How to Create an Employee Compensation Plan that Works

In this article I will walk you through an immediately actionable, step-by-step guide on how to create an effective compensation plan.

Employee compensation plans can be your best friend or worst enemy when it comes to improving results.

First, we need to define what an effective compensation plan is:

“An effective compensation plan motivates employees to perform and creates a positive return on investment for your organization.”

If either of those ingredients is missing, it’s time to re-evaluate your model.

Step One – Create a Solid Foundation

No amount of money will get your employees to perform if they simply do not understand what they are selling to begin with. Combine that with ineffective sales training and you have one of the most frustrating combinations around – the promise of financial security with no way to get there.

Takeaway: Before launching a new compensation plan, ensure your employees have a solid foundation to stand on.

Step Two – Determine Appropriate Metrics

Measuring employees on metrics that are not perceived to be within their control is a mistake many organizations make. If any of your key performance indicators contain components outside of your representatives’ span of control (for example, misdirected calls), they will deem the plan to be unfair, ultimately de-motivating your staff (or encourage them to find ways to game the system).

Takeaway: Rework metrics so that they only measure what your employees control.

Step Three – Set Realistic Expectations

You’re likely paying entry-level representatives somewhere between $30k – $45k per year. Are your expectations of them realistic? Are you measuring employees on 10 different metrics with weighted averages and variable payout based on tiered level results? Effective compensation plans have a limited number of impactful metrics for frontline employees. Supervisors should be held accountable for an additional set of metrics. Metrics that can be impacted by multiple sources (for example, average handle time) are a great fit for supervisor scorecards, not frontline representatives.

Takeaway: Reduce the number of metrics you measure and make what’s left easy to understand.

Step Four – Make Results Visible Daily

If 30% of your annual income were based on sales results wouldn’t you want to see how you were doing every day? You’d be surprised by how many organizations simply do not have accurate, daily reporting in place. The effects of this miss are enormous, from employees always refuting month-end payouts to time intensive manual tracking of results. It also makes coaching underperformers nearly impossible.

Takeaway: Make sure your reporting platform meets the needs of your frontline employees and supervisors.

Step Five – Calibrate Payout Outcomes

Upon hire your employees were likely told about their income potential. In most sales organizations there is a base salary and a variable portion. If you were to ask your employees, chances are their expectation was that they would get some if not the entire variable portion of their total targeted compensation.

At the end of your pay period if your commission payout distribution doesn’t look like this, you have a problem:

Payout Distribution Graph


Image credit:

Takeaway: Review the distribution of payout frequently and adjust goals until the bell curve ideal is reached.

There you have it – five practical steps to creating a successful compensation plan that will motivate employees and improves results. Of course, each step discussed requires that the individual(s) evaluating each component possess the talent and expertise needed to correctly identify gaps and develop solutions that are right for your company.

About the Author

Heather Lyon is President, Consulting Division of Straight Forward Consulting.

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