7 STEPS - to -

Designing an Incentive Compensation Plan that Drives Sales Per formance

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance2

74% of companies surveyed were not completely satisfied with their compensation plans.

S ales organizations focus intensely on improving sales plan compensation, and

for good reason: 74% of companies surveyed by CSO Insights in 2014 said they were not completely satisfied with the plans they had in place. According to the same study, insufficient staffing and a lack of expertise prevents these organizations from introducing more effective compensation programs. This guide introduces you to the critical aspects of successful compensation plan design, from

establishing sales strategy as the backbone of the plan to treating plan design as an ongoing process.

Based on Optymyze’s extensive experience in the field, we recommend the steps described in the following pages to create a compensation plan that drives results. This information equips you to improve incentive compensation and, by extension, increase sales force performance - leading to business growth.

Sales Behaviors Impacted by Compensation Plans:

• Selling to new accounts

• Retaining existing business

• Cross-selling/upselling

• Selling new products

• Avoiding excessive discounting

• Using a CRM system consistently

• Team selling

• Selling higher-margin products

• Motivating and retaining sales reps

Source: CSO Insights, 2014

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance3

What is an INCENTIVE COMPENSATION PLAN?

An incentive compensation plan rewards salespeople based on performance. Designing such a plan is a complex

process because it must account for different payment structures, as well as for historical data and market

insights. The challenge is to design a compensation plan that maximizes motivation and enables salespeople to

achieve goals despite complex selling environments.

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance4

Pay for performance

Align corporate goals with sales force targets

Encourage strategic selling behaviors

Keep sales force motivated

Attract and retain top talent

WHAT IS AN INCENTIVE COMPENSATION PLAN?

The Role of an Incentive Compensation Plan

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance5

How to Design an Effective INCENTIVE COMPENSATION PLAN

Over years of working with companies to create effective sales compensation programs, Optymyze has distilled

the process into seven major steps that any organization can follow.

Articulate the sales strategy1.

Strategy is the backbone of the incentive compensation plan. A successful plan is rooted in sales strategy and aligned with corporate goals, such as increasing revenue or market share or successfully launching a new product. Starting from your specific sales strategy, design an incentive compensation plan that encourages

the sales force to behave in ways that lead to the achievement of these goals. For example, if your organization is focused on launching a new product, consider including new product sales in the plan, or introducing a commission or bonus opportunity to reward sales reps specifically for their contribution to a successful launch.

The most important questions to answer at this stage:

• What sales goals are we trying to achieve with the help of the sales force?

• How will salespeople reach those goals?

• How will we motivate the behaviors necessary to meet objectives?

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance6

Assess the current plan and gather stakeholder feedback

2.

Your organization’s current incentive compensation plan can give you important information about what’s working and whether there are opportunities to improve. Look at it both quantitatively and qualitatively to understand the big picture and the details. How much are top people earning? Are the highest performers also receiving the highest rewards?

A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of your current plan will reveal a clear picture of mistakes to avoid in your redesign, processes to replicate, and how to increase plan effectiveness to ensure execution of the sales strategy. Also, ask stakeholders how they would improve the plan. Their answers will provide important information directly from the field, and will get reps on board with changes.

HOW TO DESIGN AN EFFECTIVE INCENTIVE COMPENSATION PLAN

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance7

Design a high-level plan3.

Once sales strategy is clear and you've collected background information, look at the different compensation options available and select one that best suits the organization’s needs.

Work with a cross-functional team that includes HR, finance, sales, marketing, and other key functions to ensure the plan fits with the broader company goals and values.

What to consider when choosing between compensation alternatives:

• Sales strategy

• Sales process characteristics

• Sales force culture

• Market trends

• Corporate goals

Are your reps energized by their pay mix? Are quotas, commissions, or some combination of the two more likely to motivate desired behaviors?

HOW TO DESIGN AN EFFECTIVE INCENTIVE COMPENSATION PLAN

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance8

Model the plan4.

Modeling ensures that a plan that looks good conceptually will actually work. This step verifies the validity of assumptions, expectations, and payment forecasts. Two major approaches to plan modeling are described below:

Successful modeling can increase the lifespan of a plan by 30-40%, in addition to making the initial change much less painful.

- Erich Sachse, Vice President, Professional Services at Optymyze

HOW TO DESIGN AN EFFECTIVE INCENTIVE COMPENSATION PLAN

1. Retrospective modeling compares the new plan with historic results.This method is quite common and is useful because it builds on past performance. However, keep in mind that markets and companies evolve and past results are not necessarily the best predictor of the future.

2. Prospective modeling envisions what could happen and “stress tests” the new plan.This method allows you to set realistic expectations based on hard data. Run simulations that test a variety of scenarios, including best case and worst case, to preview how the plan will perform.

Whatever your approach, start by addressing the following questions:

1. Who is being rewarded?

2. What are the intended behaviors the plan aims to encourage?

Then, perform an initial analysis to determine major problems. Follow up with more precise and detailed testing to tie up any loose ends. There is no set number of reiterations; run as many as you need based on the problems uncovered. Finally, adjust the plan as necessary and continue to monitor results after rollout.

More resources:

• Modeling Sales Compensation: Looking Both Ways Before a Plan Change• Webinar: Modeling Sales Compensation Plan Viability within Organizational Strategy

7 Steps to Designing an Incentive Compensation Plan that Drives Sales Performance9

Design a detailed plan5.

Once you’ve modeled the plan and figured out all of the nuances, it’s time to build detailed payment scales and get endorsements from key stakeholders. Completing a detailed design after modeling ensures plan sustainability. It also reveals whether the parameters in place will produce the desired results. Many companies will consider a pilot at this stage. Choose a small

group of reps – from a particular district or state, or at random - and run the plan based on the sample. Check results to determine whether or not your modeling and planning assumptions were correct. This is also a good time to test your communication strategy, preview rollout materials, and get feedback from the reps included in the sample.

HOW TO DESIGN AN EFFECTIVE INCENTIVE COMPENSATION PLAN

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Roll out and communicate the plan6.

Open and transparent communication is paramount for plan success. It is critical at this stage to communicate the plan to the sales force. Explain the objectives and illustrate how they are achievable, and paint a clear picture of both the challenges and the rewards reps can expect.

Missteps in plan communication will lead to sales force confusion, which can ultimately cause cracks in the plan. Effective plan communication, on the other hand, motivates and enables salespeople to achieve their goals, creates trust and collaboration, and leads to successful strategy execution.

HOW TO DESIGN AN EFFECTIVE INCENTIVE COMPENSATION PLAN

Perform ongoing monitoring7.

Sales organizations often incorrectly view incentive compensation plan design as a one-off event. Nothing could be further from the truth. You should continually monitor the plan to gain insight into the elements that work as well as those that come up short. Close analytical review also gives you an opportunity to continually engage key stakeholders in the redesign.

There are many reasons to regard plan design as an ongoing process, including:

• Incentive compensation plans start from strategy, but strategy also changes over time – sometimes over a very short period of time based on any number of internal or external factors. You must adjust your compensation plan to suit the new strategy and motivate sales reps.

• Plans that are regularly recalibrated before significant issues occur often maintain their effectiveness for a longer lifespan.

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Incentive Compensation Plan Design BEST PRACTICES

Work with skilled professionals who have expertise in designing incentive compensation plans and in gathering and analyzing industry data. This will help you avoid typical roadblocks and mistakes that can cost your company and create frustration among your sales force.

Be prepared to execute the plan operationally. A plan can look good on paper, but that doesn't necessarily mean it will work in practice. Make sure your incentive compensation plan is operationally feasible by modeling and testing it before rollout.

Engage stakeholders. From conducting interviews with management to organizing focus groups with sales reps, getting input from the people who will be directly impacted by the incentive compensation plan is crucial. In addition to gathering important information, you will gain their trust and support throughout the process.

Strive for simplicity. Simplicity does not mean leaving important performance metrics out or neglecting to plan for different roles in the sales structure. Simplicity is found in an integrated compensation platform that makes goals and performance easy to understand. You know your plan is simple when it reduces the administrative burden by automating processes whenever possible.

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INCENTIVE COMPENSATION PLAN DESIGN BEST PRACTICES

Complexity Can Be Costly

One-third of first-line sales managers’ time (or 79 days per year) is spent on internal administration.

In contrast, sales managers spend only 60 days per year working to improve the performance of their

salespeople (setting expectations, coaching, etc.)

- Growth Solutions L.L.C.

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The Benefits of a Successful INCENTIVE COMPENSATION PLAN

Designing the right incentive compensation plan requires an investment before you can roll it out and start reaping the benefits. This investment more than pays off: the success of an effective incentive compensation plan

positively impacts the entire sales organization.

Sales reps are more motivated because they understand goals and rewards better.

Overall sales organization performance increases as salespeople work towards common, achievable objectives.

Top performers feel their work is fairly rewarded and continue to contribute to the entire team’s success. Retention of top performers is often a benefit of successful plan design.

Performance reports are readily available to sales reps and managers alike, allowing for timely feedback and behavior adjustments.

The sales organization relies on realistic scenarios and accurate predictions for budgets, timelines, and strategy.

With the right sales behaviors, companies can measure progress and set realistic expectations for achieving their objectives.

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ABOUT OPTYMYZEOptymyze helps companies improve sales force and sales operations performance with enterprise cloud applications and business process management services for aligning sales goals and compensation, efficiently executing sales strategies, driving faster increases in sales results, and gaining visibility into sales performance.

F ollowing the steps highlighted in this guide will put you on track to

reap the benefits of an effective incentive compensation plan. Compromising on plan quality and skipping stages might prove more costly in the long run and can result in lost opportunities. Successful organizations understand that incentive compensation plans require substantial investment due to complexity.

The investment gives rise to a motivated sales force, increased revenue, and the achievement of goals.

Large sales organizations benefit tremendously even from minor improvements to compensation plans. Imagine what is possiblewith a plan not only designed to fully fit your sales needs, but that's efficient, flexible, and lifts the burden of complexity.