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Compensation Plans – Planning your growth

Compensation Plans – Planning your growth

About a week ago, I commented on a post at David Maister’s site related to sales commissions. Both David M and David Kirk asked for a bit more explanation of my comment. (This is not uncommon since I can be unclear more often than not!)

This is a copy of the original comment post:

I see different compensation schedules at each of my clients. They hire me to help them figure out the best method. Some believe there is a “golden rule” for how people should be commissioned. 

Every company, and sometimes department, needs a system that works for all the players involved in growing the business (business developers, outside sales people and some inside sales), maintaining the business (inside sales, service, and project technicians), and managing the business (administration). 

In all the years I’ve done this, I’ve never created one system that is a clone of any other. Personal and group culture and the company direction are the strongest factors involved in my work. 

The rest of this post is about general compensation. The next post will be sales-specific.

There are a few questions I ask when handling compensation:

  1. “What am you trying to achieve?” Business owners may want to be the next Microsoft or they may just want a comfortable lifestyle business. Whatever is desired must be clearly stated and measurable in order to build a business around the desire(s). Are you trying to grow quickly and sell the business? Are you trying to lower client attrition by 10% this over the next 2-3 years? What is our strategic plan for the business? Always find out the timeframe with the desire, too.
  2. “Who will help you achieve the desire(s)?” For the purpose of this article, let’s just consider people internal to the company. Typically, this is at least one sales person, a technical or delivery person, and some administration. Depending on the size of the business, this could be a team of people (General Mills requires hundreds of people to put cereal on grocery shelves) or just a few (look at our thousands of understaffed small businesses where everyone wears many hats).
  3. “How will you communicate my desire(s) to these people in a way that creates incentive to help you reach the desires?” If I started a business tomorrow and told the staff my goals for the company are to get a million dollar house, a yacht, and fund a Hollywood movie, I doubt I’d see peak performance from them. However, if I let them know I’d like to grow the business to $20MM in revenue with a 10% net profit and a 5% profit sharing plan of which they are entitled to, then my result might be slightly different. (So far, we’re just dealing with the cash aspects of compensation and company mission.)
  4. “How is each person on the staff compensated for his effort and for going above and beyond?” I start with this question to learn two things: a. how are people comp’d now and b. is everyone entitled to recognizable comp for being a superstar?
  5. “Does each person have a piece of short and long term results?” This is key. Many businesses offer a salary, a year end bonus option, and “standard benefits”. Talk about boring the heck out of someone. Everyone should have a shot at short term compensation bumps (like a commission) and long term benefits related to the performance of the company (stock options, profit sharing, etc).
  6. “Is the compensation plan clearly understood and achievable?” Everyone should be able to measure his progress and see/hear others who have achieved success with the same or similar plan. This is critical to buy in.
  7. “What non-monetary compensation is available?” We need cash to pay bills and plan for retirement. We need more than this though. For some people, its recognition, for other ongoing training, and so forth. Personally, I love it when a manager and direct report come up with something together on a quarterly or annual basis such as “a five day trip to Mexico” or “extra time off to help rebuild New Orleans”.
  8. “What is the risk to the company and staff is we a. exceed our projections, b. horribly miss our projections, or c. achieve our projections?” Compensation plans are wonderful when a business is being planned. They make sense then. What happens if your annual revenue plan was $15MM and you achieved $30MM or only $5MM? Is anyone grossly over or underpaid? Is the payment justified or easily understood?
  9. “How often will we review the compensation plan?” This is important to do annually with new companies and every few years with established firms.
  10. “Will you allow exceptions?” Does a recognized expert in your field who just accepted a position with you get a deal outside the normal compensation plan? Typically, they do. This is easy. But, what about the new hire who wants to work from him two days a week when others in the same employee classification do not have this luxury? How you handle these exceptions is key in maintaining morale.
  11. “Are you paying for results or time?” I hope the answer is the former, but too often, I see its the latter. Changing company culture so the focus is on results is much easier when all staff have the benefit of short and long term compensation bumps. Otherwise, you could be hiring people who just need a job.

These are the questions I ask of managers and business owners when I’m engaged to review a compensation plan. My next post will be about sales commissions for staff.

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Bill DotsonSee the About page (linked at the top of this page)View all posts by Bill Dotson →

  1. Nathan SNathan S08-13-2009

    “Everyone should have a shot at short term compensation bumps (like a commission) and long term benefits related to the performance of the company (stock options, profit sharing, etc).”

    This is key! If you read about Sales commissions on the web, it won’t be long until you run into a horror story about sales commissions gone wrong. Either sales members try to game the system, to the detriment of the company, sales people are driven to work against eachother, or moral is destroyed. The missing element in these situations is profit sharing. Everyone KNOWS what good behavior is, knows when their actions are not to the benefit of the company, or when they’re abusing a system. The key is to have a blanket incentive which discourages these behavior in a generalized form… if it’s a formula, people will find an important element to abuse – something that you can’t quantify, or which has been left out of the equation accidentally. Bottom line, if your company gives stock options, your employees will want your company to be successful.