Getting Compensation Right

Fact #1: An effective compensation plan is a critical component of a successful sales organization.

Fact #2: The effectiveness of compensation plans depends more on how well it is communicated to the sales force than how well it is designed.

Although comp plan design is undoubtedly important, what really matters at the end of the day is the sales force’s perception of the plan, particularly how fair it seems.  CEB Sales research shows that the greatest risk sales leaders face when making changes to their comp plans is seller backlash stemming from general misunderstanding—if sellers don’t understand what they need to be doing differently in order to get paid or if they don’t buy-in to the plan for any reason, it’s only a matter of time until they become disengaged and resentful, rendering the comp plan a dud.

While this may not seem like a revolutionary point, there’s no arguing that improving how compensation is communicated to sellers is something that companies need, and want, to improve. To this end, a recent PayScale survey found that 73% of leaders do not feel “very confident” that their managers could have tough conversations with their employees about compensation, the Harvard Business Review reports.

So what are the best companies doing to make compensation communication work for them? CEB Sales research finds that in order to maximize sales force buy-in to their comp plan, companies should:

Consult the sales force on proposed plan changes

Take sales force input into account as you design compensation plans—especially star reps. Plans created “behind closed doors” are unlikely to obtain crucial sales force buy-in.
Communicate transparently

Be honest about your reasons for changing the comp plan, and explain what reps need to do differently to maximize their pay.
Empower first-line sales managers to have tough compensation conversations

CEB Sales research shows first-line managers are the most effective channel for communicating the plan.  Manager communication is especially critical when bonuses are paid out and during plan changes.
Hold at least two formal compensation conversations per year

CEB Sales research shows that fewer than two conversations reduces perceived pay process fairness by 50%, while more than five conversations produces little incremental gain.
Focus conversations on the pay-performance link

Performance criteria used to determine pay is the number one topic managers should discuss.  Actively reinforce organizational messages around performance expectations and pay potential rather than just current pay.

CEB Sales members, visit our topic centers on Designing a Compensation Plan and Communicating Compensation Plan Changes to learn more about how to maximize the effectiveness of your compensation plan.