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It's that time of the year again. You've been asked by your manager to lead this year's sales compensation design project—a process you know that is laced with systems constraints, passionate and politically savvy sales leaders, and considerable risk to the company. Could this be the year that your company enters a state of sales compensation perfection? If so, how do you make sure you don't make a mistake that destroys the integrity of the plan and forces you to go through another round of heated design discussions next year?

In helping companies prepare new sales incentive plans for 2006, Sibson has spent plenty of time diagnosing what is “broken” in existing sales incentive plans. While strategic issues like changing business environments, new products, or mergers often drive the need for a new incentive plan, we're seeing more and more examples of plans that simply had a flawed design and implementation process that is leading to a need for change. Ensuring that the process employed to design and launch the new plan is sound and error-free frees the design team to focus on the strategic issues and sales behaviors needed for the business to be successful. This article contains lessons learned by too many companies in previous years.

The design process and implementation flaws described in this article are not the only potential blunders for sales incentives, and the following pages do not represent a detailed how-to guide on building an error-free compensation plan. However, knowing the potential pitfalls is often the most important part of planning for a successful plan implementation.

Mistake #1: Unclear or Unrealistic Change Objectives
The Cause. Embarking on a sales compensation design change usually means that there is something undesirable about the current program. However, it is not always the case that there is a common understanding about what specific outcomes are expected from a plan design change. Is it a demonstrable increase in revenue? Is it lower employee turnover? It's very difficult to be successful when there is no clear statement of what success looks like.

Another cause of this problem is a general misunderstanding about the role of compensation. Sales leaders often overestimate the importance of incentive compensation compared to other elements of rewards or other management interventions (e.g., coaching, sales training, etc.). This can result in unrealistic expectations of what the new plan will accomplish.

The Cure. Changing compensation should not be a business need in itself. Compensation changes result from a business need, rather than creating one. Business leaders should be united on what problem you are trying to solve with a change in compensation, and this business need forms the backbone of the design effort.

Be realistic, however, in what you expect a new incentive plan to accomplish. It is important to understand that compensation is only one element of rewards (though a very important element), and rewards is only one part of the overall relationship between employer and employee (albeit a prominent one). Don't assume that changing compensation will solve every problem in the sale force: it won't. Incentive compensation is one element of the larger toolkit of performance management programs (appraisal, awards and recognition, etc.) that can be used to attract, retain, and motivate sales talent. Manage expectations during the design process so that business leaders understand what a plan change can reasonably achieve.

Mistake #2: New Plan, No Time
The Cause. Compensation planning is often part of an annual human resources or sales operations cycle, and incentive design is typically a component of that planning process. The timing of that cycle may work well for other parts of the process, and thus the annual calendar tends to be fairly consistent year-to-year. In addition, sales incentive design is usually an element of someone's job (rather than having a complete focus on sales compensation design), so there are multiple priorities relying on the same resources. This exacerbates the issue of getting a late start, and often results in needing to eliminate parts of the process to ensure timely completion.

The Cure. While not ideal, sometimes the right solution is to delay the launch date to ensure the integrity of the design process. Depending on the structure of the existing incentive plan, there may be very little “cost” to extending its life until the end of the first quarter of the next fiscal year. This delays the expected benefits of a new plan design, but it provides greater certainty that those benefits will be realized.

If delaying the launch date is not possible, seek out guidance from peers or outside experts on how to “fast cycle” the design process without taking too many shortcuts. Employing a proven process can ensure that all the right work steps are completed in an abbreviated timeline. Often this requires scheduling real-time working sessions rather than standard design meetings, widening or restricting participation across individuals depending on the point in the design process, or allocating additional resources to provide additional bandwidth.

Nevertheless, be sure to start earlier next year. While many companies think about compensation changes as a fourth quarter initiative, leading companies get ahead of that curve and start planning for the following year early in the third quarter.

Mistake #3: Systems in the Driver Seat
The Cause. Because technology has become such a critical part of how business is conducted, project management has largely become an IT activity. Because many (though not all) sales incentive design changes will require some sort of change in technology, it is common to combine the two into the same project. In addition, companies have invested millions of dollars in hardware and software to be able to automate business processes, and the owners of those resources tend to be asked to ensure they generate a return on investment. Information technology process methodologies have evolved to attempt to “eliminate risk and maximize return on investment.” Sounds great—let's apply that to sales compensation. One problem: Systems can be tested, humans can't.

The Cure. It's okay to change a design because it can't be implemented, but not okay to design merely what can be implemented. Be clear on that principle, and ensure that all of the key stakeholders understand it. While employing project management techniques borrowed from systems implementations, recognize that a new design linked to business needs, not a new system, is the outcome of the design process. As such, business needs must drive the design process, and systems then become an enabler of the solution.

In some cases, this may require separating the systems element of “the project” into a distinct stream of work. This sub-project will run concurrently with the overall compensation design and implementation, but will need to be managed from a systems point of view. Make sure there is enough time in the process to allow this sub-team to function effectively—don't expect systems changes to happen overnight. While this can be frustrating, taking extra time is a lot less painful than paying people incorrectly.

Mistake #4: Managing to the Average
The Cause. A very common objective of a new plan design is to change behavior without adding additional cost to the plan. As such, we often see companies looking at the average cost of the new and old plans to ensure they are the same. While it is important for a plan to be cost neutral, it is critical to note that cost neutral is not impact neutral. The same amount of pay can be redistributed an infinite number of ways across the sales population, and it is the distribution of earnings that really dictates the impact of the plan.

The primary causes of this mistake are the availability of quality performance information and the time it can take to review that data in detail. It is expensive to build and manage systems that collect detailed transaction information, so many small organizations do not have access to employee-level performance information. To make matters worse, it can only slow down the design process to build models looking at individual pay and performance and vetting such information with key stakeholders.

The Cure. In order to enable a detailed review of pay and performance, you must invest in gathering that information at the lowest level possible. For some organizations, having access to employee-level data on an annual basis will be sufficient (e.g., in 2004 John Smith had $1 million in revenue and earned $50,000). For other organizations or types of compensation programs, product or transaction-level data may be required.

Furthermore, you must be dedicated to taking the time to allow for a detailed review of the proposed design to ensure the impact on individuals is understood. Know who will earn more or less compensation, and understand the sales behaviors that create that change in income.

Mistake #5: Dehumanizing Sales Compensation
The Cause. Companies often say that there is a very fine line between making solid business decisions and taking employee emotions into consideration. We prevent ourselves from “taking sides” and manage away risks associated with “playing favorites” by not attaching names and faces to compensation changes. We also focus on the great strategic things the new plan will accomplish, allowing us to forget that doing so often requires real people to rethink the way they generate real income to support their families. There are a series of hard conversations that can be avoided by focusing on “the plan” rather than “the people” in the plan.

The Cure. You must recognize that a change in the compensation plan is a unique management decision in that it directly affects the security of an employee's paycheck. Just knowing that a change is occurring represents a financial risk to the salespeople because they will need to change what they do on a daily basis in order to maintain a desired level of income. While it is essential to build the business case for that change in behavior, too often the business case becomes something to hide behind in subsequent communications. Many employees then perceive a lack of interest in how the plan affects them as a lack of interest in them as an employee. Certainly, this tension can undermine the success of the plan.

When making changes to pay levels (or designs that can affect pay levels), be open and honest about what will need to change under the new plan. Help employees understand how to “win” in the new environment by providing tools that can give them line-of-sight to their historical—or better—level of income. You actually do your employees a service by helping them overcome the hard change than by denying the real impact of a change in pay structure.

Conclusion
The mistakes, causes, and solutions described in this article are certainly not a complete inventory of what can go wrong in the sales incentive design process. They represent a sample of some of the issues we've seen when conducting post-mortems on plans now being redesigned. By knowing the potential pitfalls, you can avoid these errors as you plan for your next sales incentive design project.

SUMMARY: COMMON MISTAKES, CAUSES AND POTENTIAL CURES

Paul Reiman is a Senior Consultant with Sibson Consulting, a division of The Segal Company, in Chicago. Contact Paul at preiman@sibson.com.