As part of our series on Compensation Plan Modeling we bring you insights from our expert, Dan Ganse on best practices to ensure that your compensation plans achieve the results you expect. What to expect and plan for and how to ensure that you won’t end up overpaying or underpaying your people:

“When plans are not properly modeled before they are rolled out to the sales force, companies must deal with the consequences of unknown budget risk, unanticipated compensation costs, and unexpected mid-cycle modifications to plans. Many companies lack the time and resources to model new compensation plans, but not doing so can lead to some nasty surprises. So, the first step to modeling is to simply allocate time and resources to people with the right experience.

Once you’ve established modeling as part of your compensation planning process, the next step is creating a plan model. Building plan models requires a specialized set of skills so that the resulting plan model can be tested easily in a range of likely scenarios. You have to know where you’re headed with your testing to know what kind of model you need to build.

Once the plan model is created, the next step is using it to test different scenarios. The first run of the model should be “at plan,” or assuming achievement of the sales target. That is, if your company performs as you expect it to for the plan year (or whatever appropriate timeframe you’re modeling), what will the commission/bonus payments be?

If your results are not what you expect, the problem could be related to the structure of the plan or to the plan parameters. If adjustments to the commission rates, products weights, or other parameters do not produce the expected results, the problem is likely structural, which means rethinking and redesigning the plan itself.

Assuming your results are in line with your expectations, the next step is testing the plan’s budget sensitivity. What happens to payments and the cost of sales if goal attainment is 50 percent, 90 percent, 110 percent, or even 200 percent of target? Note the expected payout of each of those scenarios and match that against what is acceptable.

When running the various scenarios, be sure your modeling data sets are representative of typical performance distributions rather than assuming that everyone overachieves at exactly the same levels.

If you are satisfied with the model results under a wide range of scenarios, you are ready to launch your sales compensation plan, but modeling does not end there. After plan launch, track actual performance against predicted performance on an ongoing basis. Investigate any deviations that you may find and consider making mid-course adjustments to your compensation plan if the consequences of not making adjustments are severe enough.”

Write in if you face issues or have anything to share about your compensation plan modeling.

A well-designed compensation plan is one of the most effective ways organizations can drive their sales forces towards their sales and revenue targets. However, many organizations cannot predict how their new plans will perform or assess the impact of changes to existing plans because most software systems lack easy-to-use modeling tools. A lack of robust reporting and analytics tools similarly hinders the quality interpretation of modeled results.

Sales organizations without the ability to effectively build plan models and interpret results are unable to:

• test changes to compensation plans, data inputs, organizational hierarchies, team definitions, territory alignments, and many other important factors

• compare results from multiple plan models before making changes to compensation plans

• track, monitor, and audit changes to compensation plans over time

• understand how proposed changes to compensation plans will impact pay across the sales force

• predict compensation expenses both in absolute amounts and in percentage of sales

Failure to model, validate, and analyze the impact of new plans or plan changes before they are rolled out to the sales force exposes companies to unknown budget risks, unanticipated commission costs, and excessive mid-cycle plan modifications.

With these challenges in mind, Synygy recently enhanced the already-proven plan modeling capabilities of its sales performance management software. Now, it’s even easier for sales organizations to model the impact of proposed plan changes in response to changing market conditions, corporate strategies, data inputs, and sales force structures. Click here to learn more  about how modeling can eliminate the unexpected.