We all know the importance of modeling sales compensation plans when we are making changes. Effective modeling allows us to anticipate how the new plan will work, ensuring that we have tested our assumptions, and giving us confidence that the results will deliver on the promise of the new plan. In my experience, successful modeling can increase the lifespan of a plan by 30-40%, in addition to making the initial change much less painful.
There are two important ways to model sales compensation plans, retrospective (or “back-testing”), and prospective (or “risk modeling”). Both provide valuable insights as we design and deploy changes to sales compensation plans.
Retrospective modeling allows us to “back test” the new plan using real world results. This is the most common way that companies approach modeling, because it is relatively simple to compare historical performance on the old and new plan. The biggest benefit of retrospective modeling is knowing where there are likely to be concerns when the plan is rolled out. Just as it is easy for us to compare performance, each sales rep will likely do the same comparison to know if they are a “winner” or a “loser” on the new plan.
Although retrospective modeling has merit, the one thing that I can guarantee is that next year will not have the same exact results as this year. Prospective modeling allows us to “stress test” the proposed plan, running simulations of potential outcomes to ensure we have no surprises after we roll the plan out.
One way to do this is by using Monte Carlo simulations, creating randomized data sets that parallel real world results. We can use these to run hundreds or thousands of potential years through the plan, looking at the average and extreme outcomes so that we know what to expect.
Here are a few tips that could help you get more from the two approaches to modeling:
- When you model retrospectively, focus on top and bottom performers (on the old and the new plan), as well as those with the biggest change in earnings (in either direction). Don’t assume previous performers will continue to be top performers.
- Remember that a new compensation plan might be a better measure of performance, aligned with your current sales strategy.
- Make sure you model different potential business scenarios to set expectations for how the plan will perform. Prospective modeling allows you to do this.
- After the plan is rolled out, continue to monitor the assumptions and review the model on an ongoing basis. If the plan isn’t working as expected, this will help diagnose whether it is due to issues with the plan or changes in the market that may require recalibration.
Although modeling plans can take time while rushing towards rollout, it is time well spent. This investment in modeling, using both the retrospective and prospective approaches, will help ensure that your sales compensation plan performs as expected, and delivers results for your sales organization.
Article initially published on the WorldatWork blog.