Insights | Dec 11, 2019
By Tom Kosnik
As you think about making a change to your company’s compensation plan, consider these factors to help your employees adjust to these changes:
This is somewhat of a fine line to navigate through. On one hand, you don’t want a compensation plan that is too complicated. On the other hand, you don’t want a compensation plan that is so simple that it’s boring and not engaging. Well-crafted compensation plans will be both engaging and exciting. Such plans motivate behavior and utilize multiple sales leavers. This means that well-crafted compensation plans will pay on both “lag” and “lead” indicators. For example, the various compensation plan components might include: (a) a salary with opportunity for salary increases based on years with the company, (b) a percentage of gross profit production typically on a sliding scale, (c) a monthly activity bonus or commission for hitting certain activity metrics, (d) a quarterly commission for signing on “x” number of new accounts or bringing in one enterprise account, (e) benefits such as healthcare or 401K matching, and finally (f) a Presidents Club trip. The point is, you should use multiple sales leavers and craft a compelling compensation plan that motivates behavior and helps achieve employee engagement.
Every great compensation plan is built out of an economic model. While this is a complex concept, remember that an economic model is the company’s financial model. What are you shooting for in terms of net income percentage, operating expenses, sales expense, recruiting expense, and general and administrative expense as a percentage of revenue? First, there are industry averages here. For example, consider sales expense running at 5% of revenue, recruiting expense running at 4% of revenue, and general and administrative expense running at “X%” of revenue. Second, the compensation plan needs to align into this economic model. If the compensation plan does not align with the company’s economic model (and not all economic models are the same, as they vary due to the life cycle of the business and the strategy and the type of staffing offered plus some other items), then there’s a high probability the compensation plan will be too rich or too weak. Such a compensation plan spells disaster for the company. The point here is to have an established economic model and to align your compensation plans with this model.
Non-financial rewards are very overlooked in our industry. There are tons of surveys that show compensation is a “7” on a scale of 10 variables that employees look for and value in their employer. Does the company offer good benefits? Is the company involved in community projects that better the community? Does the company offer ongoing training? Is there a career path within the company? Do the managers know how to manage effectively? Is the leadership of the organization inspiring and one people can look up to? Is this culture engaging and does the company have a vision one can believe in? There are countless non-financial variables that employees value when considering joining an organization or determining whether to move on to a new opportunity. Recognition is the easiest and most overlooked. Publicly and personally recognizing employees for a good day or good week, closing a deal, landing a new account, and the like, goes a long way, and in many instances, holds more weight than financial rewards.
While developing a compensation plan can be challenging, taking into account all the factors above is critical for successful outcomes when making compensation changes.
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