SalesCompInsights

Ah . . . . sales comp, quotas and territories.  Three important legs of the productivity stool.  While sales compensation and quotas share time in the design process spotlight, many salespeople will tell you that their territory assignment has as much, if not more, impact on their success.  We recently had the opportunity to catch up with Ken Kramer, Director of Business Development at TerrAlign, a software and services company focused on sales resource optimization.  

Mike:  From your perspective, how important is territory management for increasing or maximizing sales productivity?

Ken:   While I might be a bit biased, territory management is critical for maximizing sales productivity and revenues.  But it might be helpful to first clarify the differences between Territory Management and Territory Alignment or Optimization.  I think of Territory Management as the broad umbrella term for all things related to territories – assignment, tracking, definition.  Or alternatively Territory Management can specifically relate to the tracking of who owns what and storage of the information in the system of record while integrating to CRM, ERP, ICM and similar systems.   Territory Alignment or Optimization is more focused on the design aspect; creating territories to optimize the utilization of the entire sales force.  TerrAlign focuses on territory optimization and is the reason for my first statement.  To maximize overall sales productivity, each sales rep needs to be leveraged to their fullest capacity.  Companies need to provide roughly the same amount of ‘work’ in each territory, while minimizing drive time and maximizing the number of accounts or prospects a rep can service.

Mike: Are there any examples you can share where companies have been able to quantify the impact?

Ken:  Our research, as well as that from other organizations, typically shows companies increasing revenues 5-15% without increasing headcount.  At the same time, they are able to reduce travel related sales costs up to 15%.  The results are incredibly strategic, typically producing ROI’s that are so big, they verge on unbelievable.  But, for companies doing millions of dollars in revenue, even a small increase in productivity can have a very significant impact.

Mike: Are there some guiding principles for organizations that want to evaluate the effectiveness of their current alignment approach?

Ken:  From an evaluation perspective, I’d recommend companies focus on a few things.  They might vary based on company and industry, but should include metrics related to work, opportunity, and revenue.  Ideally, you want to understand if each rep is making the same number of calls or producing a proportional amount of revenue for the number of accounts they are servicing.

As an example, one guideline we see in life sciences or consumer goods is to target 32-35 hours of work per week.  This allows for vacation or sick time, training, or other non-selling time.  When we talk about work or workload, we consider this to include the number of calls, duration of those calls and drive time to get to each call.  In high tech, companies typically look for a relatively similar number of prospect companies across territories that meet a particular profile.  We also recommend that variables used for balancing territories reflect those measures in sales comp plans; that is, design the territories around what you’re also paying for.

Mike: What are the characteristics of the most effective approaches versus ones that didn’t work so well?

Ken:  Where possible, build the territories based on a workload factor.  It will lead to better territories where customers will be better served for a longer period of time.  Don’t build territories around reps, they often don’t last as long your customers.  Also, build territories from the ground up, if you start at top and go down, the ability to create balanced territories is greatly reduced.

Mike: How has technology impacted the process?

Ken: While we have been applying technology to this issue for over 20 years, technology solutions for territory design are nowhere near as well-known, as say CRM or ERP.  However, technology has had a major impact on territory optimization.  Previously, and in many organizations today, alignment decisions are largely based one or two factors – neither of which is particularly desirable; 1) gut feel or  2) that’s way the it’s always been done.  The truth of the matter is that sales managers have largely driven the process based on what they think makes sense, an effort to not upset the over performers and their memory from when they were in the field.

Not too long ago, sales managers would generate complex spreadsheets and attempt to create some degree equity across the territories.  Then generic mapping tools arrived so they could plot accounts and visualize things.  Both tools helped, but didn’t reflect the combination of variables and algorithms that could balance each territory, allowing for a consistent workload across the team while minimizing drive time.

As an aside, our organization provides consulting in this area.  I remember one field session  in particular.  As we worked to  adjust and finalize the alignments I observed the field managers taking on a new perspective and focusing on alignments that would benefit both their teams and the company as a whole.  The managers realized they could communicate the changes to their teams and recognized the potential benefits of a more systematic approach.  Prior to that, I had mostly experienced sales managers in a land grab because they knew quotas wouldn’t keep up with
opportunity, so the more the better.  Also, by involving field managers and providing them an integrated tool to make changes, Sales Ops doesn’t become a bottleneck.  So, the technology helps to change thinking, validates (or negates) gut feel and provides better results in a shorter time
period.

Mike:  What lessons learned can you share around the connection between territory alignment and compensation planning and goal setting?

Ken:  Compensation can be a touchy subject.  While reps wait for their Territory, Quota and Comp Plan to be distributed at the sales kick off meetings it is easy to complain about their territory assignments – what accounts they’re going to lose or how little opportunity exists.  Most reps expect their quota to be similar to their colleagues, so they can commiserate about that.  And, they dissect their Comp Plan, figuring out how to ‘beat’ it.  What they often miss is that regardless of the comp plan design, the tie between their quota and territory is what will have the greatest impact on if and how much they will exceed their target.  A territory in the rural Midwest could have the same amount of workload as one in New Jersey, but significantly less opportunity, so the quota better reflect that.

As I mentioned earlier, comp plans and territories need to share common measures and these should also drive the quota setting process.  Quotas should reflect the opportunity per territory.  The impact of unbalanced territories on quota attainment distribution and the cost of incentive comp can be disastrous for a company.  Most comp plans have accelerators that far outweigh any decelerators associated with below quota performance.  When reps outperform their goal, the related expense is significantly higher than what a company ‘saves’ when a rep misses.

Mike:  Have you observed any trends or shifts in how companies approach this topic given the recent economic environment (e.g., entering the downturn, dealing the trough and now what appears to be a period of higher growth expectations)?

Ken:  Change is a trigger for products and services like ours.   The recent downturn forced many companies to figure out how to do more with less.  We recently worked with several companies charged with reducing headcount, but determined to maintain revenues and  effectively service their customers.  Aligning territories to allow each rep to visit the most number of accounts is critical to this effort.  Growth, which we prefer to see our clients enjoy, also forces the issue of how to realign territories – and how to do it in a way that the sales team doesn’t feel penalized.  Regardless of the change, companies want to minimize the level of disruption – the number accounts being reassigned from one rep to another.  Our technology can do that while also balancing the new territories and making them geographically compact.  One other point worth mentioning;  when things are good companies are less conscious about ”optimization” than when headcount is being cut.  We encourage our customers and prospects to continually focus on how to get the most from their sales headcount.

Mike:  Any final thoughts on what companies should be thinking about as they go into the 2012 planning process?

Ken:  Customer segmentation, sales force sizing, territory alignment, compensation plans and quota setting all part of the sales planning process – a new year represents an opportunity to revisit each piece of your sales coverage model and support programs.  Typically, the companies that come out of a downturn in the best shape are those that used their resources more effectively and invested while others pulled back.  Much like any other year, it’s critical to do the analysis, set the company strategy and then put your sales team in place to execute.  There are a lot of pieces to consider, but also an awful lot of upside when done well.

Ken can be reached at kramer@terralign.com

An effective mid-year incentive program evaluation should answer three key questions:

• What should we measure?
• Where do we get the data?
• How do we use the information?

But what’s the best way to construct a repeatable and objective mid-year evaluation framework for your incentive program?  As Scott covered  back on April 25th, there are four important measures of a well-functioning incentive plan:

1. Pay Distribution
2. Performance Distribution
3. Return on Compensation Investment
4. Sales Time Allocation

But is that enough?  We’ve talked a lot about the importance of articulating and documenting your incentive compensation philosophy and creating principles to facilitate the decision process.  Design principles can take many forms and cover a variety of dimensions based on your specific situation.  Sample categories include financial, operational and cultural.   Your design principles
should also play a role in evaluating the program.   Each principle should be accompanied by a set of measurement standards.  Let’s say you’ve established a principle around the motivational impact of the pay opportunity and sales goals.  The standards in support of this principle might include:

• Each performance measure contributes to >20% of the job’s targeted incentive
• Each performance measure has >70% participation rate
• At least 10% of the role’s incumbents are high performers
• High performers earn >3+ times that earned by average performers

If we’ve agreed on these standards in advance then we can identify and collect the data and then use it to evaluate how well the program is working:

Other design principles and their accompanying standards might go beyond the four key measures.  Here are some additional examples of areas that might be covered:

• Quota quality
• Correlation of credit and role influence
• Plan eligibility and participant plan assignment
• Correlation of transaction credit with actual revenue
• Use and ROI for SPIFFs and contests
• Consistency in thresholds, accelerators and other mechanics
• Payment timing and accuracy
• Number of disputes and response time

As part of the plan design process, we suggest a formal work step to define the evaluation standards.  During this step, the Design Team should review each principle and document
the corresponding standards.   The data requirements can then be identified and a process established/tool created for ongoing tracking.   There might also be a set of measures you
include from year-to-year.   As an example, you might want to track the distribution of incentive pay even if there wasn’t a specific change priority this year.

The notion of design principles and their accompanying standards might be all well and interesting, but what if you don’t want to wait until the next design cycle?  The four key measures are a good start, followed by a working session to review the beginning of year expectations.  Was senior management looking to increase teamwork?  Improve margins?  Launch a new
product?  With these expectations in hand you can then determine what metrics and data might be available for testing.

Whether the evaluation framework is established well in advance or at review time, a few metrics
used are better than a lot not used.   Be sure data used is credible.  And remember the evaluation supports both strategic and tactical decision-making.

Welcome to June!  School’s out (or almost out), barbecues, hanging out by the lake, and . . . . incentive program governance. This is the time of year when many incentive plan designers ask themselves whether the current governance model makes the most sense given the organization structure, evolving business priorities and culture.  In this installment of NewSigma’s Sales Incentive Practices Series, Scott discusses the standards, roles and other elements of  effective program governance.

Summer is almost here. And as sure as the seasons change, sales compensation designers are already starting to think about next year’s potential changes.  Whether it’s time for a wholesale realignment or minor update, a myriad of factors can impact the success of your redesign effort.  In this installment of NewSigma’s Sales Compensation Practices Series, Elliot Scott and I discuss the lessons learned from companies that have successfully (and not so successfully) managed a major change within their organizations.  We hope you enjoy it.

We hope you enjoy this installment NewSigma’s Sales Incentive Practices Series.  This chapter focuses on the mid-year evaluation of your sales incentive program.

When it comes to sales compensation, business services firms pose a unique challenge.  By business services firms we mean companies that provide technology implementation, design, maintenance, printing, temporary personnel, etc., to other firms.   Unlike a product company that sells “widgets,” a services business essentially sells its people.   Similarly, the service is often an extension of the salesperson’s relationship with the customer.  Typically it’s more difficult for services firms to differentiate themselves, and these companies are less likely to experience the waves of business common to product firms, where the sales organization enjoys a growth cycle from the launch and subsequent momentum of a new product.

Maintaining and growing your existing client base is certainly going to have a lower cost of sale than acquiring new customers.  Significant time and attention should be paid to cultivating and maintaining existing relationships.  Unfortunately, the evil twin of relationship management can be  complacency; less focus on new services, limited ability to increase prices and insufficient acquisition of new clients.  We observe four key sales compensation issues within business services firms looking to re-ignite growth:  

• Commission on margin:   In a business where the profitability of a deal or customer can vary so significantly there may be a strong desire to pay on margin.  The counter argument is that “delivery,” not sales really influences the profitability of the deal.  If the delivery team provides the contracted service for a lower cost than estimated the deal will be more profitable.  Less efficient, less profitable.   For us, the key considerations are the role of the sales person and how much pricing discretion is available.  Paying commissions, or bonuses, on margin will certainly engage the rep in the profitability discussion.  It also encourages them to stay close to the delivery of the service; potentially a good or a bad thing based on the priorities of the role.  From a pricing perspective, the more discretion, the stronger the argument for some kind of margin component.
• Revenue versus bookings:  Revenue proponents contend that the sales team shouldn’t get paid until the company is able to invoice the customer (or in some cases until the company receives payment) and paying on revenue encourages the salesperson to better manage the relationship.  Bookings advocates point to a similar rationale as not paying on margin and like to point out that bookings measures encourage both new clients and new business within existing relationships.  Once again we’re back to the question of role:  what is the sales person being asked to accomplish?  What are their priorities and if we’re asking them to change, why? 
• Quotas:  We observe many business services firms where quotas are used for performance management, but are not part of the sales compensation program.   Linking quotas to incentive pay is a significant tool available to drive growth.   These performance expectations directly tie the productivity of the sales team to the business plan.  Further, within sales organizations historically paid on revenue, new business quotas can represent a major cultural shift and drive additional changes across the organization.   One cautionary note; the potential change brought by the introduction of quotas, means getting the quotas “right” should not be trivialized.   Revenue based quotas have their own issues, but setting a bookings goal for the first time requires careful thought and preparation.  Unrealistic or unachievable quotas can have an incredibly negative impact on the organization.    
• Sales expectations for delivery teams:  Within many organizations the role of the deliver team is to provide a high quality service and ensure the client’s satisfaction; can the customer be used as a “reference.”   Maybe there is a referral bonus available or even a SPIFF.  But in other organizations, offering new services to the client is part of the satisfaction equation.  Scott’s recent experience with AAA is a perfect example (Sales is Service).  For companies that believe in the service they provide, we think it a mistake to not at least consider the role of sales incentives for the delivery teams.  The incentive might represent a smaller portion of total pay relative to other priorities, but its absence often represents a missed opportunity.  Organizations that introduce a sales incentive need to train team members on their role in the sales process, as well as how to identify opportunities.      

Beyond the question of sales compensation, role design and account assignments play critical roles in the management of a business services sales team.  Effective sales compensation plans are predicated on clear roles and selling priorities.  Questions about how services salespeople should spend their time must be answered before any sales compensation decisions are made.   In a recent survey of incentive plan participants within a services organization, over 30% of the field said their incentive plans are not aligned with their roles and over 40% said they weren’t sure or don’t believe the plan supports the priorities of the business.  As sales compensation designers, numbers like that are like a big red flare, regardless of what industry they represent.

We hope you enjoy this Q1 summary of our new Field Sales Compensation Survey Series.  Clicking on the full screen button will make it easier to see some of the statistics (sorry about that). 

As a reminder, you can also receive automatic updates about new posts via the email subscription option. 

While many surveys exist for benchmarking sales compensation pay levels, growth expectations and other important metrics, we find few gather input directly from the plan participants.  Field input represents an important component of our consulting work and we encourage our clients to conduct field sensing activities at various points of the year.  This month we launched Rate My Sales Comp Plan, an ongoing survey series focused on the perspectives and insights of sales professionals.  So far we’ve gathered responses from approximately 1,000 salespeople at over 200 companies. 

The early results are somewhat startling.  Fully 30% of the respondents answered false when asked whether they understand their incentive plan. 

26% disagreed with the statement that their plan contributes to the profitable revenue growth of the organization, or said they didn’t know because the strategy isn’t clear.  More than 10% indicated that their comp plan is causing them to think about leaving or are in the process of leaving because of it. 

Given the importance of the incentive program, having 30% of the field not understand how they are paid is unsettling at best.  Couple that with a quarter of the field feeling like the plan is not aligned with the priorities of the business (or not sure what those priorities are).  As plan designers, we have to ask ourselves whether this is a symptom of complexity or communication.   Perhaps it is a bit early to be thinking about 2012 just yet.  But, it might be time to take the pulse of your field organization before 2011 gets away from us.

We hope you enjoy Scott’s new video from NewSigma’s Sales Incentive Practices Series. This installment is part one of two on building a case for changes to the sales compensation program.

Top Questions Answered

This season’s brutal weather hasn’t slowed the number of questions from incentive planners and sales leaders.  Team- and goal-based plans are common themes.  We’ve handpicked a number of related questions from our mailbag, and hope at least a few are on your list of open questions.

Q: What is the ideal mix of individual and team measurement?

A: The ideal mix is consistent with the mix or relative share of the job’s responsibilities that are individual versus team-based.  In our experience team-based measures often take the place of what should be individual measures because either the company cannot measure individual contribution or it wants to avoid internal competition.  Good use of team measures is when the job carries responsibility for a goal that cannot be executed exclusive of other team members.

Q: Can one plan do all?  If a company has both Key Account Reps and Territory Reps, how common is it to have different plans?

A: Not effectively if the company has dissimilar requirements across the jobs considered, and the market requires different cash targets.  It’s for this reason that most companies have different plans to serve a diverse set of sales jobs.

For example, the requirements for a Key Account Rep and Territory Rep could be the same.  That is, base salary and target incentive, performance measures and pay frequency could be identical.  While in our experience we find the performance measurement similar – sales volume in either absolute or relative to goal, the pay targets are not.  Key Account Reps typically have a more-defined pool from which to fish versus the Territory Reps where the variability across territories is higher.  This means the Territory Rep carries a higher risk/reward proposition (higher incentive target as a percent of target total cash, higher upside potential).

There is an age-old debate around what constitutes a different plan.  This is a communication and administrative issue.  We say, if a sales manager can explain the plan to both audiences simultaneously, your one plan for different jobs passes the test.   Or if you can use an identical set of requirements in your system for paying both jobs, with only differences on your rate tables, your one plan passes the test.

Q: Given sales reps often have “unequal” opportunity with respect to their existing customer base, number of customers, type of customers, markets, etc., how do you effectively “level” the playing field among various reps?  

A:  This scenario is one of the strongest arguments for a goal-based incentive program.   With a goal-based approach you set a target incentive commensurate with the role and skill level.  Let’s say Scott and I both have a target incentive of $25,000.  Our goals might be very different, taking into consideration the factors your reference in your question.   If we both meet our goals we earn our $25,000, regardless of what our goals are.   The transition from a commission program to a goal-based incentive approach is one of the more challenging that we observe given the financial and cultural implications, but long-term it can be one of the most productive.

Q: What is the preferred approach for allocating quotas?   Is this typically a process of mutual agreement between the sales rep and management, or is it something that management enforces unilaterally? 

A: Goal setting approaches vary by industry based on the availability of data, go-to-market model and selling roles.  That said, we find that the most effective approaches use a combination of bottom-up and top-down input.   It is common for there to be a gap between what the salesperson says she can do and what the company requires in terms of performance.  While not a negotiation, there should be a clear and equitable set of logic used to close the gap.   Perhaps the most important characteristic is that the salesperson understands their quota, how the gap was closed and how it ties to the overall success of the organization.  Regardless of which approach is used, if the sales manager can’t explain it to their team, the goals will be viewed as arbitrary and unrealistic. 

Q: For goal based incentive plans, would you expect a normal distribution of performance, or a bi-modal distribution?

A:  When the goals are set correctly we would expect to see a normal distribution of performance.  The range of performance varies somewhat by industry, business model and selling role.  The company’s approach to goal setting – promote a culture of winners, 100% is stretch — also play a role.  The rule of thumb we use is to strive for a bell-shaped curve with approximately 60% – 70% of the plan participants achieving their objective.   With this type of distribution, the field force typically views the goals challenging, but realistic – a key characteristic from our perspective.    What varies then is the spread of the curve.   Consider a consumer product goods (CPG) manufacturer and software company.  We expect a narrower range of performance outcomes for salespeople in the CPG organization..  Most software firms have greater variability in the business, and software salespeople experience a broader range of quota-achievement outcomes versus those in CPG.    A final point, we recommend accelerators and thresholds, if included, be set with a goal of 90% percent of the population earning “some” incentive dollars and 10% earning a significant payout, in line with your industry’s pay benchmarks. 

Q: With goal based incentives, do you advocate setting annual performance goals, or goals with shorter time-frames?

A: In general we observe shorter performance cycles (e.g., monthly) as more effective for promoting line of sight and urgency.  However, in businesses with complex, long sales cycles and infrequent but huge deal values, each month in isolation says little about performance success.  In such circumstances annual goals are typical.  To gain the benefit of more frequent performance periods, management will often tie quarterly milestones and cumulative performance to annual goals.  Rarely do we see performance cycles beyond one year due to fiscal reporting norms.