Sales compensation plans for improving new hire productivity

Attrition is generally high in sales functions which makes it extremely important to have a 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 the 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 the initial months. The goals increase every month till they reach the desired potential goal at the end of the ‘Ramp period’. For example, the rep may be assigned 20%, 40%, 60%, and 80% of the full rep goals 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 the 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 from 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 the remaining incentive on the sales they make. For example, if an average new-hire rep makes 70% of the target incentive, he can be paid a fixed 30% incentive and be allowed to earn the rest on the basis of his sales. In such a plan, the rep has the 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 training 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 the ramp, quota relief given each month, guaranteed amounts paid each month, etc. These are often set based on the ‘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 the quota be progressively increased as the rep matures?

To answer these questions, we categorize reps on the basis of their tenure and plot their average revenue achievement against the 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 :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 : 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 on 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 progress (s

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 judgment. Nevertheless, these analyses help create a great first pass and help company sales leaders to make a more informed decision.

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