SalesCompInsights

By Scott Barton and Matthew Zink

As we have written numerous times on these pages, quota attainment distribution is a critical diagnostic for a goal-based incentive plan.  The shape of the distribution and its position relative to target attainment impact both the plan’s motivational capabilities and its ROI.

Consider an example:

• Company A sets a goal for its sales organization to produce $100 million in revenue.  It models a normally-distributed, salesperson-attainment scenario to test the impact of pay mix (ratio of base to incentive target pay) and pay rate accelerators on total comp expense.
  • Under the “model” scenario the company pays 113% of its incentive budget at 100% attainment, due to its use of accelerated payment rates for salesperson attainment above 100%, and the model scenario placing approximately half of the sales population into accelerators;
  • Its compensation cost of sale, or CCOS, is 4.26% — i.e., Company A is spending 4.26% of each dollar of revenue on sales comp under this scenario.

•  In a wide distribution scenario, the company experiences an increase to the deviation of salesperson quota attainment – i.e., the left and right edges of the distribution curve grow outward.
  • While the company generates no more revenue in this scenario, it spends more of its incentive budget, due to more salespeople earning at accelerated payment rates;
  • The scenario also produces a less efficient CCOS, given the increased number of salespeople performing at low attainment levels, yet continuing to earn base salary.

• In a third scenario the company experiences an upward shift in average performance, such that all salespeople produce 5% more than what the company modeled under the normal scenario.
  •  Due to its accelerators, the company spends more as a percent of incentive budget than under the normal scenario;
  • The higher cost is at a lower effective rate (CCOS) than under the wide scenario, because revenue increased at a higher rate than comp expense.

• Finally, a forth scenario, and an unfortunate one, is where the average attainment is 100% of revenue target but the shape is bi-modal.  I.e., instead of one, normally-distributed curve there are two – one centered at the lower end of the performance continuum and the other at the upper end.  Think of a two-humped camel, or the tale of two cities:
  • The lower-performing camp produces relatively-high fixed cost as a percent of revenue due to base salary;
  • The higher-performing group produces relatively high variable cost as a percent of revenue due to accelerated payment rates;
  • There is no middle group to offset each, extreme group.

From a purely budgetary perspective, Company A prefers the normal distribution scenario, which provides the lowest spend rate as a percent of incentive budget and revenue.  However, the company’s sales management has a different view.  The wide scenario provides more extreme examples of performance, and pay:

• High performers pull down big pay checks and serve as a source of inspiration to average performers;
• Poor-performing reps opt out of the program (or company), saving sales leadership pain and hassle associated with administrative, “performance-management.”

Obviously, for the sales management, the right-shift scenario is preferred – beat the goal and increase the number of salespeople over quota.  But beyond some point of goal attainment the sales organization’s success carries both short- and long-term consequences.

Short-term Company A – and this is a real example – is dealing with the fact that its overall corporate growth and profitability in its last fiscal year fell below analysts’ expectations, even though a large portion of its sales organization exceeded 110% of their quota. 

How is this possible?  Goals defining company success and sales team success are not aligned.  Misalignment usually stems from: 

• Under-allocation of goal, which is the practice of assigning to the sales team a level of quota that falls short of the corporate goal;
• Excessive use of measures and goals that enable the sales team to earn what they view is sufficient pay, even when their performance on the primary goal of revenue or margin falls short.

Longer term, companies that celebrate sales team success but fail to meet Wall Street’s expectations must take radical steps to get salesperson pay and performance in line with corporate results.  Ultimately the sales team must perform more, or earn less.

The prospect of earning less doesn’t sit well – with salespeople in particular.  Therefore, sales leaders need to ensure the sales compensation program uses measures and goals that align with corporate requirements, and that the resulting performance of the sales team and the company is aligned as well.  Other components of the comp plan, including target pay mix levels and payment rate accelerators, help fine tune the pay-and-performance relationship at difference levels of average attainment. 

The cost of poor quota setting and alignment can be substantial.  In our Company A example, the firm spent about 10% more than the modeled result at 100% average attainment, enough to employ at least four salespeople.  Another scenario could have been an average attainment below 100%.  This outcome better aligns pay and performance as fewer, highly-leveraged salespeople exceed goal.  The cost here, while difficult to measure, can be high as well, as salespeople perceive they can’t meet their income expectations because the company sets its goals too high.

Two recent news stories provided a lesson on the significance of core selling attributes, a theme often marginalized by the prevalence of social networking and the like.

The WSJ wrote on June 17 how Groupon and similar web-based marketing firms have boosted sales in small businesses.  Article

That same week the Journal reported the departure of the Apple Store’s chief Ron Johnson and the phenomenal success he helped create.  Article

These stories represent opposite ends of the sales-role-influence continuum, a core attribute of sales compensation design.

Take Groupon.  While technology enables the service, the service does not sell itself to many of business owners Groupon targets.  So Groupon relies on good old fashion telesales to embed its value proposition in the minds of potential customers, many of whom are too busy running the shop to spend time on the internet.

The Apple Store and its success is quite a different matter.  We’ve seen cases in retail where technology affords store personnel real-time data on customer profiles and preferences, and up-to-the-minute sales incentives based on inventory flow and strategic positioning.   But spend a few minutes in an Apple Store and you sort of conclude that the stuff sells itself.  Sure, Store personnel tend to be knowledgeable, courteous and attentive (all things we complained recently were missing in the RIM store). But aggressive sellers they are not.

Not surprising then that the incentive pay strategy is completely different between these two models.  We can’t speak specifically to Groupon but know a few of its competitors offer little base salary with lots of commission upside.  Sales reps secure a contract and get paid on a percent of the deal’s revenue.   Apple Stores do not pay its personnel commission.  A representative told me the focus is on the customer’s overall store experience, and not whether customers hear from a store rep about the latest product or app.

This, my friends, is old-school sales comp design.  Take into consideration factors such as brand equity, market share, competition, teamwork and the company culture for deciding how much if any variable comp goes into the total pay mix for the role in question.  Groupon may come to dominate the market for localized, deal-of-the-day advertising so that more prospective customers call Groupon than the other way around.  For now though, it’s a phone, call list, well-honed message and big, dangling incentive carrot that gets the sales job done.

Effective Sales Compensation Starts with the Sales Role

Over the years in our work on sales compensation we’ve engaged with companies of all sizes.  One of the more instructive aspects is the way in which a small firm, as it grows, formalizes its sales roles and uses this structure as a competitive advantage.  Many firms we encounter are loose on this approach, giving salespeople the autonomy to focus where they see fit, or directing salespeople in ways that conflict with how they’re paid.

A similar issue comes when the company has no formal approach for profiling sales job roles after an acquisition.   Either the acquired job stays in its legacy plan and is “off the radar” from a governance perspective, or the job gets slotted into a plan without any formal analysis to ensure alignment.

In either case the sales compensation approach does not align with the job role.  Salespeople complain they’re being asked to focus on account development, new products or profitability while the sales compensation plan doesn’t adequately reward for these initiatives.  In addition to salespersons’ perspectives are those of sales management.  If the rank order of salesperson contribution, as perceived by sales management, doesn’t align with the ranking of salesperson earnings, then there’s a disconnect between job role and comp plan.

At core is a lack of role profiling and ensuring the compensation approach aligns with the role profile.

Components of the Role Profile

Many firms rely on a narrative job description and generic leveling matrix.  Read the descriptions for a number of different job titles and they start to all sound the same.  Problem is these descriptions lack key components of the sales role.

More thorough is a role profile that targets priorities of the job, including:

• What’s the degree of market maturity into which the salesperson selling – e.g.: mature; high-growth? 
• On what is the salesperson’s knowledge oriented – e.g.: accounts; products; technical solutions; partner relationship?  To what degree is the solution a stand-alone versus configured?
• What are the buying patterns and overall segment characteristics of the targeted customers – e.g.: sporadic; aligned with budget cycles?
• What percent of the sales time is on new versus current accounts?  What percent of current account focus is on maintaining current business?
• To what extent must the role team with other sales and support roles?
• Where is the role to focus during the sales process – e.g.: prospect; persuade; fulfill?
• What’s the length of the sales cycle?  What’s the timing of revenue recognition following the sale?

Should-be, As-is and Multi-Source Inputs

Those responsible for profiling the roles should construct a template using the factors above.  The next step is to complete a “should-be” version based on the coverage model and strategic intent for each job.  We are often asked to assess the gap between this ideal profile and how incumbents currently execute — “as-is.”   For the as-is profiling, consider multiple inputs, including incumbent surveys, management surveys and interviews, team interviews and focus groups, and observation.  The observation track can be particularly insightful. 

Long ago I spent six weeks with over 30 field sales representatives from Alliant Foodservice (later acquired by U.S. Foodservice), visiting customer accounts in territories around the U.S.   Using the templates my colleagues and I performed as-is profiling for over 100 field sales personnel, and inputs from surveys and management focus groups, we observed seven distinct profiles for a single job title.  Relative to the “should-be” profile, we assessed coverage gaps and other deficiencies – information critical to training, cross-role coordination and change management.  Typical of what we’ve observed in similar assignments, the reps were critical of their as-is execution and saw significant opportunity for refinement. However, they were not likely to start executing on a new role profile until first being heard and perceiving their input helped shape the future-state approach.

Aligning Sales Compensation

Aim to design a sales compensation plan for each unique job role.   Start with the target total cash amount.  Profiling often identifies an increase in the job’s strategic content, from where management had thought it was previously.  This shift requires an increase in base salary.  Use market pay surveys appropriate for your industry as an input for appropriate target total cash levels.

Pay mix, the proportion of target cash that is both base salary and target incentive, should align with the job’s relative influence over persuasion on deals.  Many factors for determining the appropriate mix tie directly to components of the job profile.  For example, jobs focused on more complex segments of customers tend to command higher base salaries in the pay mix.

Performance measures and pay mechanics must align with each profile as well.  Suppose the account manager role earns variable pay according to revenue quota achievement, yet the role profile indicates the job’s primary responsibility is to penetrate the account base with new products.  Therefore we’d expect the plan to include an account penetration measure, with pay mechanics geared toward the sales cycle and deal’s revenue flow.

Managers often attempt to design and apply sales compensation programs on unfocused or misdirected job roles, believing the plan will focus and guide behavior accordingly.  This puts the cart before the horse.  Formal role profiling is a critical step in the evolution of a sales organization and the foundation for sales compensation effectiveness.

What Makes This Group of Sellers Unique?

It used to be that inside sales was commonly seen as a lower-tier channel relative to field sales.  Inside reps could touch more accounts than their field counterparts in a given period, at a lower cost, making them well suited for covering lower-value customer segments.

With changes to customer buying habits, inside sales is playing a larger, more prominent role.  Indeed, a client recently confirmed this notion, sharing that he bought a $600k enterprise software application after researching options and receiving some over-the-shoulder support from the software company’s inside sales rep.  “If I can buy a $60k Audi without ever speaking to a salesperson, (it) seemed logical I could buy a software app without all the in-your-face, dog-and-pony shows.”

As prominence of the function increases, so too does the complexity and questions on how best to attract, retain and motivate inside sales team members.  We look at three aspects.

Culture and the Social Network

Generational nuances come up more frequently with inside sales forces because these roles are typically the first rung on the sales career ladder.    Inside sales is a tough environment, and the fate less certain than a field sales role.  There’s no loyalty.  Field sales is a career; reps increase their comp by staying in the role and being better at it; inside reps look for a job promotion instead.

For the manger, culture can work for you or against you.  Ring the bell, free pizza in the lunch room, public expressions or recognition and success – all less viable in a field sales environment; but skepticism and disappointment travel like wildfire in a call center.  Such conversations used to occur over cube walls, in the hallways or at the water cooler.  Today’s younger inside sales reps are more likely to stay in their cubes, texting and emailing as a way to stay connected to peers both inside and outside the firm.  These factors make it harder for the call-center manager to leverage the positive aspects of an inside team.

Steve DeMarco is VP of Sales for Xactly Corporation, and a long-time manager of inside sales resources.  Recently Steve spoke at the American Association of Inside Sales Professionals (AAISP) Conference, where much of the discussion was around how best to motivate “Gen Y” employees that fill the majority of inside sales seats.

Steve says, “Given all the sports and related activities that kids now participate in from an early age, today’s younger workers can be dedicated but expect structure and formal training for advancement, much more so than earlier generations.”

And Baby Boomers are entering or returning to inside sales at rates not seen in years, given the recession’s hit to retirement incomes.  “Everyone gets along,” Steve says of the two generations working side by side, “but management has to appreciate that what motivates one group won’t necessarily work for the other.”

Role Design: Inbound or Outbound

There are significant differences between inbound and outbound roles.  Of the two, inbound is more difficult to benchmark for determining competitive pay rates because the pay mix – the split between base salary and target incentive – is not consistent across firms using inside roles.  More challenging is the confusion many inside incumbents have around the inside role – is it sales?  Service?  Firms that haven’t nailed the culture, performance expectations and skill requirements will struggle.

We think of outbound sales roles as being similar to field sales but typically more transactional and data driven.  Issues pertain to account ownership and handoffs when both field and inside sales work on the same accounts and opportunities, or lower-value accounts migrate from inside sales to field coverage.  In these cases the sales credit mechanism must align with each job role’s point of influence.

Pay for Performance

Measuring performance for the inside sales role is problematic.  In call routing schemes managers can struggle to identify which rep influenced a buying decision.  Call routing and marketing campaigns influence overall sales opportunity for inbound roles, and have an impact on the customer experience – “my cable is down and you’re trying to sell me phone service?!”

Call centers have a tendency to overload reps with metrics.  Frequent spiff programs can conflict with, or dilute from, the core incentive plan.  Management has to filter out what are important-but-not-critical measures from those that link to profitable revenue growth.  Inbound roles do well with incentive credit schemes that retire quota at a rate that’s proportionate to the product’s or service’s strategic value, with a minimum customer-service score serving as the qualifier for incentive eligibility.  And quota must, for the inside role, adjust with fluctuations in call volume.

As we’ve said on these pages many times before, sales is, or should be, service.  Salespeople able to demonstrate this approach do well, particularly in the inside sales environment, where words, tone and timing account for everything.

Adding to our List of Favorite Sales-Themed Movies

Ah, Friday night.  Maybe you shut down early, pick up some Chinese food (though here in SF we have to distinguish between Hunan and Mandarin) and stream a good sales flick.  We keep a running list of our favorite movies that speak to the madness of the sales profession.  If you’re a salesperson, manage salespeople, or in some other way find the profession entertaining, we suspect you keep a similar list or at least enjoy a sales-themed movie on occasion.  We’re happy to recommend one for your list.

Let’s first get something straight: this is not a movie review.  My Friday night viewing standards are low, given the alternative to a Friday-night-dinner-movie-kids-asleep scenario is being stuck at O’Hare, or worse.

Now then, “Love and Other Drugs” represents a good dinner-and-a-movie piece because it’s a love story, though considerably spicier than your average Julia Roberts flick, and showcases primal sales behavior.   Jake Gyllenhaal’s character is a heartless Pfizer sales rep with some unsavory tricks up his sleeve, that is, until Anne Hathaway’s Maggie makes a strong bid for his attention.  We can only imagine the legal wrangling between Pfizer and the movie’s producers.  Perhaps the subject’s period was enough long ago – when you could still buy a new 911 for under $50k – so that any unflattering depiction of Viagra or its sale force is moot.

There are three general types of sales-themed flicks: light-and-foolhardy; dark-and-serious; and serious-yet-ultimately-uplifting.  Depending on your meal and mood, we’ve tried to cover all three categories with our top-pick list, in no particular order:

1. Glenngary Glen Ross: “Put that coffee down – coffee is for closers”
2. Boiler Room: Ben’s profanity-laden pep talk is second only to Alec’s above
3. Fargo: William H. Macy didn’t go to Club that year
4. Wall Street: Charlie Sheen plays a grownup
5. The Big Kahuna: don’t let the cover art fool you – dark and serious
6. Thank You for Not Smoking:  “We don’t sell Tic Tacs, we sell cigarettes. And they’re cool, available, and *addictive*. The job is almost done for us.”
7. Tin Men: some great dialog….and a government probe!
8. Clerks: retail at its best
9. Tommy Boy: “That guy may not call us”
10. Working Girl: Talk about self motivated – she wasn’t even eligible for the comp plan!

Upon reflection it’s the dark-and-serious genre that dominates the list.  Avoid many of these movies if you’re considering a career in sales, or are skeptical of salespeople.

But any one of these movies illustrates the stuff that makes salespeople tick: passion, tenacity, guts, desperation. If you work around salespeople and find them a little hard to understand, you might consider watching these as part of your  sales sensitivity training.

Or just decent entertainment.  As for the dinner portion of the equation, we’ll leave that to Part II of this series.

Tales and Tribulations in Retail Shopping

One of my first jobs was a shoe salesman in a mall store.  What motivated me?  It wasn’t the money – horrible.  It wasn’t the job content.  I could have cared less about shoes.  Rather it was a way to make a little money while I socialized with friends staffing other retail shops in the mall.  This was long before Facebook.  What else was I to do?  I took the job because the chain’s district manager sold me on the idea that I could make a lot of money selling shoes.  Didn’t hurt that he arrived to our lunch meeting in a new BMW.  His proposition didn’t pan out.  I lasted about six months.

Don't Try This at Home

Why do I share this unfortunate chapter from my past?  We get that life is difficult for the retail store sales clerk.  It’s tough for their employers, too, with turnover at many stores ranging from 200 to 300 percent.  Is this a reasonable cost of doing business, or a decent tradeoff for low prices or convenience?  Maybe so for some environments, but not businesses that require motivated, knowledgeable and courteous sales staff.

Take this scenario.  Wednesday afternoon Mike and I are killing time at the Philadelphia airport and come across a Blackberry store.  Prominently displayed is a new Playbook, RIM’s answer to Apple’s iPad.  Mike is a dedicated Blackberry user and appears particularly interested.  We start fiddling with the thing, and can’t, after about two minutes of trying, get to a web page.   All we see on the screen are photos taken by other shoppers/travelers.  By the looks on their faces, they, too, struggled to get the Playbook “playing.”

We strolled to the other side of the store, where another Playbook sat perched on a stand.  This one had what looked like a browser on its screen.  We try in vain to locate a search or address window.   All we get is a “Windows Live” login screen.  There’s a seemingly useful menu bar that sporadically appears on the screen’s header but when pulled down disappears.  Ever get a contact lense stuck behind your eye ball?   “This sucks,” we say, and walk off.

Our experience with the Playbook was short lived.  The store clerk seemed unconcerned.  Maybe she thinks the device sells itself (it doesn’t), or that we already own iPads (we don’t).  Whatever the case, she may have been able to salvage the situation…and did not. I expect that in situations where the product could use a little help to capture hearts and minds that someone is there to sell it.  Playbook needs, in its current form, a few good salespeople.

I’m loathe to use “best practice” examples, because of the “yeah, but” responses these examples might elicit.  But here it goes.

I don’t mean to pick on airport vendors, but a little kindness goes a long way.  After all, most people in airports are grumpy, and they have plenty of options for food, drink and general time-killing.  Take this sandwich shop in DEN.  I use its name, Paradise Bakery, to promote its business.  Recently I walk up to the counter and am blown away by how friendly, efficient and seemingly grateful the guy on the other side is for my business.  “Yeah, but he’s probably the owner.”  Good call.  Though I observed he wasn’t the lone friendly guy in an otherwise surely operation.  If anything he was setting a good example for the others.

Take another example: the now defunct WaMu.   Management there, in the bank’s hay day, concluded that losing a newly-hired-and-trained teller after six or eight months wasn’t good business.  The bank had spent all this money to make their branches look like an employee breakout room at EBay (lots of open space with colorful, creatively shaped chairs and little tables).  So why have the cool branch experience ruined by a service representative who could give a flip?  “Yeah, but WaMu got seized by the Feds – its management is being prosecuted.”  True.  But let’s separate the unsavory lending practices from the solid execution on the retail floor.  WaMu determined it could increase engagement and reduce turnover by paying more and demonstrating to tellers that this tough, first occupational step could lead to a meaningful career.

When the news arrived hard and fast that WaMu would cease to exist, I’m sure many of the tellers felt like I did a few weeks into my shoe-salesman career – this isn’t turning out the way I expected.  But many of these folks did continue on a path toward a meaningful career in banking, with Chase or another institution admirable of WaMu’s practices in this area.

Takeaway?  In an increasingly electronic, mobile, Facebook-Google-Amazon-Groupon marketplace, face-to-face customer experiences matter more than ever.   As a business person, who do you want facing off with the customer?  We’ll take the knowledgeable, engaged salesperson every time.  Sure, they cost a little more, but it’s a cost of doing business.

RIM Playbook, R.I.P.

Does your company plan to ramp up on sales headcount for 2011?  Checkout the Sales Management Association’s June 9 webcast on maximizing the return on sales headcount investments. 

NewSigma and TerrAlign will illustrate factors that impact sales headcount ROI, and share the results of research that shows which investments payoff, and which come up short.

Topics include:

• Optimizing sales force roles
• Evaluating sales compensation investments and impact
• Managing sales force capacity
• Aligning sales territories

Register today

http://salesmanagement.org/events/maximizing-return-on-sales-headcount-investment

Getting the Most Out Of Your Newly-designed Program

As a manager or administrator of the sales compensation program, what should you care about?  What measures characterize a well-functioning sales incentive plan?  You’re in an excellent position to assess how well the plan is working.

Getting Started

Can you imagine a car without instrumentation?  Your only indicator of success would be a safe, timely arrival at your intended destination.  The scenario is analogous to a sales compensation plan where payments issued are the only measure of success.  Like cars, complex incentive programs need regular monitoring and maintenance, less something unexpected goes wrong and costs dearly to fix.

Most managers of incentive compensation accept that ongoing measurement of the plan’s performance is good business practice.   The problem lies in execution.  What should be measured?  How do we get the data?  What do we do with the information?

Start by focusing on a few fundamental measures.   Your car, for example, is a sophisticated piece of engineering.  There are plenty of things that can go wrong.  Yet most drivers focus on the speedometer, fuel gauge, service-engine light and thermostat.  For each of these devices there are standards that indicategood operation and potential problems.  Without these standards, the underlying information is of little value.

For your sales compensation program, we suggest four key measures and corresponding standards you monitor to ensure your plan operates properly:

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

Pay Distribution

Most companies track what they pay their salespeople and  standards for responsible pay.  Often missing is measurement of an effective pay distribution for specific classes of salespeople.

The measure starts with acceptable ranges of pay around a midpoint or median amount.  Ideally your standard comes from a published compensation survey that covers the specific jobs in your sales organization.   Compensation managers often fret over the “right” survey, while sales managers usually discount any survey referenced for their team.  The most important thing is to find a survey(s) that your stakeholders agree represent your industry, and then use the information. You want the midpoint (50^th), 25^th and 75^th percentile pay amounts for eachjob.  These amounts include base salary, incentive target, incentive actual, target total cash (a.k.a., on-target earnings) and actual total cash.

Pay Distribution Sample

Each quarter you want to measure the degree your pay distribution represents a normal distribution around your standard range.  A compressed curve, where your 25^th and 75^th percentile actual incentive pay is well inside of your standard range, suggests lack of meaningful pay differentiation across your job group.  A bi-modal curve, where distributions concentrate around the 35^th and 65^th percentiles, may reflect underlying causes such as poor goal setting or territory alignment and result in a very expensive outcome, especially when the plan uses accelerated pay rates for above-goal performers.

Performance Distribution

Similar to pay, we suggest analysis of acceptable ranges of performance.  Managers fret here, too, over the right standards of performance distribution, which can be measured on a both absolute and relative basis.  Don’t sweat the details.  With anything close to a normal distribution across a large population of like jobs, your plan would appear to be working well relative to a performance standard.  Obviously a normal distribution that is set left or right of your standard calls into question goal reasonableness, as does bi-modal or skewed (biased to the right or left of median) distributions.

Performance Distribution Sample

If your plan has multiple performance components, your options are to measure each component separately, or calculate weighted average performance using an attainment rate from each component.  Either way, the more components in your plan, the less clear and consistent the company’s determination of “good” salesperson performance.   It’s a reminder to keep the plan simple.

Return on Compensation Investment (ROCI)

On our sales compensation dashboard, ROCI is like the check engine light on your car.  It lights up when something is amiss, and you or a trained expert must then dig a little to find out why.  I once paid $130 for a mechanic to diagnose what turned out to be a loose gas cap.  The ROIC measure is often not a practical means for measuring the health of your sales comp plan, but we argue it’s necessary in some form.

At the heart of this measure is an answer to the question of, “what performance (return) should we expect for the amount of compensation (investment) we spend?”  Industry standards range from useful to irrelevant, depending on your business and the operational diversity of your peer group. If the standard isn’t already well known to you, it’s probably difficult to obtain.  That said,  published surveys with ranges of acceptable ratios for pay-to-production by job type are available for some industries.  If the published survey doesn’t cover your industry or jobs, you can initiate a custom survey using a third-party to maintain participant-data confidentiality.

The majority of companies we encounter use an internal standard of ROIC based on external or market-driven standards of target pay amounts and the company’s revenue or gross-margin goals.  Logic being, if the company pays competitively and hits its financial objectives, then it is “safe” — for now (i.e., the check engine light isn’t illuminated).

What if the plan uses multiple performance components?  Or it includes supplementary components, like those for short-term promotional campaigns (a.k.a. “spiffs”)?  Another complexity arises when performance uses measures other than financial units, making comparisons of pay-to-performance rations across multiple measures meaningless.  In either case, managers can track what they pay for each component, and assess whether the spend is worth the result.  The more components, the more likely one or two components will be ineffective– i.e., not producing compensation.  Administratively, the company spends money supporting a plan component that isn’t producing fruit.  And from the salesperson’s perspective, the opportunity isn’t worth their time. 

Sales Time Allocation

“Whoa,” you say.  “I manage the sales comp plan, not the salespeople.”  Fair enough.  But the reason you love sales comp is because of its implications for the company’s profitable growth. 

Devilish Details

Of course, you can’t rely exclusively on these four measures to ensure the health of your sales compensation program.  Once you have nailed the basics, you should explore upgrades to your dashboard to include other dimensions, such as administrative expense per payee, or number disputes per incentive dollar. 

The time should be now to start measuring your sales compensation plan effectiveness.  Come third quarter, questions will surface around what’s working and what’s not.  Armed with output from your four plan-effectiveness measures, you’ll have definitive answers.

Would You Like a Battery with that Jump?

Living in the San Francisco Bay Area and relatively close to a market, we seldom stock many groceries in our tiny, overpriced (or is it half-overpriced now?) home.  The grocery store is our pantry, and daily visits are routine.  So too is my older daughter’s claim of weakness from extreme hunger.   So in grabbing stuff for dinner with starving daughter in tow, I’m quick and efficient, except when something goes amiss.  

Such was the case recently when my car, having worked fine only minutes before, would not start.  This thing’s got enough electronic gear to power an Apollo mission.  It clicks and hums when sitting in the garage.  Now it was dead.  No time for a 1,300-point diagnostic, we’ve got to get home.  The car stays, food and kids go.  I packed up my two-year-old daughter and a bunch of heavy bags; the other, starving daughter, could only manage to carry a small bag of French bread.

AAA Northern California has, over the years, built up significant brand equity in my book.  The annual dues more than cover what would be the cost of jumping, towing, unlocking and refilling our cars.  AAA’s Roadside Assistance is cheap insurance for absent-minded owners of unreliable cars.

So I wasn’t surprised when the AAA roadside assistance driver (RAD) arrived at my car precisely when I did, according to plan.  About 60 seconds later my car is idling as if nothing happened and I’m signing a form reminding me something had.  The RAD suggested I let the car idle for awhile before shutting it off and then if it’s slow to start, consider buying a new battery.  Then came the pitch for AAA’s battery replacement service: for $135 another RAD will come to my home and replace the battery with a dealer-spec, three-year-warranty model.  Interesting, I thought.

Indeed a few days later my car was slow to crank.  Being proactive and resourceful I called the dealer from where I bought my car to compare its battery replacement charge to AAA’s quote; the dealer wanted $60 more.  And I would have to go to them – something I do too frequently.  I’ll save the $60 and go without a free cappuccino.

Get on with the punch line, you say?   Here it is:  I spend a good chunk of my career thinking through what enables a successful up-sell and service experience to co-exist.   A former boss of mine avoided making the distinction.  “Sales is service,” he would preach.  In the case of my recent AAA encounter, he’s right.  But in retail, the tag line often falls on deft ears.  Employees in designated customer-service roles often balk at sales goals.  “I didn’t sign up for this,” they’ll say.  From a management perspective, you’re kind of stuck.  Push the goals too hard and you lose valuable service employees.  Not hard enough and the sales goals go unmet.  In our experience, getting the inbound-sales/service role right is a tall order.

So what makes AAA and other firms successful here?  The first hurdle is cultural.  If your employees believe that to serve the customer means informing them of products and services they can genuine use and value, then this knowledge transfer is just an extension of their service routine.  The product/service must fit with the service encounter for the customer to recognize its value.  “I’m glad you told me, ‘cause I just might need a battery.”  Quite a different thought process from the belief a rep is taking advantage of your needy state to sell you something you don’t want or need, or suggesting a quid pro quo.  “Hmm…. if I don’t sign up for the credit protection service, will she not waive my late charge next time?”  Feels sort of slimy.

The second hurdle, if it’s not yet completely obvious why I selected this week’s topic, is compensation and performance-management “alignment.”  I can’t say with certainly how this AAA RAD gets paid, but know enough on this particular issue to believe his cash comp is base salary with a very modest variable piece tied to customer service scores (I received a survey about three days following my service call) and battery sales volume.

What needs to be aligned, exactly?  If we have the sales/service connection set – i.e., there’s an obvious connection between the service request and the proposed sales opportunity – our performance measures and variable comp must fit the context of the job role.  Take the “Fries-with-that-Coke” example.  A natural connection, simple, unthreatening message (what Coke drinker wouldn’t want a delicious pouch of golden fries?) and for a national chain lots of data and surveillance opportunity to appropriately measure service quality and sales volume.  Dial up the incentive opportunity for hitting the fry goal.  Have it part of their target pay.  There’s little that can go wrong.

Our battery example has some similarities but the role context is far different.  It’s not a transitional job.  I would expect some toughness and pride on the part of the employee.  To say these guys are set in their ways is probably not too offensive.  And you want them to sell batteries?  Better dangle some incentive out there.  But how much?  What’s the goal?  What can go wrong if these things aren’t aligned?

Take into account the customer’s perspective.  I try not to generalize or stereotype based on appearances, but a tattooed, heavy-equipment operator with an aggressive sales goal and vulnerable customer in a dimly-lit parking lot sets an intimidating scene.  “Would you like a broken neck with that refusal to buy a battery, sir?”  Good thing I left the kids at home.    Me and my car, never seen or heard from again.

Yet the thought never crossed my mind.  This guy knew what he was doing, and I’m $60 richer because of it.  Call it random in a world of information overload and crummy service experiences.  Something tells me a lot of work went into getting this right.

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Extinction of the Sales Rep?

Like the internal combustion engine, direct selling persists despite technology and cultural shifts suggesting its demise.  Certainly, many of us in direct-selling roles consider much of today’s technology critical to our selling success.  But the fundamentals of sales success are as old as the wheel.

Notwithstanding there are bold pronouncements of how the internet will significantly marginalize the direct selling role.  Selling Power magazine publisher Gerhard Gschwandtner goes as far to predict that in nine short years only 3 million of the roughly 18 million salespeople employed in the U.S. need report for duty.  “In a digital age, every part of the sales and marketing process can be automated,” reports Selling Power.

The article goes on to say that increasingly, customers will make decisions based not on slick sales demos and well-timed follow up calls but on the advice of peers through social networking.

If you’re a salesperson reading this, you know there’s always been a social network, and you’re rather certain you’ll always be able to get a job as a sales professional.   Sure, customers get a lot of information that wasn’t available before.  You do also and use it to your advantage.

More at issue is how the sales compensation professional accounts for these multiple channels of influence relative to that of the salesperson.  One director of compensation for a consumer products company explained, “Customers used to rely exclusively on the sales rep for a lot of the information they now get over the web.  Our reps don’t have the same degree of individual influence (on customer buying decisions), but we pay them like nothing’s changed.”

Indeed, a recent study by Deloitte & Touche suggests that most companies have not found the right way to pay for sales performance, with significant implications for sales productivity. 

One would think we’re not prepared for this new age.  Like having bought an electric car and finding its plug incompatible with your garage electric socket.   But in the world of sales comp we’re convinced that all seemingly new trails have been previously trodden.  So we refer to our shelves and dust off the volume on “Alternative Channels.”  Not surprising the lessons in this volume seem particularly apt to the likes of Twitter and Facebook.

It goes something like this:  rep, having spent all available selling time with end users, must now shift some time to those “channel partners” influencing the customer through alternative channels.  Do we pay the rep differently for this shift in behavior?  Of course we do.  The solution could be as simple as measuring all sales volume in a particular, geographic territory, but paying at a reduced rate in recognition of the greater efficiency (and incremental cost) associated with the alternative channel.

This is a simple example.  Your reality may be a bit more complex – e.g., channel partner influence spans multiple, direct-sales territories.  At a minimum you may be looking at a less-aggressive pay mix to accommodate a job role with less direct influence and a higher skill level.  Or maybe performance measures not tied to transactional sales volume.

Case in point, GlaxoSmithKline reported changes to compensation for its direct sales reps, away from prescription sales volume and toward customer feedback, knowledge of the business and overall contribution to the business units they serve.  While at the time of this writing we can’t be certain GSK’s changes come in response to the massive number of tweets, posts and walls related to its product, we’re pretty sure the model of putting armies of direct sales reps on the ground of healthcare facilities, loading them with free samples, pens and bagels, is long in the tooth.

And while the industry overall has pared back considerably the number of direct selling jobs over the past three years, most firms are now hiring – GSK posted ten new sales representative jobs in the last 24 hours.

In fact, many companies across multiple industries appear to be on a sales-rep-hiring binge.   Far from being on its way out, the direct sales rep is in demand.   Three-quarters of the respondents in SalesGravy.com’s annual survey of sales hiring trends say they plan to hire salespeople in 2011.   A tech client having returned from her annual sales meeting last week said over 40% of the audience had less than 12 months’ time with the company.

Are we in a bubble-building mentality, soon to wake up and discover we have too many salespeople for the work required?  In all respect to Mr. Gschwandtner, we think not and hope his prediction is way off base.  The direct sales rep of the future will succeed in part by leveraging massive amounts of information that until recently didn’t really exist.  It’s a different, more complex job role though, and companies hoping to reap productivity from these jobs must adopt their sales compensation programs accordingly.