For the global business community, 2020 was arguably one of the most difficult years (if not the most difficult). Many industries, such as airlines, hotels and retail, had material revenue declines with expected periods of recovery measured in years. By May 2020, Gartner was predicting a decline of 8% in IT spending by the end of 2020, dropping to $3.4 trillion from $3.7 trillion in 2019.
This unprecedented decline in revenue presents its own challenges for sales leaders, particularly in the form of variable sales compensation. The difficulty lies in how to evaluate variable compensation in a year when achieving quota was nearly impossible in many businesses and industries, especially where targets were not reset.
In order to try to solve the question of variable compensation, we need to create a framework to define a sales compensation strategy that relies less on traditional metrics.
Sales compensation: A framework for moving from the pragmatic to the strategic
Beginning with the pragmatic
For some of you, the choice of how to evaluate variable compensation may be (unfortunately) very straightforward: your revenue downturn may have been so severe that there simply aren’t enough funds to pay any variable compensation. In this case, your hopes and efforts will be focused on creating a turnaround in 2021 and the goal of “rolling forward” below could offer some perspective.
Moving toward the strategic
If there are funds that can be allocated to variable compensation, it’s important to think about what can be achieved with the payment (and the associated amount), which will, in turn, provide some guidance on calculating the amount.
- Effort: Effort and performance unfortunately may be distinctly separate in 2020. There may have been a tremendous amount of effort at the beginning of the year that resulted in no sales due to COVID-19. Since results cannot be evaluated, the amount of effort (for 2020 only) could be taken into account for calculating compensation. Effort can be evaluated using sales metrics that typically lead to won deals, such as:
- Number of new customers contacted
- Number of touch points with current customers to upsell or cross-sell
- Meetings booked, with emphasis on Q1
- Retention: A handful of industries have thrived during COVID-19, and as others have struggled, healthy companies are using the opportunity to pick up top sales talent. Providing some level of compensation, particularly for your top sales talent, is important to create a defence against another company enticing your talent to leave for greater compensation.
- Rolling forward: As many companies look to rebound in 2021, this year’s compensation programs could include some ability to capture upside that can be “allocated” as a goodwill gesture to account for 2020. For example, if the normal commission bonus above quota is one and a half times, consider making it two times for 2021 only. This not only helps with retention but also creates additional incentive to overachieve this year.
- Competition: Use your competition as a guide. This certainly relates to retention as outlined above, and being relatively in line with your competition in terms of compensation can buffer any other material consequences of being markedly different.
Performing the calculations for variable compensation
If you have decided to pay some variable compensation (irrespective of not achieving quota), the next challenge becomes calculating the amount in a way that provides some level of logic and internal equity. Three example ideas are presented below.
- Sales metrics: Look at your sales metrics as of March or April 2020 and apply numbers from previous years. If the same ratio of deals had moved to close, what would have been the sales level achieved?
- Industry benchmark estimates: Nearly a year into the pandemic, industries have started to quantify the impact COVID-19 has had on their businesses. Using the Gartner prediction above as an example, and assuming you sold in the IT industry, you could adjust the quota downward by approximately 10% and then pay the variable based on sales achieved against the revised target. Although far from perfect, this is a relatively straightforward mechanism to separate sales performance from market performance.
- Previous years: Calculate variable commission based on past years of compensation. This method uses some basis of performance history to generate the amount. It’s certainly the most generous option, as it essentially ignores the impact of COVID-19 and treats 2020 as an average year.
Even in normal years, calculating sales compensation can be a blend of both art and science. Calculating variable compensation in 2020 becomes an extraordinary challenge. As with any year, start with your goals and make the compensation the associated outcome. For last year more than ever, beginning with your goals can bring a level of clarity and help you get started in the process.