T’s and C’s: The Unspoken Hero (or Villain) of Sales Comp Design
If you've ever designed a sales plan, the next story should sound very familiar to you.
I was working with a company that asked for an assessment of the sales compensation program - so of course we did what any consulting firm would do: we interviewed key stakeholders, collected data for analytics, and found that there were issues in the way the plan was designed, specifically that measures were aligned across all sales roles, so there was a bit of a miscommunication to the field as to what was important.
Was this an issue from the client’s perspective? Absolutely. Was the problem insurmountable? No way.
So the engagement continued - we showed the client where the previous plan design went afoul of best practices, worked with their ops, HR, and sales leadership teams to craft new plans, and landed on designs that would better incentivize reps to work with each other to meet company objectives - and everyone was excited about the prospect of a better fiscal year.
Except that better performance never materialized.
See, due to the policies outlined in the comp program’s terms and conditions - the governance rules that describe in detail how reps will be compensated across a variety of scenarios - reps knew that even with the new plans, they would get paid on all the accounts in their names (including subsidiaries) so reps were not incentivized to go out and close new business, but rather wait to see if a mid-market rep or rep in another geo would inadvertently close a deal belonging to a parent account and then get paid on that deal - without doing any of the selling work!
This scenario, although extreme, highlights the importance of assessing the governing policies of your plans to ensure they are supporting your overall sales strategy. Often, these terms and conditions are thought of as the add-on components to the overall comp program but are in fact the minutiae that reps will exploit to the detriment of the company as a whole.
So, when building new comp plans, consider taking a look at your t’s and c’s and follow our 4 key tips for effective compensation terms:
Create Comprehensive and Business Specific Policies: Many businesses run into problems when they loosely define sales compensation terms and conditions. Courts often side with employees in commission disputes, which can mean big trouble for your business. Be sure that your compensation plan accounts for scenarios that your business in particular may face. Consider unique aspects of your business that need additional governing language - for example: in a cloud computing company, how is consumption defined, and how is internal vs. end-user consumption attributed to different reps based on the comp plan? These definitions can save the company time and money when legal disputes arise.
Vet Policies with Legal: State employment laws vary and are subject to change, and it is important to ensure your plan is in full compliance with these regulations. Your legal team should remain up to date on new policy changes and court interpretations of existing policies to ensure your business won’t fall victim to a mistake another business has already made. Fostering a strong relationship between your legal and sales team is crucial for ensuring the security of your plan.
Ensure Policies are Transparent & Comprehensible: Your reps should not be surprised or confused about how their plan is administered and the impact of the policies on sales behaviors. Provide your reps with a clear and accessible way to digest the terms and conditions, and specifically call out important policies when communicating the new comp plan. Otherwise, reps can feel feel unfairly compensated, leading to feeling of disincentivization and may even pursue legal action. For example, if your reps experience a status change (i.e. new role or territory), they should understand how this will affect their strategies, practices, and earnings. Your sales ops or HR team can be a valuable resource for accomplishing this goal.
Constantly Scrutinize Your Policies: Just as your company strategy will evolve over time, so should your compensation plan terms and conditions. In order to ensure incentives remain optimal, your team should review the policies on a regular basis. Check for policies that may be driving incorrect behaviors, such as in the plan above, or areas where reps are reporting confusion (potentially leading to legal trouble). These steps will help ensure your comp plans achieve maximum impact!
Many companies are afraid to review their t’s and c’s regularly, and that makes sense: they are often the more tedious aspects of compensation plan design; unfortunately, these policies can be the make or break components of any compensation plan, so it is in every company’s best interest to check their policies regularly to ensure the t’s and c’s are working for your organization - and not against it.
Are you considering new plans this year or want an assessment of your current compensation practices to see how they align to the market? Feel free to get in touch with Incentiv for a comprehensive compensation program assessment today!