How to avoid the ‘compensation trap’

There are four areas companies should focus on improving when it comes to compensation plans, says one business expert

How to avoid the ‘compensation trap’
A good compensation plan can be great motivation for some employees but some companies still struggle on how to best structure it in a way that is fair for everyone.

Former tech CEO and business development expert Ian Altman calls it ‘the compensation trap’ and said it happens when companies focus too much on compensation plans themselves instead of business goals.

“The right incentives reward professionals for contributing to achieving strategic goals,” he wrote in Forbes, adding that there are four areas companies can focus on if they want to improve their compensation plans.

‘Build accountability’
Encourage teamwork by tying the incentive plans to individual, group, and company performance, he said.

He added that this is particularly helpful to non-salespeople in a team and it encourages top performers to help less experienced members of the team.

“Having a bonus pool to reward across teams can instill a sense of, ‘What’s good for the company is good for me,” he said. 

‘Split the pie’
Business opportunities can pop-up anywhere and offering an incentives to individuals who are not necessarily part of the business development team can be a good addition to any compensation plan.

“Do not be afraid to split the revenue pie to provide a taste for those who play valuable roles in opening (and not just closing) business,” he said.

“I suggest that you split the pie into four segments – identification, buying vision, signed contract, and results – but be careful to clearly define the criteria to earn credit,” he added.

Factoring in ‘discounts’
Sales representatives often give out discounts but how do you factor those in a compensation plan?

Altman suggested working on a type of sliding scale, with the end goal being that your sales reps “battle to preserve margin”. For example, selling at full price will get 100% recognition; give a 20% discount, get credit for 70% of the revenue.

“If your professionals constantly say they need to reduce prices, then you have to consider if you have something of value that you are selling. If you do, then realize that being the low bidder is a selling skill issue.” he said.

“Do not penalise the reps, however, if you cannot demonstrate value that makes your product or service worth the extra investment of the full price.”

Rewarding consistency
It’s no secret that an employee who consistently nails their target after every quarter is more valuable than one who hits and misses between quarters.

Altman urged employers to offer a ‘kicker’ or extra bonuses to employees that either hit their target or go beyond it after having hit it in the previous period as well, adding that companies should not put a cap on incentive-based compensation plans for salespeople.

He said that this not only “allows reps to stay motivated, it also discourages them from playing games with the comp plan”.

“Finally, be sure that your incentives are easy to calculate. The best incentives are the ones that your rep can calculate before they leave a meeting,” he said.

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