Get Your Compensation Plan Out of the MUD

[0:04] This is the Full Funnel Freedom Podcast, supporting sales leaders and managers to improve their sales funnels from people to prospects. I'm Hamish Knox. In this show, you'll learn how you can improve your results, lead a great team, and hit more targets with Full Funnel Freedom. Welcome to the Full Funnel Freedom Podcast. I'm your host, Hamish Knox, today bringing you ideas and insights around compensation plans. The Full Funnel Freedom podcast is brought to you by Sandler in Calgary. To discover if Sandler in Calgary might be a good fit to support your organization, creating a common language around sales and a consistent, repeatable, scalable sales function, go to hamish.sandler.com forward slash how to Sandler. Compensation plans. Most of them are okay. Some of them are terrible. There's a few good ones. And really what it comes down to is clarity or lack of clarity. As we often tell the leaders that we work with, there are no good compensation plans that are only effective and ineffective. And the effectiveness is based on are they creating or driving the desired behaviors in our salespeople? There was a client years ago, one of our colleagues, who decided to put their compensation plan based on revenue. So one of their salespeople went out and sold $5 million of stuff at cost.

[1:33] And that compensation plan was very quickly changed after that. Earlier in my sales career, our senior executive would change our compensation plans essentially every year. And one year, they decided to compensate on a specific product. And they would call them strategic products for the year, and they would add some compensation. Well, one of my colleagues in Calgary, the majority of his book of business was already using that service. But because there were no controls around it had to be net new business, he ended up with a very lovely renovation of his basement at the end of the year because he was getting compensated on services that were already being bought. So it ended up costing the company that we both worked for a lot of money that they didn't actually have to pay out if their compensation plan had been framed a bit differently. If we start looking at ineffective compensation plans first, the way I think of ineffective compensation plans is they are stuck in the MUD. And MUD, of course, being an acronym for Misperceived, Unintended, and Dysfunctioned.

[2:50] So first of all, ineffective compensation plans are misperceived. So there are two types of misperception in this case. Number one is the total compensation plan for the individual is not shared. I'm a huge fan, especially when recruiting, of sharing total compensation. So every bit of compensation that a team member is going to receive, whether that's benefits, a phone, a car, anything that goes into their compensation plan is going to be shared with them even before they become a member of the team because then that way they understand that their compensation is much more than just the number that shows up on their base salary or their commission check every month. So number one is misperception around compensation plans is all we're sharing is the base salary and maybe some projections of commission.

[3:48] That's not enough. We need to share everything with our team member because that's going to actually reduce the number of awkward conversations that we have to have around, hey boss, I need a bit more on my base.

[4:00] The other misperception that will come up in ineffective compensation plans is the calculations for actually figuring out compensation are so Byzantine that the individual feels like they're never going to get compensated for their efforts.

[4:17] And so they'd end up getting demotivated because after a while, the efforts that they think are going to get them to variable compensation are actually not working. And their leader doesn't give them any sort of clear line of sight to how they can actually get to earn more variable compensation, which causes them to be demotivated and then, of course, eventually leave. This is similar to a previous episode where I talked about the six ways that managers steal from their people and in stealing the credit, or I've seen it multiple times where a quote-unquote sales leader will actually take credit and deny compensation to a salesperson because that sales leader might have encountered the prospect at a networking event years ago and had a conversation with them. Ergo, that salesperson does not actually get the compensation for closing that account. That's ridiculous. But there are real scenarios where a salesperson should not be compensated for...

[5:30] Earning a piece of business because essentially it was already closed before it was shifted over to the salesperson. And I've coached several leaders on how to have that conversation well in advance with their sales person around. They're not going to get the commission for the initial sale, but they will be eligible for commission on an ongoing basis. We want to reward effort. And like my anecdote earlier about my former colleague who got commissioned for sales that he was already making, we don't want to unintentionally increase our cost of sales by being overly nice to a salesperson when we're essentially gifting them a piece of business. Now, if they work that piece of business and they expand it, awesome, let's compensate them all day long. But if essentially the business is closed for them, that's not eligible for commission, in my opinion. So that's the misperceptions an ineffective compensation plans can have. Then they create unintended consequences.

[6:36] So if our compensation plans are set up to focus much more on retention and account management, our team is going to default that way, even though we may be wanting them to do more proactive prospecting, lead generation, funnel filling, qualify closing activities. It's fascinating how many times I've been invited in to look at compensation plans and the behaviors that the sales team are doing that the leader is complaining about are the ones that are completely being incentivized. So it totally makes sense after a quick review that the salespeople would be doing something other than what their leader wants them to do because we're all creatures of comfort and we will also tend to follow the path of least resistance when it comes to incentives. The dysfunction in MUDD.

[7:29] Comes from compensating on activities or results that are not beneficial to creating full funnel freedom. So easiest example is compensating our marketing department on the number of leads they generate instead of the quality of leads that they generate. Or if there's an outsourced lead development firm or meeting booking firm. And to date, I've yet to have a conversation with the sales leader who has had a positive experience with an outsourced firm because, again, they're typically compensated on how many meetings they book instead of the actual quality of those meetings and whether or not the prospect is even qualified before the meeting is booked. So when we look at ineffective compensation plans, they're stuck in the mud because they are misperceived, they create unintended consequences, and they also foment dysfunction in the organization towards creating full funnel freedom. Now, if we look at effective compensation plans, all effective compensation plans have a cap on them. You might be thinking, hold on, I thought, you know, salespeople motivated uncapped compensation, et cetera, et cetera.

[8:47] Well, cap again is an acronym. him. Now, if you read The Machine by Justin Roof Marsh, he talks about no variable compensation for salespeople, which is a bit of a radical idea, but he's got some data that shows that it can be highly, highly effective. When we're talking about CAP, we're talking about creating clarity.

[9:08] Keeping each person on our team accountable, and promoting the correct behaviors. So from an effective compensation plan perspective, a great compensation plan is going to create clarity in two ways. So number one, each individual understands exactly what they must deliver to be compensated, whatever that might be, whether it's X dollars in sales, certain percentage of renewal, a certain number of unique conversations with decision makers each month, which by the way might sound weird and you're going to get in a fight with either your controller or your CFO foe over compensating for doing behaviors. But as we talk about with our clients, if our proactive prospecting activities or behaviors are consistent, our results are going to be consistent. It is fantastic when one of our salespeople has a giant whale land in their lap or a shower of pennies from heaven falls on them for an entire quarter. But what often happens is they stop doing the proactive activities that keep their funnel full. And then the following quarter, they are in a very, very bad place. So we encourage all of the leaders that we work with to have a portion of the compensation plan.

[10:22] To be accounted for continuing to do the proactive activities. And oftentimes what that looks like is the salesperson will not get paid their commission unless they are at a certain percentage complete of their proactive activity plan for either the month or for the quarter, which again, might sound like a radical idea to you. However, for consistent, repeatably, reliably full funnels, compensation on activities is key. The next clarity in compensation is it's real easy for individuals to calculate within a few dollars plus or minus of the number that their accounting is eventually going to produce. In a previous role earlier in my career, we often did not get our calculations, much less our compensation, to four to six weeks after the close of the quarter, which is at least a third to a halfway into the next quarter. And none of us really felt like doing any sort of proactive activities because we were already, we were still waiting on what were we going to get from the previous quarter. When we look at holding accountable, is the compensation plan holding each salesperson accountable to growing their book of business?

[11:35] Now, if they're in a qualified closer role, now that's, they're starting from zero. So they have to continue to expand. That's obvious. But if they're in much more of that expander or account management role, does their comp plan actually hold them accountable to growing their business? So if we're looking at compensation plans that are compensating our salespeople for business that was closed months or years ago, often this happens in subscription business, eventually that salesperson is going to get to a comfort level of their income and they're going to stop.

[12:10] And there's no way for us to let them go for cause because they're literally performing the way that we ask them perform. However, they're not actually growing our business anymore. So does our compensation plan hold our individual salespeople accountable for growing their business? And that ties into, does it promote the correct behaviors? So if we have an overarching corporate goal of increasing share of wallet with existing customers or having our customers buy on average leverage three products from us, where right now they're only buying two products from us. Does our compensation plan promote conversations with existing clients about other products that they're not currently using that may be a good fit for them? So if they don't, then our compensation plan is ineffective and it's creating dysfunction. And circling back on something I mentioned a.

[12:59] Earlier in the episode about compensating based on doing the proactive activities, one of our clients tied their salespeople's opportunity to earn 100% of their quarterly commission to successfully achieving the leading indicators. Those are things like number of unique conversations each month, number of discovery meetings held with qualified buyers each month to actually being able to earn 100% of the compensation. If the salesperson didn't hit 100% of their leading indicators, they couldn't get 100% of their compensation. What was amazing is this client's funnel was consistently reliably full because their salespeople were always focused on continuing to add to the funnel as opposed to sitting back and enjoying the pennies from heaven or the whales that they might have closed. Ineffective compensation plans are stuck in the mud. Effective compensation plans have a cap cap on them. Compensation is a giant, scary beast that can go in a myriad of different ways. But if we avoid the mud and we stick to a cap, our compensation plans are likely to be more effective and create full funnel freedom in our organizations. This has been the Full Funnel Freedom Podcast brought to you by Sandler and Calgary. I've been your host, Hamish Knox. Follow us on Instagram and Twitter at SandlerNYYC. And until the next episode, go create full funnel freedom.

[14:22] Thank you for listening to Full Funnel Freedom with Hamish Knox. If you want to increase your sales with ease, go to fullfunnelfreedom.com.

[14:33] Music.