"FALL" Into Step With Your Compensation Plan Evaluations

"FALL" INTO STEP WITH YOUR COMPENSATION PLAN EVALUATIONS
 
Upper Saddle River, NJ - October 30, 2007 - Leaves have changed, the temperature has gotten crisper, but are your efforts to evaluate your compensation plans lukewarm?  For companies whose fiscal years operate on a calendar basis, a great deal of effort has already gone into the budgeting process for 2008 salary and merit increases.  But are you operating with plans that are outdated, non-motivating, or otherwise ill-fated?
 
In the past we have addressed the need to evaluate the effectiveness of your sales compensation plans.  It is important as well to look at how your other compensation plans are operating, namely, are they achieving the results that were intended when the plan was first designed or last updated?  Basically, the design of any compensation plan should focus on achieving the main objectives of compensation:
 

• Focus:  Does the plan link pay to desired performance?
  
• Attract:  Does it provide the company with the ability to hire qualified candidates?
  
• Retain:  Does the plan enhance your staff’s desire to stay with the company?
  
• Motivate:  Does it provide the “carrot & stick”
  

 
Those plans that are not achieving these objectives should be looked at more carefully, to determine the root of the problem and the possible solution.  The starting point should be to look at compensation plans that have not been assessed in the past two years, and especially those that deal with salary administration.  In particular, salary structures should be evaluated every two years in order to determine what changes have occurred in the marketplace relative to structure movement and anjy adjustments that may be necessary to enable the structures to be competitive and reflective of yoru compensaton philosophy.  Structures that have not been updated frequently, or if there have been significant changes in the marketplace relative to the market value of positons or the need for talent, may need to be reconstructed.
 
In determining whether the salary administration program needs updating based on the quality of the salary structures, a thorough market analysis should be undertaken on benchmark and "hot" jobs; therefore, job descriptions should be reviewed and updated to ensure that they accurately reflect the scope and responsibilities of the positions.  During this exercise, Human Resources should evaluate the exemption status of each unique job under the Fair Labor Standards Act to ensure that exepmption assignments are consistent with the regulations.
 
 
Review and update job descriptions
Evaluate exemption status of each job under FLSA
Consider the need for a market analysis to determine where pay falls against market
Evaluate costs related to market adjustments needed to remain competitive
 
 
Sales are integral to the success and growth of a company.  Companies often drive their salespeople hard, but neglect to put the same energies into the design of meaningful and rewarding sales compensation plans.  The resulting plans are often non-motivational and disconnected from the goals of the company.  Sales suffer and the sales force becomes disgruntled.  Annual changes to the plan are time consuming, and often exacerbate the problems, with credibility suffering as a result.
 
Assuming that the company has done its homework and recognizes that its sales compensation plan is not achieving the intended results, a plan redesign can be accomplished in time to permit a new plan to be developed, tested, and readied for roll-out well before its effective date, usually the beginning of the next fiscal or calendar year.  In order to achieve the desired results, it is best not to be rushed, but rather to have sufficient time in which to review and redesign the plan without the extra pressure of an unrealistic, last minute deadline.  CRI suggests that the following six (6) step approach be taken to a plan redesign in order to maximize the chances for success:
 
Step 1 - Clarify the Sales and Marketing Strategy:  It is not unusual for a company to attempt to design a new sales compensation plan without having a consensus among Senior Management as to where their sales focus should be and the role of the salesperson.  Although factors may change during the course of a year, and the plan should allow for sufficient flexibility for modification without radically altering the plan.  Once the focus items have been identified, they need to be prioritized from most important to least important.
 
Step 2 - Determine the Desired Mix and Amount of Sales Compensation:  Utilizing reliable comparative market data, the company should decide on its intended Sales Compensation Philosophy.  Specifically, it will define the mix between fixed pay (salary) and incentives, bonuses, and/or commissions.  These typically range from 50/50 to 70/30, but each company will have to determine what is really best for its own sales force.  This mix will serve as the foundation upon which to evaluate the current plan and determine any changes to be made.
 
Step 3 - Develop a Draft Sales Compensation Plan:  The plan is actually the sum of the parts needed to achieve the identified sales and marketing strategy in the most effective manner.  The parts should consider participants, setting and measuring of performance targets and thresholds, award determination and funding, and the rules for administering the program, including splits and sharing of awards, payout mechanics, etc.
 
Step 4 - Model the New Plan:  Many companies fail to model the new plan to determine the potential impact on the sales force.  This is, in effect, a cost/benefit analysis to see how the best sales people will be treated under different scenarios.  A point to remember is that the plan may have the effect of increasing turnover, most likely impacting the lowest performing members of the sales force.  If the plan is designed right, the model will show that if a salesperson is achieving his/her level of expectation, pay will be at the right level, and vice versa.
 
Step 5 - Implement and Administer:  A new plan needs to be thoroughly communicated to all concerned personnel: the sales force itself, their managers, and the staff who is charged with the plan's administration.  The form of communication will be different, since each group has to understand it in a slightly different way.  The sales force has a special interest in the new plan - “WIIFM”- WHAT’S IN IT FOR ME.
 
There are a number of transitional issues that have to be addressed, in order to avoid turmoil and demotivation among the sales personnel.  These could include running parallel systems, grandfathering some sales activities, and other related issues.  Clearly, management and the administrative staff need to understand the mechanics of the plan and have all of the necessary tools for handling the administrative issues they will encounter.
 
Step 6 - Monitor and Apply Corrective Action:  Is the plan effective at focusing the sales force’s attention on the desired results?  Does it provide the motivation necessary to achieve those objectives?  If the results don’t match up with the expectations, the company needs to examine why not, and take remedial action.  The plan, if designed with sufficient flexibility, can then be tweaked, in order to place more emphasis on the desired results.  This is an on-going process that must be carried out on a timely and continuous basis.
 
Why do sales compensation plans fail?  Often, plans fail because they are too complex, difficult to administer, and lack focus.  Using the systematic steps outlined above should help to eliminate some or all of these issues, and assist in the design and implementation of sales compensation plans that will be more effective at meetings the company’s intended goals.  Resolve to kick off the New Year with a bang!
 
About Compensation Resources, Inc. (CRI):  CRI provides compensation and human resource consulting services to mid-size and Fortune 500 clients, as well as public, private, not-for-profit, family-owned, and emerging companies, specializing in executive compensation, sales and incentive compensation, performance management, salary administration, and expert witness services.