Compensation Plans for improved new hire sales productivity

13 May 2014

Attrition is generally high in sales function which makes it extremely important to have good ramp up strategy in place to attract top talent. To ensure motivation when newly-hired reps are still adjusting to their role, they are generally provided extra incentives or are put on special compensation plans with lower sales targets. The type of acceleration provided during initial months depends heavily on the type of role and the industry. Some popular incentive plan designs that are used for new hire reps are:

  • Reduced Quota/Goal: Many companies provide reduced goals during initial months. The goals increase every month till they reach the desired potential goal at the end of ‘Ramp period’. For example, the rep may be assigned 20%, 40%, 60% and 80% of full rep goal in the first, second, third and fourth months of employment and full rep goal thereafter.

  • Fixed incentive: Salespeople are sometimes paid a fixed incentive (mostly equal to target compensation) during their ramp period in industries where it is difficult to make a single sale during initial months. These are primarily the case where the sale is a large complex sale and tenured sales reps only make 1-2 sales per month. The clear downside to this plan is that reps have no motivation to make sales during their ramp period and may sometimes defer sales to get incentives on them after they graduate to the regular compensation plan.

  • Combination of fixed guarantee and variable incentives: In this type of plan, newly hired reps are awarded a part of their target incentive as a fixed guaranteed amount and are free to earn remaining incentive on the sales they make. For example, if an average new-hire rep makes 70% of target incentive, he can be paid fixed 30% incentive and be allowed to earn the rest on the basis of his sales. In such a plan, the rep has motivation to sell more even during the initial months to overachieve on his incentive payment.

  • Management by objective (MBO): Some organizations treat new hires by assigning them a purely subjective MBO compensation plan during their ramp period. The reps may be required to complete fixed objectives such as completing specific trainings or achieving some certifications. On the basis of their performance in these objectives they are awarded incentives.

The primary struggle in defining such new hire ramp plans lies in gauging correct parameter values such as duration of ramp, quota relief given each month, guaranteed amounts paid each month, etc. These are often set based on ‘gut feel’ of compensation managers and might not necessarily correspond to ground realities. Simple analytics can be used to design the optimum plan for new-hire sales reps which helps them achieve their target incentive while motivating them to sell as much as possible, thereby increasing their sales productivity.

For such analysis, let's assume we've decided to utilize the reduced quota/goals strategy for the new hire ramp period. In order to design this plan we need to answer 2 questions:

  • How long should the ramp duration be?
  • How should quota be progressively increased as rep matures?

To answer these questions, we categorize reps on the basis of their tenure and plot their average revenue achievement against full rep quota (See figure 1). This shows the profile of rep performance improvement as they mature. It is clear from the graph that sales achievement in initial ramp months is very low and increases progressively until it reaches 80% in the 4th month after hire. Thereafter, the rate of increase slows as rep matures further and achievement eventually plateaus off. This makes a good case for a ramp duration of 4 months.

Figure 1

Figure 1 :Reps are categorized on the basis of their tenure and average revenue achievement of reps in a specific tenure category is plotted. For example, the graph shows that employees who have been in the company for 1 month achieve, on an average, 20% of the revenue quota.

In addition, we also plot the distribution of sales achievement of all reps within a specific month since hire and identify the quartile markers (see figure 2). This helps us determine if particular reps are overachieving compared to others. The graph shows that the median (50th percentile) is steadily increasing over the initial months and the values are similar to the averages we plotted in figure 1. 80% target achievement for a rep with 4-months of tenure passes the 'gut-feel' test as well. The rep can be expected to mature further without earning substantially lower than his target incentive. Had this number been around 60%, we might have further extended the ramp duration as it suggests that reps require more time to adjust to their role.

Figure 2

Figure 2 : Plot of achievement of all reps categorized on the basis of their tenure. The 50th percentile shows an increase with the increase in maturity level of reps.

Having decided the ramp duration, the next step is setting progressively increasing quotas for each month. For this we need to see how sales reps' achievement ramps as their tenure progresses (see Figure 3). Quota expectations should be in line with average sales ramp up. In this case, for example, we can set quota values for months 1, 2, 3 and 4 as 20%, 60%, 70% and 80% of full rep quota.

Figure 3

Figure 3: Reps are categorized on the basis of their tenure and their sales revenue is plotted. For example, the graph shows that employees who have been in the company for 1 month make sales of $2004 on average

While these numbers are analytically determined on the basis of data, company sales management would probably prefer to tweak these numbers based on their business judgement. Nevertheless, these analyses help create a great first pass and help company sales leaders to make a more informed decision.

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