Changing Sales Compensation Plans Quarterly, Does It Work?

If you have ever designed sales compensation plans, the suggestion to build an incentive plan and then change it quarterly may have been proposed.  Perhaps leadership needs this flexibility because of the many unknowns in planning.  Maybe the company is going through restructuring, where the sales organization and goals are shifting – yet the sales team needs a pay plan so that they can be rewarded for their efforts.  Now from leaderships point of view this may make sense, buts let’s consider three of the biggest unintended consequences.

• Employee morale & motivation: The sales team is already facing the unknown, which causes stress.  Now the sales compensation plans are layered on top of that ambiguity.  One of the key principles in sales compensation plan design is transparency.  They need to understand and see the possibility of how they can earn their annual target incentive.  Because of the lack of visibility into future plans, the sales employees maybe overly stressed by meditating on whether they should go all in into this quarter's plan, or push sales for next quarter’s plan.  They are geared to make the most out of the plan – which is what you want as a company.  Without that visibility, these quarterly changes may lead to unintended behaviors.
• Plan performance analysis: When it comes to analyzing sales incentive plan performance, it becomes more complicated to asses which plan is working & why.  Typically, when analyzing sales compensation plans you use a minimum of 1 years’ worth of data.  Without a full years’ worth of data, you may have skewed results, or results that don’t depict the true sales incentive plan performance.  In my experience, when working with clients, the data cannot tell a story because of the limited time-frame which has a compounding effect if the sales team is fairly new.  If the sales team has new hires that are still ramping, 3 months is not enough to analyze their performance.  Exacerbating the issue, for the next quarter there may be a shift in focus for the sales team.  If there is a shift in role or job function, this requires sales enablement.  The sales team should be trained to show how they can achieve the plans.  With plans changing quarter over quarter this doesn’t allow for proper enablement, and will hinder performance.
• Year-end rewards: Let’s say you have a president’s club. How do you combine the 4 different plans to determine achievement?  What weighting will you use for each sales compensation plan?  If the plans are drastically different, meaning you are not only changing the quotas, but the structure, how will you determine who goes to president’s club?  Quarterly commission plan changes will limit visibility on how you are rewarding your sales employees in aggregate, for the year.  We have to be careful here, because the way in which we measure each quarter may seem unfair in the eyes of the sales employees.  As an example, for quarter 1, let’s say the rolled-out quotas were all unachievable.  Due to this realization, leadership resets quotas and gives them a little buffer so that the sales team has quotas that are realistic and more than attainable.  How would you weigh the performance of these two plans?  Most likely you won’t weigh them 50% & 50%.  Switching compensation plans quarterly complicates how we measure annual performance.    

So, what’s the answer?  Generally, a company should not change sales compensation plans quarter over quarter.  There are two types of sales incentive plan changes, plan structure or quotas.  If you have to change, the latter is better than the former.  Last thing you want to do is change the plan structure quarter over quarter; mainly you shouldn’t have to do this if you are designing the comp plans in alignment with the role and business objectives.  Before the beginning of the year, the company objectives should have already been established, so the focus in the compensation plans should be the same throughout the quarters.  Quotas may shift quarter over quarter due to seasonality, amongst other factors.  However, they should be shared with the Salesforce at the beginning of the year in the plan document if possible.

Now if the company's objectives are changing resulting in the entire sales organization & roles to shift then this will require change management; including enablement & training before you tie their pay to new plan performance.  In the meantime, there are three options employed with this type of uncertainty. 

1. One option frequently used with most organizations is leaving the plans as is from the prior year until training & enablement has taken place.  Although this option may cause confusion, since you are training them on something new yet paying them for something old. 
2. The second option is giving them an MBO or KSO type plan.  This is challenging to implement but allows better performance management.  Because the role or structure is changing, and there are too many unknowns, you want to pay them for their performance but can’t clearly set fair quotas.  So, you set the desired objectives, and let the direct manager assess their performance. 
3. You can give them a non-recoverable draw (guarantee) until sales strategy, organization and roles are well defined.  This maybe the least favorite in a company's point of view, but it allows the sales team to learn and get up-to speed on new roles.  To help with budgeting, you can apply the non-recoverable draw in combination with the new plan.  So the new plan is based on new behaviors & goals that they are still learning, but you can guarantee them a portion of their target pay, and if they exceed it then they will get the higher of the two (sales commission versus guarantee).  You can also do this in a decreasing scale, depending on time needed to execute restructuring.  As an example, they can have 100% of their target variable for the non-recoverable draw for the first 3 months, then the next month is 75% and etc.  The goal is to get the sales team enabled to achieve the corporate goals, but also not penalize them for the restructuring of the sales organization.  This option is the one we would generally recommend.  

Now, this whole process with restructuring requires communication and transparency.  The sales person should feel like they know their new role, they have proper training, tools & support and the plans should be aligned with that.  Leadership and strong manager support is also critical in the effectiveness of change management.  As stated in a study on human relations, “…organization-wide work design changes need strong manager support to be fully implemented and effective, further supporting the alignment of work practices with job design.”

On a side note, best practice is to evaluate commission plans quarterly, but only change if absolutely necessary.  Generally, commission plans are changed annually if corporate objectives change year over year.  If plans are not aligned with corporate objectives & roles then they should they be changed.  The change referred to in this blog are quarterly changes, that are typically non-standard in most organizations.

If you would like to know more on how to design, create or manage sales incentive plans then checkout our coaching program here.  We work with you monthly to ensure your plans are fair to your company and fair to your sales team.