SalesCompInsights

Along with prior year calculations and current year plan launches, Q1 is also the time of year when many companies sweep the dust off of their dormant  incentive compensation management/sales performance management projects.   Rare is the sales compensation manager who wouldn’t love to replace the aging homegrown incentive system or do away with the calculation spreadsheet.    Historically the request for money might be met with a raised eyebrow from the CEO; “why would we buy a new system when the checks go out on time?”  Or from the CIO; “that’s a good project, number four on our list.  This year we have funding for three.”   Even with our bias for the subject matter, given all the money spent on incentives and all the pain incurred, the growth rate of the ICM/SPM market has surprised us over the years.     

But change is in the air.  A growing recognition of the difference between incentive compensation management and sales performance management.    Plenty of companies generate real returns from their ICM investments.  And you could argue that the ICM focused market (i.e., companies that really just want to upgrade their compensation system) continues to grow.   The noticeable change from our perspective is more companies considering true SPM projects.  More companies investing in SPM. 

What caused the change?  Improved economy? Maybe.   Increased awareness?  Again, maybe, but less likely from our perspective.   Increasingly dynamic selling environments?  Shift in sales management focus?  SPM product evolution? We think yes to all three.  A recent eBook from CSO Insights supports our hypothesis.  In it, Barry Trailer contrasts the difference between incentive compensation management – limited number of primarily tail light focused metrics – and sales performance management – increased number of forward-looking metrics.  CSO Insights analyzed the prevalence of behaviors motivated by the sales incentive program.  Across 8 of the 11 categories measured,  SPM focused companies reported a higher prevalence of motivated sales rep behaviors compared to companies that are strictly ICM focused.   Companies that invest in SPM report positive results.      

In our experience, companies tend to invest in both ICM and SPM for one of three primary reasons:

1. Pain resolution:    Low accuracy, delayed payments, compensation team turnover or other symptoms of  a broken process/system that is no longer tenable.    
2. Aspiration:   We can be more productive.  Through better reporting, program modeling, dashboards, workflow and the like we can increase the motivation of the field, target and implement more effective strategies and improve the overall performance of the organization.
3. Regulatory or risk avoidance:   Federal regulations, compliance or related issue requires that we change our processes and/or tools. 

Business cases for a new ICM process or technology solution tend to focus more on categories one and three:  fix what we have today and if the other areas can be improved, well that would be great.  Business cases for SPM tend to focus more on category two:  we can take the management of our sales team to another level and drive increased sales productivity.     For those companies considering a new ICM/SPM solution, it helps to inventory the change drivers into the three categories and then tailor the proposal accordingly.   For category one in particular, hard dollar costs may be easier to quantify and generate a “credible” (from the CFO’s perspective) ROI.   Category three often ends up “we just need to do it,” while aspiration focused efforts may require a broader base of support. 

And therein lies the rub; aspirational projects may be harder to quantify, but can arguably generate the biggest return.   Intergalactic revenue increases might look good, but they won’t be credible.  Successful SPM business cases  the hard dollar impacts that can be quantified along with a compelling argument for how the organization will change; practical examples and tangible goals.  One final thought; woe is the project champion who forgets the political dimensions of any ICM/SPM project.   Often times the unspoken considerations sway the decision one way or the other.   And in all cases, successful ICM/SPM transformations require more than just technology;  the associated  job roles, processes, and governance model impact  your ability to drive sales performance as much as the underlying software.

Wait . . . what’s that?  The holidays are over already?  But there are still plenty of cookies to be eaten and I’m positive Scott is hiding a present or two that he meant to give me but just forgot.  Ah well, Happy New Year and welcome to 2011.  

For many companies, the next several weeks will be busy with sales meetings and new plan rollouts.  A cross-functional team worked on the designs, the CEO agrees the new plans will help him make his bonus and the CFO signed off on the numbers.   All we need to do now is send out the announcement email, right?  Wrong.  Three more boxes still need to be checked:

• Program documentation:  At a minimum, the communication package should include a participant guide, terms and conditions and a participant calculator.  The participant guide provides an overview of the plan, highlights performance expectations and explains the reward opportunity.  Also known as the 1 – 2 pager, the participant guide is role and sometimes person specific.  The terms and conditions document on the other hand details sales crediting rules, eligibility and other related policies.  Normally it can be applied across the program participants.  And the calculator is just that – a way for plan participants to run what-if scenarios and determine what they can earn in the coming year.  More and more the participant calculator is being integrated into the administration system.   FAQs, presentation materials and administrator play books should also be on the list if time permits. 
• Communication approach:  We can’t say it enough times; sales management needs to take the lead on communicating any plan changes.  The more significant the change, the more comprehensive the communication strategy.  Ideally the timing works out where the VP Sales can present the plan at the national sales meeting, followed up by breakout groups where sales leaders can discuss the details with their teams.  If not, we recommend an all hands conference call/WebEx, with similar follow up meetings.   When the change is really significant and part of a broader sales transformation, it might be time to think about a road show, job aides and other events.  In any case, we like to conduct a post-launch survey to test people’s understanding of the plans, find out what worked and what didn’t and if necessary, prepare a contingency plan.
• Administration preparation:  Hopefully your administration team and IT group  participated in the design process, gathered the associated requirements and made any necessary process/system changes.  If not, hopefully they received the new requirements and will have the process/system changes  ready for the first payout.  In either case, the changes must be tested and validated prior to opening up the system to the field.  Nothing will kill the new program faster than incorrect checks (except for maybe a sales leader that opens with “well, guess what they did to us this year”).   Once the calculation rules are correct, the next order of business should be an easy to use, easy to understand incentive statement where a participant can see a summary of their performance, earnings for the period and the details that went into calculating the payment (i.e., the transactions).  Managers should be able to easily see the results for their team and other stakeholders will likely have a list of reports that they need. 

Unfortunately, we observe many companies that invest significant amounts of time and money into the design process and assume they are finished.  Certainly the finish line is near, but next several weeks will have a big impact on the success of your new plans.

We subscribe to the notion of the sales compensation plan as a tool for sales management.  Whenever possible, this means that sales management should be part of the design team.  They may not own every decision, but certainly theirs is a voice that should be heard.  And perhaps more importantly, this means that sales management should lead the communications effort.    We observe many companies where sales leadership actively, and enthusiastically, participates in the evaluation and design of the new incentive plan.   They recognize the impact the plan can have and want to maximize the likelihood of success for the business, their team and themselves.  When it comes time to communicate any changes they line up in front of the organization to help people understand why the changes were made, what the changes mean and how best to win under the new plan. 

Unfortunately, “many” doesn’t mean the same thing as “all.”   Based on several years of survey data, we’ve observed that in 20% and 30% of responding companies, the incentive plans are designed by corporate staff, with limited input from line management.  These companies would argue that a corporate approach makes the most sense for a variety of reasons.    

More concerning is the design process that is supposed to include sales management but doesn’t.    There’s the scenario where the VP Sales is chartered to design the plans, but is not involved in the final decisions.   Or the scenario where the VP Sales doesn’t believe any change should be made and avoids the design team meetings.   Then there is the arms crossed passive aggressive meeting participant;  I’m here, but don’t ask me to do anything that could hurt my people.  Any of these scenarios can lead to the dreaded “look what they did to us now.”  With the credibility of the plan now in question, a significant change management opportunity is lost and the odds of success go down significantly. 

As we enter the final weeks of 2010, it is critical that sales management supports the new plans.  The bigger the change, the more important it is that you’re sales leaders are armed and ready to effectively communicate with their team members.   If there is any question about their support, address it immediately.   With so much riding on the success of your incentive program, you can’t afford to have your most important stakeholders waving goodbye as the rest of the troops head off to battle.

The new year is almost upon us.   For those companies that have a January 1 fiscal year start, December brings a combination of finishing 2010 on a strong note while at the same time preparing for 2011.  On December 14, my colleagues Scott Barton and Elliot Scott will host a free web session geared towards those organizations that are finalizing their 2011 sales compensation programs.  

Just as top skiers do a final check of body and equipment before heading out onto the icy course, top sales organizations leverage pre-launch checklists to ensure sales compensation plans will deliver pay for performance…without unpleasant surprises.   Using a combination of market practices and specific case studies, Scott and Elliot will cover topics such as:

• Calibrating measures, goals, and plan parameters with final budgets and strategies
• Finalizing mechanics to drive pay differentiation
• Communicating to address field concerns
• Testing for gaps and risks in plan administration
• Mitigation strategies for system and reporting issues

Our goal for the session is to faciliate a focused and pragmatic discussion around the activities to finalize a successful program.   You can register for the session at:  https://www3.gotomeeting.com/register/367735126.

We hope you’re able to join us.

(Almost) as sure as death and taxes, sales organizations build their incentive compensation programs based on a corporate philosophy or set of design principles.   Even if not formally articulated, your company is likely to have its own philosophy about sales incentives.  Examples might include target pay set to the 50^th percentile, thresholds so that 90 percent of plan participants should earn at least some incentive dollars, quota reasonableness to support 65 percent of team members overachieve,  and/or team players should earn more than lone wolfs for equivalent levels of performance

We observe many companies that document their overall compensation philosophy, but haven’t tailored it to the sales incentive program.  We think this is a mistake.  Your compensation philosophy should serve as a touchstone during the design process; as new designs or changes are discussed they can be tested against the company’s belief system.   We recommend our clients review and their incentive philosophy each year and create a set of design principles to support the planning process.  The output of this activity should be published to the field and eventually make its way into the plan launch materials.  Hearing the company’s belief system around incentive compensation and guiding principles for any changes increases the likelihood of acceptance and support by sales force.

More than a “touch feely” HR topic, disagreements on design philosophy can have very real implications.  Decisions ranging from eligibility, target pay, mix, accelerator levels, measures and crediting rules are all impacted by the philosophy of the organization.

One recent client transitioned its long term incentive program due to a shift in business strategy and determination that salespeople were significantly overpaid for their contributions.    On this point there was universal agreement.   On how to manage the transition, however, not so much.   Should the new designs incrementally reward people for doing the right thing or “haircut” earnings when they don’t?  Similarly, should the company ease the team into the new program and essentially keep them whole for the first year?  Or implement a hard cutover, with the belief that salespeople, like the rest of the organization, need to realize the urgency of the change.

We regularly hear about multiple design meetings with endless debate going nowhere, taking on the theme of Bill Murray’s “Ground Hog Day” — without the humor.   Salespeople ask, what was management thinking when it made changes to last year’s plans.  Or the company’s CEO suspects the sales comp plan isn’t up to snuff, but has no criteria other than revenue and profit performance on which to base this suspicion.   All three issues stem from a lack of clear design philosophy and unprincipled plan management approach.

Take another recent example where the design process started with the company’s leadership sitting down and saying, “what do we want from our sales compensation program?”    After summarizing what each leader did not like about the current plan, the group documented a brief but clear list of principles.  A myriad of decisions followed that helped align the program with the business needs and motivational aspirations of the sales force.  The group was able to efficiently test different design approaches, validate their choices and prepare for an effective communication and implementation campaign.

This is a big week as far as corporate earnings are concerned and, of the S&P 500 companies that have posted results, 83% have topped analyst estimates. Apple announced $20 billion in revenue this quarter -  a new record.   We observe this trend within our clients as well.   More discussions around investments for growth, hiring and new sales roles.  For those companies thinking about next year’s plan designs, one common question involves the right balance between bookings and revenue.   There are several considerations and potential trade-offs: 

Bookings measurement:  Motivates new customers and new opportunities, creates a clear line of sight between selling activities and incentives, can result in negative cash exposure

Revenue measurement:   Aligns incentives with the company financials, creates a linkage between selling efforts and delivery of the company’s products/services, can result in hunters becoming account managers, at the expense of new business

As with most incentive design questions, the right answer begins with the role of the sales person and how it supports the coverage model.  For those roles where salespeople are expected to close the deal and move on, and the risk of cancelled orders is low, a bookings measure might be very appropriate.  For those roles where salespeople are primarily responsible for growing existing relationships and winning a contract does not guarantee the revenue will follow, the most appropriate metric might be realized revenue or profit.   Below are a few examples of how bookings and revenue can be balanced based on the specific role of the sales person:

o   50% of target incentive on realized financial results

o   25% of target incentive on new bookings

o   25% of target incentive on strategic products

o   70% of target incentive on revenue (rather than cash), with finite crediting term

o   30% of target incentive paid against a booking goal

o   60% of target incentive on expected first year revenue

o   20% of target incentive on new account wins, with kickers for initial contract size

o   20% of target incentive on key sales objectives

As companies balance the tradeoffs of new business, financial requirements and ongoing relationahip management, other considerations for selecting the right performance measures should include: Emphasize financial outcomes that align with the business goals, ensure the job has a high degree of influence over the outcome, define measures and goals that reflect competitive practice and ensure systems can provide timely, accurate reporting. 

Back in May we wrote about moving from a commission to goal based incentive program (http://salescompinsights.com/2010/05/17/moving-from-commissions-to-goal-based-incentives-part-1-of-2/).  Since then, we’ve continued to receive a range of questions on this topic.   In addition, several of our clients recently completed or are in the process of transitioning out of their commission programs.   As we noted previously, some of the circumstances that suggest it might be time to change include:

• Exceeding the budget for sales compensation but falling short on product or profit objectives
• Evolution to a more solutions-based sales model
• Support from engineering, marketing, finance,  and/or product management is more prevalent in the sales process  
• Salespeople primarily focus on a legacy book of business with existing products
• High earners are not necessarily the top performers

From a salesperson’s perspective, the move to a goal based incentive program is significant.  “Management just wanted to cut my pay,” “how could they do this when we can’t set fair quotas,”  and “wow, this is more complex” are just some of the comments we hear when the transition didn’t go well.   Our advice:  once the decision to implement a goal based plan is made, do not underestimate the change management effort required. 

An effective transition plan should focus on five key elements:

1. Impact analysis:   Part of the reason you’re moving to a goal based plan may be to better align incentive payouts with your sales priorities.   Whether your new  target incentives are based on a percentage of base salary,  job role or other mechanism, individual plan participants are going to be impacted.  Understand the impact to your high, average and lower performers on an individual basis.  As an example, one recent client implemented three sales rep levels in place of the one historical role.    
2. Bridge strategy:   The wider the variability in pay levels, the more challenging the transition to a target incentive based approach.   Where necessary, the goal of the bridge program is to move everyone to the new approach without losing key team members unnecessarily.    An industrial manufacturing client faced a situation where commission earnings  varied as much as 200% or more for what the company felt were similar levels of performance.  The company implemented a two-year transition plan.  Year one target incentives  were set using the average commissions earned over the past three years.   In year two, the target incentive amounts will be standardized by role.  
3. Communication plan:   It is difficult to over state the importance of the communication approach.   Preferences for communication should be gathered in advance, during the design process if possible, a cascading communication approach put in place and multiple touch points.   Earnings examples should clearly demonstrate how to win under the new plan along with what-if calculators that plan participants can use to try out different scenarios .
4. Systems and reporting:   Few things can hurt the credibility of the new plans more than poor administration systems or reporting.   Plan participants must know how they are doing against their goals on a regular basis.   Payment calculations must be accurate and timely.    Earnings statements should include attainment results, earnings by measure and transaction details.  There should be a clear and easy process for inquiries or payment disputes. 
5. Follow up:   Post-launch surveys/focus groups/interviews with management and the field should be used to evaluate the effectiveness of both the communication approach and the new plans.   In particular, we find that field surveys typically have a good response rate; 60% – 70% or more.

On September 8, Scott and I had the opportunity to participate in a web event with the CEO of Xactly Corp., Chris Cabrera.  Xactly (www.xactlycorp.com) is a leading a provider of sales performance management solutions.   The focus of the session was getting ready for 2011 and avoiding the top temptations that can lead to a sub-optimal plan design.   Almost 500 people registered for the session and were asked to participate in a pre-session survey.

The survey covered topics such as the alignment of plans with business priorities, inputs used in the plan design and launch processes, satisfaction with administration processes and process timing.   80+% of people who responded indicated that their sales strategy will undergo some level of change heading into 2011.  Over 50% have already started thinking about next year’s plans, with 45% of the respondents indicating that their planning process is either non-existent or painful.  Interestingly, 25% responded that they launch their new sales plans in December, somewhat contrary to the typical argument that a December launch can distract people from their 4^th quarter selling efforts.

Our top five temptations that can negatively impact plan design efforts included:

1. Go with the flow: As plan designers we find ourselves being helpfully reactive and focused on supporting (or not supporting) one constituency’s design idea.  Or, in a different scenario, the team rushes to make changes to the plan mechanics without the design owner being able to provide sufficient analysis or evaluation.

2. Plug and play: A complete plan design or concept is implemented because it worked somewhere else or at some other point in time

3. Launch lite: After all the energy spent on the design process, an email from corporate or similar approach  under-merchandizes the plan, results in limited understanding and misses the change management requirement.  Closely related is having our administration or IT colleagues  “on the distribution list.”

4. Just one more year: Plan designers resemble field medics, applying compresses to stem the bleeding from a comp plan, system, or process that has reached the end of their useful life

5. One and done: Similar in nature to siloed compensation management; plan design, launch and administrative activities are viewed as points in time.   For example, new plans are designed but not evaluated through the course of the year to ensure their effectiveness.

Avoiding the temptations requires a combination of 1) data – benchmarking, incentive analytics, case for change, 2)  Networking – key stakeholders, field input, consensus strategies, and 3) A well-defined path forward.

We’ll post a link to a recording of the session as soon as it is available.

Joining or assuming leadership of a new sales compensation group brings its own set of challenges and opportunities.   The structure of the program, sales model, company leadership and team culture all come together to determine the right approach and priorities.  Through our consulting work we’ve observed many situations where this transition has been managed successfully (and unfortunately some less successful ones as well), from the perspectives of both the company and the person taking on their new role.     

Christy Roberts leads the sales compensation program at high tech firm AMD.   Christy had the opportunity help the industry leading company transform the way sales incentives are designed and managed.    We recently caught up with Christy to hear her thoughts on what it takes to build out a successful sales comp competency. 

SalesComp Insights: It is a bit unusual to find such a large company without a solely dedicated owner of sales compensation; can you provide some background on the situation?  

Christy Roberts:  AMD is an engineering company at heart, and continues to be to this day.  In the ongoing process to ensure AMD’s competitive edge our executives looked internally at our sales organization.  We have dedicated ourselves to a sales transformation and with that journey AMD saw the need to engage a subject matter expert in the area of sales compensation.   

SalesComp Insights: What did you observe as the biggest differences moving from an established sales comp organization to creating a new one?   

Christy Roberts: The biggest difference is speed of adoption.  It is imperative that your vision and philosophy are quickly introduced when creating a new organization.  It seems with more established organizations you must move slower and be more cognizant of the political ramifications of making changes.  With a new organization, you must immediately frame the way you want your organization to work.  It is a small, yet very open, window that you must take full advantage of.  If you hesitate the window will close very fast.

SalesComp Insights: With such a unique opportunity to create the function from the ground up, what priorities did you decide to focus on first?

Christy Roberts:  We decided to focus on two areas:  tools and governance.  Our tool is antiquated and does not meet the goals of our sales organization; we needed something nimble that can change with our fast paced business.  So the first thing we looked at doing was implementing a new sales compensation incentive system.  The second priority was that of governance; we needed to ensure our policies were not only documented and distributed, but adhered to.  This creates a large change management effort that although seems easy on the surface, can be very complicated and sensitive when implemented at a global level.

SalesComp Insights: Looking back, are there any tips/techniques you can share that have really helped?

Christy Roberts: Prioritize the tactical items separately from the strategic items.  When you are trying to build a new organization, it is easy to get lost in the day to day tactical work that needs to be done.  Ensure that you prioritize them separately and ensure you keep your eye on the strategic items to ensure movement on that front.

SalesComp Insights: What about any expected, or unexpected, challenges?  

Christy Roberts: I think my biggest challenge was creating the culture that sales compensation can be a controlled, non-stressful event.  I think we tend to look at things from an emotional level since it deals with employee’s pay.  It was important for me to back up claims with actual data so we can prove that this can be done in a way that deals with the issues without being a fire drill. 

SalesComp Insights: What’s next as you start to prepare for 2011?   

Christy Roberts:  Ensuring our data can support the design that we want to launch.  I find the biggest pitfall is designing a sales compensation plan that your data cannot support.  I am also a large advocate of gaining input from the field level sales force, so I will be creating a global sales compensation committee to help with the design phase. 

SalesComp Insights: What advice would you offer for someone going into a similar situation or thinking about transforming their sales compensation function?    

Christy Roberts: I think going in with an open mind, and making sure you do not come across as the “know it all” but as the subject matter expert.  It was top of mind that I did not say anything negative about current design or process as it was most likely one of my co-workers that created that work.  Let go of preconceived notions of what you have done in other companies, as many times those ideas might be good but not perfect for the new company you have joined.

A recent article focusing GlaxoSmithKline’s decision to eliminate the use individual sales targets for calculating incentives has garnered a fair amount of attention the last few days.   Our friend Justin Lane, a veteran of the sales performance management space and author of a similarly titled blog, interviewed Scott about the announcement and the implications for other industries. 

From our perspective, the decision in and of it self is not cause for worry or celebration.  What’s important is whether the plan change aligns with the priorities, roles and behaviors the company is looking to motivate.  Justin’s interview, along with his insights on the sales performance management space, can be found at:  http://spmnews.com/