Webinar Recap: Turning Your Largest Expense into a Strategic Advantage
Gord Smith, Scaling Up Certified Coach, led a webinar explaining base principles of compensation and how business leaders can use them to optimize their compensation plans moving forward. As founder of ALTA Consulting, a firm that helps companies engineer more revenue, Gord shared his experience-based expertise about what makes a compensation plan unique to its business and how you can customize your own plan to fit your business’s specific needs.
Business leaders can easily be put in a tough spot when it comes to discussions about compensation. Employees can often feel underpaid and undervalued when compared to their team members who seem to be higher up in the pay pyramid. In order to handle tough situations regarding compensation, it’s crucial for all businesses to have a set strategic plan in place.
According to Gord, the 5 Principles of Compensation Design use psychological factors to “incentivize behaviors that customers will appreciate and make them reach for their wallets.” He goes on to explain each principle:
One successful company’s compensation plan might not be equally successful for other businesses. It’s important to have a compensation strategy that reflects your company’s core values, brand promise, and culture. One way to do this is by considering non-traditional hires, rewarding team members for upholding cultural values, and viewing your people strategy as an investment into your overall strategy.
Gord used Lincoln Electric’s unique compensation system to illustrate what “Be Different” really means. The company’s brand promise includes high-quality welding equipment; therefore, employees are compensated for producing just that. There is no base pay, yet their employees are among North America’s highest-paid manufacturing workers, thanks to this system.
Fairness, not sameness
The notion of performance in fairness and sameness is critical. Naturally, the highest performers in the company should be making more money than their underperforming counterparts. That being said, paying people below their worth can be highly detrimental to motivation and performance. Gord says the key is creating a coherent and flexible pay structure that is less directional and more formulaic.
Easy on the Carrots (Incentive Pay)
Statistics show 97% of executives believe they are among the top 10% of performers. Yep, you read that right. The truth is that people tend to think they are higher performers than they actually are. This is where incentivized pay comes in.
Gord notes three effects of financial incentives:
–Selection Effect – People either want to work here or not based on what the company has to offer
–Information Effect – Connect what you measure to what is important to provide understanding
–Motivational Effect – Motivate people to try harder
Gamifying gains is about driving Critical Numbers through pay, a way to improve productivity and culture. People are more likely to work harder and remain motivated if they are working toward a reward. A gamified approach involves team members committing to move the needle on a metric that points to a specific business challenge. This number is then tied to some kind of bonus that is promised to be rewarded to team members when the goal is achieved.
Sharing is caring
Sharing involves practicing transparency to get employees to think like owners. While sharing value and profit will not necessarily create a significant motivational effect, it will encourage staff to make different decisions based on the good of the company, leading to performance improvement and growth.
The 7 Sales Compensation Design Principles
Gord continues with the 7 Sales Compensation Design principles. Any sales force requires a documented sales compensation plan that defines who gets paid, when, and for what. These principles, along with psychological considerations, help craft a unique sales compensation plan that fits your culture and strategy.
Define who is eligible for your sales compensation plan. One common criterion for eligibility is based on whether or not the employee influences the customer’s purchase decision.
Target Total Cash Compensation
Obtaining benchmarks for total cash compensation (TTCC) is the next step. This helps determine how much a salesperson should make at X performance level, compared to other markets. This will help you decide where to position yourself.
Pay mix and leverage
Pay mix and leverage looks at how much of your compensation is base pay vs. variable pay. Gord says that variable compensation must be at least 15% to be meaningful, but it is typically more.
Performance measures & weight
Gord notes that defining performance measures and weights is where your compensation system begins to drive strategy. Performance measures (examples: volume, sales effectiveness, customer impact) can be classified either by the object of measurement or the phase of the sales cycle. Weighting performance measures help provide balance and determine where you drive focus depending on your strategy and execution constraints.
A quota is an individual sales target assigned to a salesperson. The idea behind a quota is to set the bar for expected performance. Gord says that generally, about 2/3 of a sales staff should be meeting their quota. If everyone is meeting it, it’s likely too low – and vice versa.
Performance range deals with the distribution of when payments occur and how much is paid, based on performance measures.
Performance and payment periods
Performance and payment periods involve defining the length of the period for which you measure performance (weekly, monthly, quarterly, yearly) and the frequency with which you pay out the variable compensation.
Enjoyed this webinar? Take the next step! Book a 60 minute meeting to discuss your current compensation strategy, pain points and goals with Gord and ALTA Consulting. This will be an open-ended consultation call at no cost. Click here for more.