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Best sales compensation plans are customized, says Xactly CEO

In this Q&A, Christopher Cabrera explains why companies should personalize sales compensation plans and limit performance measures to three.

The new book Game the Plan: Every Sales Rep's Dream, Every CFO's Nightmare starts with the assumption that sales representatives will -- and should -- try to maximize their pay and rewards. Rather than worrying if reps are taking unfair advantage, author Christopher Cabrera, founder and CEO of compensation management technology vendor Xactly Corp., argues that finance and sales leaders should instead design sales compensation plans that make gaming a win-win scenario for both reps and their organizations.

Game the Plan books

In this Q&A, Cabrera talks about some of the key themes of the book and explains how to construct effective sales compensation plans. He also gives tips on how to get sales and finance on the same page and provides a benchmark for when a company should consider moving away from spreadsheets for compensation management.

A major takeaway of the book is that sales compensation plans should contain a mix of monetary and nonmonetary rewards. Why?

Christopher W. CabreraChristopher W. Cabrera

Christopher Cabrera: The [purpose] of compensation plans is to motivate behavior, and humans are motivated by a multitude of things. Certainly cash, but recognition and competition are things you also need to tap into. Years ago, I managed a large team of inside sales reps, and we were doing regular SPIFs [sales performance incentive funds]. In those days, big screen TVs were just coming out. Everybody wanted them, so it was a popular SPIF: Whoever sells the most of X this month gets the TV.

What was funny was whenever I would ask [reps] 'What would be a good SPIF?', nine out of 10 would quickly respond 'Money.' If you ask them, they'll say that, and so sales managers do that. But in reality, winning something tangible drives a much more competitive behavior. Every comp plan has to have a component of money, but it also has to tap into [the] emotional: How do we get these juices flowing to compete with other reps?

What's an example of an effective nonmonetary reward?

Cabrera: Winner's circle [or] president's club. What's amazing to me is over the years of managing salespeople, you'd think their DNA is that they're so money hungry, but the reality is different. There's obviously a correlation between money and club -- if you make club, you're doing well, so you're going to make money -- but I have seen reps sacrifice cash [for] the recognition of club over and over again.

According to the book, the optimal number of performance measures in sales compensation plans is three. How did you determine that number?

Cabrera: We looked at [our Xactly] customer data and [did] an analysis that correlated the number of measures on a plan to how the reps on those plans performed in terms of percent of quota. The data showed very clearly that plans with one measure did well, those with two did better and those with three did the best. Plans with four, a little bit less, five even less, and with six or seven, performance [dropped] off dramatically. So pick the three things that are going to be most important to your business and find a way to drive those things.

Game the Plan argues that compensation plans should be personalized as much as possible. For instance, customization by generation is good, but the ideal would be by individuals. Why is that important, and how can a company practically achieve that level of personalization?

Cabrera: If you go back to the TV, one of the things that frustrated me long ago when I was a rep and my managers were throwing out these SPIFs [was] I already had a big screen TV. So they'd come out with yet another TV SPIF and I wanted to win because I wanted to be competitive, but I kind of didn't want to because what [would] I do with another big screen TV? So it wasn't as motivational as if they said, 'Chris, if you could have something that would drive your behavior, what would it be?' They couldn't do that years ago was because it was a very manual process to manage. [It was] difficult to have the SPIF, let alone have individualized SPIFs. But now with the advent of ... software, you can do that: Managers can literally create SPIFs on a rep-by-rep basis.

We have Gen Y salespeople and [also] pretty senior people. I can guarantee the SPIF we're going to do for the folks in their 50s will be very different that the SPIF for the folks in their 20s. If we tried to do one homogenous one, it wouldn't be as effective but that is how companies do it today if they can at all -- a lot don't even employ SPIFs because it's too hard.

One chapter is devoted to getting finance and sales to craft and agree upon sales compensation plans that are mutually beneficial to reps and to the organization. How can business leaders achieve this alignment?

Cabrera: Sales is perceived as trying to take advantage of finance, and finance is perceived as being worried they're going to do that, [but] both parties are just doing their jobs. You've hired salespeople to have the DNA to work around the system and figure out [how to] maximize revenue and their pay, and that's exactly what they're doing. Finance gets freaked out about it because [they] hate being out of control. So when a VP of sales says, 'I want to change the comp plan to do this,' [finance's] first reaction [is] 'These guys [will] work the system and I'm going to get taken advantage of.'

How do you resolve that? Benchmarks. Finance loves predictability: Show me at a high level what the best companies are doing and what kind of plans are driving the best behavior. If sales can go to finance with a benchmark of empirical data, they can hang their hat on the data.

Don't be upset when reps game the plan -- be happy. Just make sure that when they do, it's not win-lose. And the way to do that is to design better plans in the first place based on benchmark data.

Compensation management is often performed in spreadsheets. Do you have a benchmark of when a company should adopt dedicated technology?

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Cabrera: Most companies view the creation of comp plans as a chore. The majority on a calendar year plan don't even get the comp plan [to] reps until March, April; I've seen as late as May. I'm trying to use variable compensation to drive behavior, [but] I don't tell you in writing what you're motivated on until you're 25% to 30% through the year. That's atrocious, and the reason isn't because people are bad, it's because they're hamstrung by spreadsheets. It's very difficult when you have 500 people to make sure you've crossed all the T's and dotted all the I's.

We think spreadsheets run out of gas at about 15 reps. [But] more importantly, remember [that] the notion of the comp plan ties into the age-old dangling carrot. I could give you a comp plan on a spreadsheet, or I give you an app on your iPhone or iPad and as you're flying around the country or driving around your territory, you can see how your comp plan's behaving. Which of those two paradigms is likely to drive behavior? Dangle that carrot in their faces with the iPads, iPhones and PDA devices.

The book recommends gamification as a good nonmonetary motivator, but experts warn that gamification initiatives can easily backfire. Do you have tips on how to best use gamification in sales?

Cabrera: Gamification is a piece of the portfolio you should use to motivate people, but it's just that: a piece. We see gamification on the sales side working the best usually in inside sales organizations where reps can earn points and badges for completing certain levels of training. Most of the gamification stuff is nonmonetary [and] it's fun, but [consider] two different sales forces: senior folks that have been selling for 30 years versus folks straight out of college. Generally the veterans don't care about badges -- that's not going to motivate their behavior. So you have to use it in the right places and as just a component of the strategy.

Emma Snider is the associate editor for SearchFinancialApplications. Follow her on Twitter @emmajs24 and the site @SearchFinApps.

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What makes a good sales compensation plan in your opinion?