power if companies are
not careful, you should be familiar with these gaps and how to
close them at your company. They include the following:
1. T
he gap between senior management and front-line managers
2. T he gap between functions (such as HR, sales and finance)
3. T he gap between business units (BUs) with distinct profit-and-
loss (P&L) responsibility
4. T he gap between geographies that may or may not have different
laws and subsidiaries (legal entities).
Gap Between Senior Management and Front-line Managers

The gap between senior management and front-line managers
typically is a problem of communication and alignment.
Communication. If senior managers do not take pains to communi-
cate strategies and tactical plans to the field, it can be expected that
there will be deviation, malicious or not. It takes many repetitions of
simple concepts to build a unified vision. Therefore, an investment
of time is necessary. However, field communications is an area in
which there is significant underinvestment by senior management.
Alignment. Alignment of plans is important to ensure that top
management’s equity and profit-based plans do not compete entirely
with middle management’s cash and revenue-based plans and the
front line’s revenue and activity-based plans. This is a check that
is often best performed after distinct role-based sales compensa-
tion plans have been designed. It is also something to be wary
of if sales management’s compensation plans are designed in a

separate effort from the front-line plans.
Both communication and alignment are areas where you can have
considerable impact as the sales compensation plan is being designed
and during rollout and ongoing follow-up. Poor communication and
alignment put governance in a deficit position from the start.
Gap Between Functions

The gap between functions is generally one of communication
and expectations; this is one of the most difficult tactical issues
to control during the sales compensation design process. Different
functional goals may result in competing agendas, and intelligent
compromise may be difficult to achieve. Clearly defined functional
roles and accountabilities are critical to closing any difference in
expectations. The concept of segregation of responsibilities is
important to good governance (for example, if finance is account-
able for quota allocation, then the exposure to cost over-runs due
to low goals should be less than if quotas are owned by sales
management alone). If the aforementioned functions are the last
accountable reviews for various distinct metrics and conditions, the
organization can feel somewhat more comfortable that irregularities
have been ironed out and a consensus solution for the common
good has been achieved.
Gap Between Business Units

The gap between business units (BUs) is a more delicate matter.
The use of business-unit P&L responsibility to empower leaders
yet hold them accountable for results is a powerful management
tool. However, these BU leaders may not have a good view of the
complete picture of success for the corporation as a whole. On
top of that, their management skills may not be as strong as those
of the corporate leadership team. They may lean heavily on a few
management tools (such as the sales compensation plan) or capitalize
on approaches or models that do not make the most sense for the
company as a whole or for the long term. These leaders are often
internal customers of shared corporate services that must work
with them to deploy sales compensation plans. Strong operating

principles and design frameworks that provide reasonable local
flexibility with some centralized control are necessary to bridge
this gap. The same governance principles must also apply to the
growth segments as well as the mature lines of business, regardless
of how much more challenging their performance goals might be.
Gap Between Geographies

The gap between geographical regions within a multinational
corporation is still a sensitive issue despite years of moving toward
globalization. The business practices accepted in some countries
may appear flawed at best when taken out of context and printed
on the front page of the Wall Street Journal. HR professionals
have long recognized the difficulty of deploying consistent sales
compensation plans across geographical and political boundaries.
Whether it is the tax treatment of bonuses in Canada or the advance
notice of intended changes required by the Works Councils in
Europe or the less aggressive pay mixes dictated by some Asian
cultures, it has always been challenging to manage across these
complex organizations.
True, sales resources in these countries are becoming more recep-
tive to traditional North American pay-for-performance structures.
But in spite of U.S.-based companies’ recent focus on business
ethics and governance, some remote regions do not always feel a
sense of urgency to get on board. Several companies have been
subject to Foreign Corrupt Practices Act violations due to actions
of improperly directed and motivated sales people. Corporate
governance processes should be in place that can be used with
appropriate adjustments across geographies, as those regions are
ready to implement a formal control system.
Common Sales Compensation-related

Governance Problems
Problems related specifically to the sales compensation plan are posi-
tioned on top of these systemic issues that require an authoritative
system of control. Sales organizations have historically maintained
their own control over the sales compensation program, contrary

to the new focus on the importance of a sound governance
process and distinct accountabilities. As the HR professional
in your organization who works with sales, you should be able
to talk with sales executives about the benefits of improved
processes and clear roles. The best approach to building support
for governance within sales management may be to focus on the
frustrations that sales already has with sales compensation (see
the assessment results from Chapter 5). The most common issues
associated with a lack of governance in the sales compensation
program are as follows:
• A “let’s make a deal” approach to sales compensation plan design
that results in multiple plans for one job or different measures
for the same job
• Missed targets, either sales or expense or both, because: (1)
quotas are adjusted downward without regard for the total busi-
ness target that needs to be achieved, or (2) upward adjustments
are made to sales credit, the payout formula or the final payout
based on a plan exception or management discretion
• Unintended negative behavioral consequences, occasionally
resulting in litigation
• Frequent calculation errors and either disgruntled members of
the salesforce (if payout is late or there is an underpayment) or
financial issues because of overpayments.
With the recent focus on enhanced governance infrastructure,

one does not have to dig very deep to uncover criminal and
civil cases based on lapses of sales compensation governance.
The interesting thing about most of these cases is that while
finance is often focused on the expense of the sales compensa-
tion plans, the most serious infractions involve dysfunctional
behaviors and illegal activities to drive the revenue side of the
equation. If the plan’s CCOS (compensation cost of sales) is
over 5 percent of revenue, it is definitely “material,” but cost
overruns can be written off to “unforeseeable circumstances”
and only impact two to three stakeholders (salesforce, senior
management, shareholders), while improperly booked revenue

involves a more premeditated act and draws in the fourth stake-
holder, the customer.
The following are recent examples of such dysfunctional behav-
iors and illegal activities:
• Both the CEO and the head of sales of a large software company
pleaded guilty a few years back to federal securities fraud. They
were guilty of, among other things, extending the last month of
fiscal quarters (to 35 days in some cases) to allow additional sales
to be booked, thereby exceeding analyst estimates and fraudulently
driving up the stock price and the value of their options.
• Several executives, including members of the salesforce, at a large
wholesale telecommunications company were convicted of criminal
charges because they exchanged dark fiber (unused fiber-optic cable)
between two companies, essentially yielding no net flow of goods
or services in either direction, and yet booked the transactions as
sales with associated revenue. The sales compensation plans in
place had extremely aggressive pay mixes.
• Another telecommunications company was named in civil litigation
based on “cramming,” the act of adding services to a consumer’s
bill that were not ordered. The Communication Workers of
America (CWA) backed the telesales resources involved (against
management) based on the belief that the sales compensation
plans encouraged this activity.
• A manufacturing company experienced dramatically increased
sales compensation costs, and ultimately stock price volatility,
after senior executives decided to “invest” in several customers in
exchange for excessively large orders of product. The customers
went public and made money on their investments, then went
bankrupt because their business models were flawed. The members
of the salesforce assigned to those accounts received large commis-
sion payouts, but the customers failed to pay their invoices.
• Sales representatives at a consumer packaged-goods company,
who needed to move extra product to hit their goals, called on
cooperative retailers who would accept extra inventory stashed
in their stockrooms.
• A publishing company that oriented its sales compensation plans to

drive for new accounts found that several salesforce members were
canceling existing accounts so that they could sign them back up as
“new” and receive increased payouts under the sales compensation
plan. Customers neither saw nor felt any change in their status, but
profitability at the company was negatively impacted.
The common factor for most of these situations is that sound

compensation administration and detailed reporting would have
probably uncovered them sooner and allowed management to
mitigate the damage. The shorthand for these processes and reports
is the “adequate controls” described in Sarbanes-Oxley.
Demystifying Sarbanes-Oxley
In 2002, the U.S. Congress passed the Sarbanes-Oxley Act as a
response to scandals at Enron, Tyco and other public companies.
The act is intended to “protect investors by improving the accu-
racy and reliability of corporate disclosures.” In reality, House
Resolution 3763 is 66 pages of well-meaning but vague legalese.
(See Figure 9-1 for a list of its contents.) Many of the act’s 11 “titles”
(chapters) address issues such as auditor independence and increased
penalties for corporate fraud. These have very little impact on the
HR professional’s involvement in sales compensation design and
administration. The sections that do have implications are fairly
isolated and short:
• Section 302, Corporate Responsibility for Financial Reports: This
section states that the CEO and CFO must certify each annual or
quarterly report. It then goes on to state what they are certifying —
“... that ... the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements ... not misleading ... ,” that “... the signing officers are
responsible for establishing and maintaining internal controls ...
designed ... to ensure that material information ... is made known
to such officers... ,” and that there will be an “... audit ... [to
identify] all significant deficiencies in the design or operation
of internal controls ... .” Essentially, this is stating that there is
no plausible deniability when it comes to the kinds of mistakes

described above in a public company’s financial statements.
• Section 401, Disclosures in Periodic Reports: This section states
that a company must disclose off-balance sheet transactions
that have a “... material current or future effect on financial
condition ... .” This could be construed as impacting several
types of sales transactions that include related binding promises
or financing.
• Section 404, Management Assessment of Internal Controls: This
section is very similar to Section 302, but adds the responsibility
for “adequate” internal controls and management’s responsibility
for assessing and reporting on the controls’ adequacy.
FIGURE 9-1
Contents of Sarbanes-Oxley Act

Title I — Public Company Accounting Oversight Board (establishes this body with its
composition, funding and authority)
Title II — Auditor Independence (sets rules for selection and rotation of independent
auditors for public companies)
Title III — Corporate Responsibility (outlines the responsibilities of the audit

committee, insider-trading issues and penalties)
Title IV — Enhanced Financial Disclosures (sets a code of ethics for top execu-
tives and establishes new reporting requirements to demonstrate internal
controls)
Title V — Analyst Conflict of Interest (establishes new rules for securities analysts and
the relationships they can have with publicly traded companies)
Title VI — Commission Resources and Authority (further outlines authority and prac-
tices of the commission)
Title VII — Studies and Reports (reviews impacts of accounting-firm consolidation and
investment-bank restructuring)
Title VIII — Corporate and Criminal Fraud Accountability (establishes criminal penal-
ties for altering documents, protection for whistle-blowers and sentencing
guidelines)
Title IX — White-Collar Crime Penalty Enhancements (increases penalties for mail and
wire fraud, violation of ERISA)
Title X — Corporate Tax Returns (establishes that all corporate tax returns must be
signed by CEO)
Title XI — Corporate Fraud and Accountability (addresses additional rules and guide-
lines for document tampering and other offenses by corporate officers
or board members, increases penalties established under the Securities
Exchange Act of 1934)
A Detailed Governance Model

A more detailed outline of “adequate controls” is necessary, primarily
because, as with most government legislation, it isn’t spelled out
for the concerned executive anywhere else. Three basic concepts
should be addressed for governance to be adequately addressed:
• Accountability: It must be clear which functions and people within
the organization are accountable for which results and adherence
to which policies. This accountability should be reinforced by
the organizational structure, performance metrics, performance
evaluation and compensation plans themselves. It should ensure
that the intended results are built into each person’s job descrip-
tion and that only people who follow the rules and deliver the
intended results receive positive evaluations and target (or higher)
bonuses. The organizational structure issue is more a function
of removing obstacles and improving “lines of sight” than of
developing any groundbreaking design.
• Alignment: The strategies and goals of the organization must be
clear and must deliver value to shareholders. The processes and
systems required to support them must align with those objec-
tives. Where necessary, explicit decision- support tools should
supplement the processes. Overall, implementation of this align-
ment creates a cultural expectation that all activity must drive
real, substantial shareholder value (not just short-term increases
that allow top executives to exercise their options). This culture
should be intolerant of fraud and supportive of whistle-blowers.
• Accuracy: Data to support financial reporting and sales compensa-
tion crediting must be accurate from all regions and channels.
There should be a paper trail to support auditing of that data.
Rules and regulations should be accurately communicated and
enforcement and penalties accurately applied. Performance evalu-
ation must be based on an accurate picture of that performance
and payout formulas accurately applied and calculated.
As complex as this may sound, it is merely a representation of

sound business practices when displayed in its basic state (see
Figure 9-2). Documentation of these activities and programs is the
FIGURE 9-2 Three-sided Governance Model
Accountability Accuracy
• Reporting structure • Data reporting
• Job definition • Audit-ability
• Metrics • Adherence, enforcement
• Performance evaluation • Performance evaluation
• Compensation • Communication
Alignment
• Shareholder interests
• Processes systems
• Culture
• Strategy, goals
• Decision support
element that is often missing. Companies tend to view documen-

tation as important to the degree that they have had issues with
enforcement. Companies without a history of legal problems or
with strong cultures of accountability may keep basic electronic and
paper files of meeting minutes, votes on key decisions and reported
metrics. However, companies negatively impacted in criminal or
civil investigations have often committed to go the extra mile and
document every step of every process.
Excluding enforcement of generally accepted accounting prin-
ciples (GAAP), many of these activities or concepts are within
HR’s scope of expertise. You should work with finance or the
internal audit team to assess each area, looking for conflicts of
interest, weak systems or undocumented processes, and to make
recommendations for improvement. The deadline for responding
to Sarbanes-Oxley has come and gone, and many companies are
still struggling to demonstrate “adequate controls.”
Leadership
Ultimately, the accountability comes back to executive leadership.
Companies that are best prepared to deal with sales compensation
governance issues are those that have top executives that will stand
up, accept ownership and champion the program. HR has as much
potential to lead this effort as any function. (Note: A powerful ally
for HR in this effort may be the legal department if it is willing
and able to exert an opinion on sales compensation governance.)
The ideal executive champion should do the following:
• Have some experience with the motivational power and potential
complexity of sales compensation.
• Be able to influence and marshal resources from other departments.
• Represent decisions made by the sales compensation team and
outline the supporting arguments for those decisions to outsiders.
• Have the authority to restructure the composition of the sales
compensation team as deemed necessary to execute on the
company’s strategy and governance model.
Keep in mind that one trade-off with a strong leader in sales

compensation is the increased importance of checks and balances
for approvals. If your organization is still struggling with the deploy-
ment of effective governance processes and practices, look first to
the leadership of the effort for serious commitment and the other
characteristics described here.
Central vs. Local Control

A strong, central, corporate leader of sales compensation, while
a tremendous asset, will also sometimes lead to questions about
centralized versus local control of sales compensation. The pres-
ence or absence of regional leaders who share a strong sense
of accountability, alignment and value of accuracy will further
complicate these questions. The most successful companies typi-
cally have structured a framework that explicitly retains certain
decision rights for central corporate resources while empowering
local resources to make other specific decisions to suit their unique
business environment and strategies. These decision rights should
be documented in both the governance framework and the sales

compensation T&Cs. A logical division of these might be as follows:
• Centralized: Market-benchmark percentile, role eligibility (there
must be an objective standard as to the skills and experience
necessary to be assigned to a role, and participants should not be
able to make that judgment themselves), performance measures,
some formula mechanics, quota-setting process, most crediting
rules (typically matching the quota-setting principles regarding
duplicate or split credit), key policies concerning employment
status (for example, transfer, leave of absence), pay administration.
• Localized: Pay level, pay mix, upside, weightings of performance
measures, some formula mechanics, pay frequency, individual
quotas, supplemental policies.
Additional responsibilities can be moved in either direction as

manpower and culture warrant. As more activities and decision rights
are moved toward the local geographies or BUs, the central corporate
lead will want to consider the need for “satellite” design teams to
parallel the design work and process taking place at headquarters.
This assumes that there are local/regional resources in finance,
marketing and HR that are up to the task. Likewise, as responsibility
moves outward to local regions or BUs, most companies will increase
investment in the audit side of the equation. Empowerment is smart,
and scrutiny is smarter. An inability to implement tailored tactics is
a symptom of a sales compensation program that is too centralized.
Plan proliferation, increased cost and loss of control are symptoms
of a program that is too decentralized.
Meetings, Voting, Notes, Documentation

As your organization works through the carefully structured and
documented process you created based on the information in
Chapter 4, you will have several scheduled or ad hoc meetings to
confirm plan issues from the assessment, plan- change objectives,
expense budgets, system capabilities and testing requirements,
communication strategies, mid-period plan (or quota or territory)
changes and emergent-issue resolutions. To conform with good
governance principles, you should make sure that these meetings

are attended by the full team (sometimes a tremendous challenge in
schedule management — you may need to postpone meetings that
are partially attended). Key decisions that require a vote of the team
members should be explicitly stated as requiring a single authority
to approve, a majority to approve, a super-majority (67 percent) or
full consensus. The results of any votes should be documented in
meeting minutes, and the minutes should be filed (electronic and/
or paper copies) for future reference and auditability. Meetings
of regional design teams, corporate-governance councils and/or
steering committees should have established distribution lists for
decisions and documentation so that information is flowing in the
right directions to provide consistent governance.
Summing Up
Governance is a concept that sounds complicated but is really a
reinforcement of sound management principles. If you have followed
the advice in the previous chapters regarding the establishment
of explicit, documented compensation philosophies, design and
administration processes with assigned roles and responsibilities,
and cross-functional design teams and steering committees, you
are already more than halfway toward a sound sales compensa-
tion program with a foundation of good governance. To complete
the model, decision rights and results must be documented and
you must be diligent in your analysis of plan performance and
process reinforcement. Disputes and issues in both design and
administration must be escalated to the correct authorities, who
must act without conflict of interest. The biggest obstacles in the
quest for improved sales compensation governance may be your
corporate culture or the inertia of some executives. Sarbanes-Oxley,
while not creating radically new thought in terms of governance
structure, may well be the impetus for change with its increased
accountability and penalties for top management.
Glossary 187
Glossary
Glossary 189
agent/broker
Member of an indirect sales channel who sells products but does
not take ownership of goods.
award
An amount of cash, a prize, a symbol or an intangible reward given
as a form of recognition. Awards can be in the form of money,
prizes, plaques, travel and public commendations. The payouts of
sales contests usually are called “awards.”
base pay
The fixed compensation paid to an employee for performing specific
job responsibilities. It is typically paid as a salary, hourly or piece rate.
benefits
Programs that an employer uses to supplement the cash compen-
sation an employee receives. Benefits include income protection
programs such as publicly mandated and voluntary private “income
protection” programs that often are provided through insurance,
pay for time not worked and other employee perquisites.
bluebird
See windfall.
bonus
An after-the-fact reward or payment (may be either discretionary
or nondiscretionary) based on the performance of an individual, a
group of workers operating as a unit, a division or business unit, or
an entire workforce. Payments may be made in cash, shares, share
options or other items of value. In the context of sales compensa-
tion, a defined, pre-established amount of money to be earned for
achieving a specified performance goal. Planned bonus amounts
commonly are expressed as a percent of the incumbent’s base
salary, salary range midpoint, percentage of target cash compensa-
tion or incentive compensation, or a defined dollar amount. See
also nonmonetary awards.
cap
The total incentive opportunity that can be earned in a given
period. Cap may also refer to the maximum cash compensation
an employee may earn in a given time period.
combination pay plan

A combination pay plan has two elements: a base salary and one or
more cash incentive components, such as a bonus or a commission.
commission
A payment based on a formula that is used to calculate the incen-
tive compensation opportunity for salespeople. In this context, it
provides a predetermined incentive amount for each discrete unit
of sales made by the salesperson. Commissions commonly are
expressed as a percent of each sales dollar (revenue), percent of gross
margin (profit), or a dollar amount per unit sold. A commission-only
compensation program is sometimes known as “full commission”
or “straight commission.”
compensation
Cash provided by an employer to an employee for services rendered.
Compensation comprises the elements of pay (e.g., base pay, vari-
able pay, stock, etc.) that an employer offers an employee in return
for his or her services.
cost of labor
A measure of external pay practices where data on labor market
costs (total compensation amounts) are obtained from labor market
competitors and relied upon when establishing target cash compen-
sation opportunity. It reflects a “cost to hire and retain” logic for
setting target pay levels.
cost of sales
For sales compensation purposes, a relative measure of internal
costs. It reflects an “ability to pay” logic for setting target pay
levels. The cost of sales, expressed as a percent, is calculated by
dividing the total sales dollar volume sold by the sales force into
the total or aggregate cash compensation costs of the sales force.
Glossary 191
cumulative performance period

For sales incentive calculation purposes, a type of performance
period in which an incumbent’s performance is accumulated and
measured over time, and compared against goals that are also
accumulated over various performance periods. For example, while
incentive payouts might be made each month, actual performance
for a salesperson might be accumulated in each successive month
of a quarter and compared against accumulated goals. As an illus-
tration, in the second month, the incumbent’s performance is the
sum of the performances of the first two months compared with
the sum of the performance goals for the same two months.
direct channel
Manufacturers and service providers in a direct channel, service the
end customers directly; they do not use external distribution channels.
direct seller
In sales compensation, one whose objective is to obtain an order
from the end user.
discrete performance period

Relative to employee performance, a type of performance period
in which the performance of the incumbent is limited to a defined
performance period without any connection to past or future perfor-
mance periods. As an example: “Each month is discrete, because
performance is measured for that month and payout is made for that
month independent of past or future performance in other months.”
distributor/wholesaler
Selling member of an indirect channel who buys and resells another
company’s products.
draw
A compensation payment that is paid in advance of performance.
There are two types of draws: recoverable and nonrecoverable. In
both cases, if performance produces incentive earnings in excess
of the draw, then the sales representative receives the additional
monies beyond the draw amount. If the sales representative’s

incentive earnings are less than a recoverable draw, then the sales
representative must return the amount of the draw that was not
earned, or the unearned amount is carried forward to the next
performance period. However, with a nonrecoverable draw, if the
incentive earnings do not exceed the draw, draw monies are not
returned or carried forward — the sales representative gets to
keep the draw.
eligibility for a plan

The basis for determining the individuals or classes of employees
eligible to participate in a particular plan such as an incentive or
a supplemental benefits plan. This eligibility may be based on
salary, job grade, organization unit or function or a number of
other criteria.
flat commission
Commission rate does not vary.
gross margin
A profit measure: sale price minus the cost of goods before overhead,
profits and taxes. Gross margin may be used as a performance
measure in sales compensation plans.
guarantee
For sales compensation purposes, a compensation payment, possibly
in addition to base salary, that is made regardless of performance. It is
usually nonrecoverable. Guarantees may be temporary or permanent.
incentive
Any form of variable payment tied to performance. The payment
may be a monetary award, such as cash or equity, or a nonmonetary
award, such as merchandise or travel. Incentives are contrasted with
bonuses in that performance goals for incentives are predetermined.
Glossary 193
indirect channel
Manufacturers and service providers in an indirect channel use
one or more levels of distribution (e.g., distributors, wholesalers,
retail stores and agents) to reach customers.
internal equity
A fairness criterion that directs an employer to establish wage rates
that correspond to each job’s relative value to the organization.
job scope
Magnitude of accountability for the job.
leverage
As used for sales compensation purposes, leverage is the amount of
increased or “upside” incentive opportunity — in addition to target
incentive pay — that management expects outstanding performers
to earn.
market pricing
Relative to compensation, the technique of creating a job worth
hierarchy based on the “going rate” for benchmark jobs in the
labor market(s) relevant to the organization. Under this method,
job content is considered secondarily to ensure internal equity after
a preliminary hierarchy is established based on market pay levels
for benchmark jobs. All other jobs are “slotted” into the hierarchy
based on whole job comparison.
maximum
Relative to sales compensation, the total incentive opportunity a
sales representative can earn in a given time period. The term may
also refer to the total cash compensation an employee may earn
in a given time period. Sometimes a maximum is referred to as a
“cap,” “ceiling” or “lid.”
mean
A simple arithmetic average obtained by adding a set of numbers
and then dividing the sum by the number of items in the set.
median
The middle item in a set of ranked data points containing an odd
number of items. When an even number of items are ranked, the
average of the two middle items is the median.
mix
Relative to compensation, the relationship between the base salary
and the planned (or target) incentive amounts in the total cash
compensation package at planned or expected performance. The
two portions of the mix, expressed as percentages, always add
to 100 percent.
nonmonetary awards
Noncash compensation, such as travel and merchandise. It excludes
other nontaxable items (not on W-2 form) such as gifts and
plaques/pins.
pay at risk
A variable pay plan funded on the basis of a reduction in base
pay that usually is offset by the possibility of a larger variable pay
plan payout.
pay survey
Gathering, summarizing and analyzing data on wages and sala-
ries paid by other employers for selected key classes of jobs or
benchmark jobs.
payout frequency
The timing of incentive payouts. Payouts commonly are made
weekly, monthly, quarterly or annually.
performance period
A predetermined span of time during which individual (or group)
performance is measured.
Glossary 195
progressive incentive formula

A rewards program in which the incentive payout rate increases as
performance exceeds predetermined levels (e.g., nonlinear sales
commission formulas).
quota
A predetermined performance goal. Quotas can be expressed as
absolute numbers, a percent (e.g., 100 percent), percent change or
units sold. Also referred to as goal, objective and performance target.
quota setting
The process of setting quotas. Quotas can be established by senior
management (“top down”), by the field sales force (“bottom up”)
or through a negotiated process involving both headquarters and
the field sales force (“combination”).
ramped commission
Commission rate changes after an objective has been met. The rate
may either increase (progressive) or decrease (regressive).
range of earnings
The amount of total cash compensation opportunity available for
minimum to excellent performance.
recognition program
A policy of acknowledging employee contributions after the fact,
possibly without predetermined goals or performance levels that
the employee is expected to achieve. Examples include giving
employees clocks or other gifts on milestone anniversaries, granting
an extra personal day for perfect attendance or paying a one-time
cash bonus for making a cost-saving suggestion.
regressive incentive
In a regressive incentive formula, the incentive rate declines as
performance exceeds pre-established levels.
revenue
The money generated by a company from sale of goods or services
including rental income. Often referred to as “sales” in manufac-
turing and merchandising companies.
sales channel
The means a manufacturer or service-providing company might
employ to interact with and manage relationships among its final,
end-user customers. Such channels might be direct, in which the
manufacturer uses a sales force to sell to its end-user customers;
or they might be indirect, such that the manufacturer employs a
third-party company to represent its products to the marketplace
of customers.
sales compensation
Monetary amounts paid to sales representatives or sales manage-
ment that vary in accordance with accomplishment of sales goals.
Sales compensation formulas usually attempt to establish direct
incentives for sales.
sales contest
An event entailing a short-term sales effort to maximize results for
a nonrecurring purpose in an effort to win a prize. Usually short
in duration, such contests are designed to be supplemental to the
regular sales compensation program, not to replace it.
sales cycle
The time, starting with identifying the customer (prospect), it
normally takes to close the sale.
sales event
An occurrence when a sale may be counted for compensation purposes.
shortfalls
A sales result significantly below expectations which is not influ-
enced by the sales representative.
Glossary 197
split credit
The division and assignment of sales credit to more than one salesperson.
target cash compensation (TCC)

As it relates to sales compensation, the total cash compensation
(including base salary and incentive compensation) available for
achieving expected results.
target performance
The expected and/or planned level of sales results. It is often called
the “quota” or “goal.”
the work experience

See work experience.
threshold
The minimum level of performance that must be achieved before
an incentive can be earned.
total rewards
The monetary and non-monetary return provided to employees
in exchange for their time, talents, efforts and results. It involves
the deliberate integration of five key elements that effectively
attract, motivate and retain the talent required to achieve desired
business results.
upside potential
See leverage.
variable commission
Commission rates in a particular incentive plan are not constant
and may vary depending on the salesperson’s performance or on
the particular measurement used.
windfall
A sales result that was realized outside the normal influencing role
of the sales representative. Because the sales person had low or no
involvement in creating the sale, a windfall is sometimes excluded
from normal incentive compensation treatment.
work experience
Elements of rewards that are important to employees but may be less
tangible than compensation or benefits. It includes acknowledgement
or recognition of effort/performance, balance of work-life issues,
cultural issues, development opportunities and environmental factors.
About the Authors

About the Authors

Jerome A. Colletti is managing partner of Colletti-Fiss, LLC, a
management consulting firm with headquarters in Scottsdale, Ariz.
His firm is a leading source of expertise and insight on strategic
compensation issues affecting the productivity of sales and customer
contact employees.
A management consultant since 1977, Colletti provides advice to
top managers on the design and implementation of compensation
plans, particularly variable pay arrangements, to reward employees
for sales success, customer retention and customer loyalty.
He is the author of more than 70 publications and has been a
course instructor for WorldatWork since 1979. In 2004, he co-authored
WorldatWork’s newest sales compensation course.
Mary S. Fiss is a partner in the management consulting firm Colletti-

Fiss, LLC. She has extensive experience in the development and
implementation of team and individual compensation, rewards and
recognition, professional development and performance manage-
ment programs. Fiss works with clients on issues and challenges
related to increasing salesforce productivity through the effective
use of compensation and management education programs.
She is frequently quoted in popular business publications and
is the author of more than a dozen articles, book chapters and
books. Fiss and Colletti co-authored the book, Compensating New
Sales Roles: How to Design Rewards That Work in Today’s Selling
Environment, published by AMACOM in May 2001.
Ted Briggs is a principal with Better Sales Comp Consultants. He

works with leading companies to develop sales job clarity and align
sales compensation plans with the performance requirements of
those jobs. By helping to evaluate sales strategies and the details
of a company’s sales coverage model, his work develops the confi-
dence a management team needs to invest in the performance of
their sales team. Briggs’ work focuses on driving the efforts of top
performers to achieve personally and for their company.
He holds a Bachelor of Science degree in organizational behavior
from the University of Southern California. He earned a master’s
in finance and accounting from Tulane University.
Scott Sands is a partner at Aon Hewitt Consulting and leads the

firm’s salesforce effectiveness practice. He specializes in the align-
ment of sales and marketing organizations with corporate strategies,
financial plans and customer preferences. Sands has 20 years of
client service experience. His experience crosses many industries
with nationally recognized expertise in technology, telecommunica-
tions, business/professional services, pharmaceutical and financial
services companies. Sands is a frequent speaker and author for
international journals and conferences.
He holds a degree in electrical engineering from Vanderbilt
University. He earned a master’s degree in marketing and organi-
zational effectiveness from the University of Texas.
sales compensation essentials
a field guide for the hr professional, 2nd edition
New and updated information including plan communication, governance and

administration guidance, enhances this classic guide’s value as a reference tool.
The premise for this book, however, remains unchanged: Not all people want to
be sales compensation wizards. Rather, they need to acquire authoritative and
practical information about sales compensation, so they can be confident with the
matter at hand. That’s where this field guide comes in handy.
Sales Compensation Essentials is intended to educate HR generalists, compensation

professionals, and consultants — both internal and external — who from time to time
are asked to participate in the design and implementation of a sales compensation
plan. Additionally, this book allows HR generalists to have a ready resource for
members of the company’s sales compensation plan design team — both operating
executives and staff managers.
Business/Human Resources


www.worldatwork.org   

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What is the purpose of the book?

What is the purpose of the book?

Who is the intended audience of the book?

Who is the intended audience of the book?

sales

Jerome A. Colletti, Mary S. Fiss, Ted Briggs & S. Scott Sands

“Sales Compensation Essentials provides an exceptional balance

“This text provides valuable information and reference material

“This book provides the HR practitioner with a basic understanding

Jerome A. Colletti, Mary S. Fiss, Ted Briggs & S. Scott Sands

This book is published by WorldatWork Press. The interpretations, conclusions and

© 2014, 2006 WorldatWork Press

ISBN (soft cover): 978-157963-361-5

WorldatWork Staff Contributors

Senior Manager: Andrea M. Ozias

Project Leader: Wendy Anderson, WLCP

Creative Services Manager: Rebecca Williams

Cover Design: Kris Sotelo www.worldatwork.org

1 | The HR Professional’s Role in Sales Compensation 11

2 | Sales Compensation Fundamentals 27

4 | Participating in the Design Process 71

5 | Assessing Current Plan Effectiveness 87

6 | Designing a New Sales Compensation Plan 105

7 | Implementing a New Plan 135

8 | Aligning Other Rewards and Recognition Programs 159

9 | Governance of Sales Compensation Programs 171

About the Authors 199

P icture this situation. It involves a brief hallway conversation

In many companies, the situation that confronts Sue Stark is

resource, and therefore, the salesforce is often seen as the “face” of

How This Book Can Help You

How This Book Is Organized

communication, front-line manager training and measuring the

T he degree of an HR department’s involvement with sales compen-

Working with the Sales Organization

However, an HR professional’s No. 1 priority should be to gain and

Some senior HR professionals have said that an up-to-date under-

FIGURE 1-1 The HR Professionals Illustrative Activities —

• Review/discuss with sales leadership teams: quarterly

• Regular calls to selected field sales managers to gain

• Issues/challenges with current plans — identify the

• Needs relative to managing with the plan, e.g., reports,

• Periodic meetings to confirm system capabilities, abili-

• Periodic salesforce surveys to understand what members

Whether HR is considered an internal consultant or a policy

Overcoming Resistance to HR Involvement with Sales

• Explain role in the process and key contributions

• Describe seminars or courses taken in sales

to participate in the sales compensation plan, the appropriate

Six Areas of Sales Compensation Plan Involvement

the business to be of help to the sales organization. The old adage

2. Design and Implementation Process

It is easier to lay out these activities than to actually execute them

changes are made to a sales compensation plan. Examples of

3. Sales Compensation Guiding Principles

of what the design team is shooting for at a conceptual level and

4. Competitive Pay Assessments

This means that HR is responsible for identifying and selecting

5. Industry Trends and Practices

1 | The HR Professional’s Role in Sales Compensation 11

2 | Sales Compensation Fundamentals 27

4 | Participating in the Design Process 71

5 | Assessing Current Plan Effectiveness 87

6 | Designing a New Sales Compensation Plan 105

7 | Implementing a New Plan 135

8 | Aligning Other Rewards and Recognition Programs 159

9 | Governance of Sales Compensation Programs 171

About the Authors 199

2. L abor Market Comparison: Appropriate companies and jobs