How effective is your sales team? If you think it needs improvement, take a look at your team compensation plan.

by Mitchell Roye

Flash back to your childhood for a moment. Remember that overeager 9-year-old jumping up and down at recess, hoping to get picked first for the baseball game? For many of us, this is our earliest memory of a team.

Back then, our reward was the pursuit of fun and after-school bragging rights. Compensating a team today is much more complex and financially oriented.

Ironically, compensation is not the place to start a discussion about how to pay team members. The place to begin is in the design of the team, because therein lies the seeds of success and failure.

“Why teams fail” (right) presents common team design mistakes that all of us have painfully experienced at one time or another. How many of them have you encountered? More importantly, what did it do to your perception of teams?

It’s no surprise that any one of these mistakes can cause friction within a team environment or even cause a team to self-destruct. What may surprise you, though, is that the first step in team compensation design is to ensure that you have correctly designed and structured the team.

Why? If you carefully examine what ruined your team, you’ll find that problems inherent in the design or structure of the team will surface in a negative and disruptive way in the compensation plan. So, in other words, an effective team compensation plan depends on a well-thought-out team design and team management process.

Back to our baseball example. How can you expect to beat the other guys if you have Jimmy in right field (who can’t catch a ball if you put it in his glove), a shortstop so farsighted he can’t read the writing on his glove and a catcher who beat up your pitcher in an after-school brawl last week?

Play ball . . .
OK, so you’ve designed an effective team structure and the rules of engagement. Did you remember to put the right team members in place? Great! You’re now probably scratching your head wondering what is the best way to compensate your team?

Let’s examine four important concepts that continually stump even the best of them.

Concept No. 1
Measuring team performance
One of the first steps you face when designing a team compensation plan is determining how to measure team performance. What do you think is one of the top three sales team performance measures? Answer: Sales or gross profit volume.

When you design a team performance measurement system, make sure you follow the guidelines listed in the box at right, “The rules of the game.”

Concept No. 2
Team vs. individual performance weighting
Another crossroad you will face is determining how much of an employee’s incentive should be based on team vs. individual performance.

Should team performance determine 100 percent of an employee’s incentive payout? Should individual performance be the sole factor? Or, is the correct answer somewhere in between?

Here is a useful test that has helped many managers successfully answer this question:

Determine the degree to which an individual contributes to a team and the importance of this individual’s contribution to the team’s results. Individuals whose team participation is minimal would generally receive less team compensation (as opposed to more individual-based performance compensation) than someone whose participation and contribution is much greater. Sounds simple doesn’t it?

While there are no absolutes in determining how much of the incentive should be team-based vs. individual-based, another guideline is the smaller the team, the greater the emphasis on overall team performance. The rationale is that on smaller teams, team members have more control of the team result and should therefore be rewarded accordingly. Conversely, on larger teams, you need to place more emphasis on individual performance. The rationale is that each individual on the large team has less ability to impact overall team results. This is a basic concept that many companies miss.

A caveat to this guideline, however, is that in some unique situations, you might choose to tie the majority (or minority) of an individual’s incentive to team performance, regardless of team size.

Concept No. 3
Rewarding team performance
Using another baseball example to drive home our point (no pun intended), you’ve now determined that if Sammy Sosa hits 70 home runs and the Cubs go to the World Series, he will earn more money than if the Cubs finish in last place.

So, your next decision is to determine how you will reward individuals for their participation on a team. Let’s look at two methodologies, cash and non-cash incentives.

Show me the money. Cash incentives are effective when management expects a team to produce incremental sales results. Cash incentives can be paid in the form of an add-on bonus to current pay or as a component of existing pay. The most common forms of cash incentive are base salary merit increases, commission, bonus or a combination of all three. The table below presents the three types of cash incentives and their impact on performance.

Where’s the beef? Non-cash incentives are effective when used to reward tasks, activities and accomplishing tactical milestones. For example, I am proudly growing my collection of hats, coffee mugs and sweatshirts bestowed on me by clients. It sounds corny, but these items mean a lot to me because of what the gift represents in terms of the bond and sense of loyalty created between my clients and me.

Examples of non-cash incentives include vacations, gifts, dinners, coffee mugs and gift certificates. The table below details when to use non-cash incentives and the expected impact.

Concept No. 4
Compensation designs
Having determined the appropriate mix of cash and non-cash incentives, your next step is to select an appropriate compensation plan design for what you are trying to achieve.

Here, the range of choices broadens significantly, including bonus and commission matrices, bonus formulas and schedules, performance hurdles and multipliers, adjusted value plans and performance-funded bonus pools. The range of plan designs and how they can be mixed and matched is enough to cause even seasoned veterans to pick up the phone and call for help. While this is certainly not rocket science, there are proven solutions and pitfalls to consider when constructing a compensation plan.

Batter up . . .
What differentiates an effective team from a team that implodes? Effective teams have a clearly identified purpose, structure and rules of engagement, thus forming a strong foundation. Effective teams also have compensation programs designed specifically to support the goals and the relative contribution from each member.

Designing a team compensation plan involves many elements and blends science and art. The best plans typically have the support of those who will be paid from them. By following the guidelines discussed here, you will be off to a good start designing your team compensation program. 

Mitchell Roye, managing director of The Cambridge Group, can be reached at 949-725-9282, or mitchelo@bigplanet.com.

This article originally appeared in the 2000 Progressive Distributor ASMMA/I.D.A. spring edition. Copyright 2000.

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