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Aligning Compensation With Business Goals

William Lieberman, CEO and Chairman of the Board, Xtiva Financial Services

Variable-based compensation can be very motivating and rewarding for both an organization and its sales force, and can work for virtually any type of business in which there are transactions measured by units sold – including all matter of products and services in the retail, wholesale, business-to-business and institutional arenas alike. Simply put: the more sold, the greater the compensation. But there are some key factors to consider when developing a plan for variable-based compensation.

A top-down approach allows the company’s overall strategic goals to drive the plan. So a well-developed business plan that maps out where the organization wants to go and how it will work toward that goal for the next twelve to twenty-four months is essential. The compensation plan is then structured to support those goals – both strategic and financial. In other words, the top-down approach aligns the activities of each salesperson with the company’s larger goals.

Specifically, first consider how the company is going to grow. What are the plans to increase sales for existing customers? Create new applications? Enter new markets? Then, think in terms of ways to compensate people for their achievements toward those goals. Since the top sales people are driven by compensation (i.e., commissions), what are some creative ways to put money in their pockets?

In the top down approach, the total quota for the department can be compared to the revenue target for the company for the coming fiscal year to ensure that the targets established are achievable. For example, Xtiva has a revenue target of 40 percent growth per year. For the current year, this translates into $2.5 million in incremental revenue (or $7.5 million in new bookings) compared to last year. That equals an average of $1.5 million in sales per rep, give or take a little, depending on a few other considerations.

Be sure to set quota at a level that is realistic, but still a stretch for the sales reps. Quota can be determined based upon years with the firm, the prior year’s quota attainment percentage, and an analysis of each rep’s ability to achieve specific goals.

Quota should be set on an individual basis, and each rep should buy into the quota they are given. If related sales goals are clearly unrealistic, then it may be necessary to adjust goals or possibly even add more sales people to get the job done. Depending on how individuals perform and how far they go beyond their quotas, commission accelerators can be provided for over-achievement. The better the rep does in exceeding their goals, the higher the payout percentage will be. (See Related media.) In Xtiva’s case, the type of sale – whether it’s a perpetual or recurring license and the extent to which other components, such as technical support and maintenance, hosting, and professional services, are sold – also impacts the dollar amount and schedule of payouts reps receive.

In addition to individual goals and rewards, it’s also important to have special incentives for the sales department’s overall achievement, which also benefit each individual in the group. This may take the form of an additional bonus, group dinner at a fancy restaurant, weekend trip, or other special compensation based on a contest, etc. And while it’s important to remember that not everyone is motivated by money (in some instances, such offerings as training or continuing education might carry more value), with variable-based compensation, financial rewards almost always make sense.

Also critical to the success of a variable-based plan is the ability to keep each rep informed of his/her progress in the current month, quarter, and year-to-date – including not only where he/she stands on commissions and payouts but also in relation to bonuses paid throughout the year. Equally important is management’s ability to easily see details of reps’ performance across the firm. (See Related media.)

To make a top-down compensation plan work, management must spend time thinking about goals and planning where they want to go with the business. Then talk with sales reps about their experiences, past compensation and models, and take those into consideration as well. Once a plan is in place, review it annually alongside the company’s strategic plan. Make sure that as the business goals change, the comp plan changes with them and continues to remain strategically aligned.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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