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Sales Productivity Takes a Big Leap Forward

One of the most challenging decisions facing sales leadership is whether to move from a commission to a goal-based plan.  By commission, we mean the relatively simple approach of sales x payment rate = payment.  In a commission plan, payment rate gets the focus – bigger the better for a salesperson.  In a goal-based plan, it’s all about the goal or quota: goal achievement = payment.  There are derivations of these approaches: variable-rate commission schemes where the payment rate changes based on a goal-achievement threshold.  But fundamentally, the commission plan provides a target share of each sale to the rep, where the goal-based plan provides a target payment when the rep has met the required goal.

Two years ago we worked with the sales force of an incumbent local exchange carrier (ILEC).  In 2009 the sales organization adopted a quota-based plan after having used a commission plan.  The firm’s head of HR said moving to a goal based sales compensation program was relatively simple, and one of the better things they’ve done.

In 2008 the company was struggling.  Yet most salespeople earned variable pay based on recurring revenue from previously-done deals.  Many in management thought reps viewed their variable pay as an entitlement, and were not sufficiently motivated to grow new business. 

The program changes for 2009 included a minimum performance threshold for incentive eligibility, and use of both cumulative and discrete goals for monthly payments, depending on the job role.  The new program simplified the calculation methodology by using a standard approach across various performance measures, whereas the previous plan used a variety of calculation rules.  In exchange for the threshold, the plan offered higher payouts for over-goal performance.

During 2009 the company operated under bankruptcy protection in one of history’s worst recessions.  Yet the sales organization performed admirably, coming in for the year just below the goal.  In 2010, management kept the same basic plan structure but increased the goals and minimum performance threshold.   The company emerged from bankruptcy in October and finished the year at 107% of plan.

The company’s mood for 2011 is bullish.  Management has refined the sales comp plans to place more focus on strategic product sales.  A benefit to goal-based plans is management can shift strategic emphasis by changing the quotas and payment rates, without structural changes to the program.  This consistency is a welcome change for reps that grew accustomed to constant changes to the plan, and given all organizational changes. 

Goal setting and allocation is never easy.  “We did a lot of work behind the scenes,” says the head of HR.  “But this paid off in making the program appear simple and sensible to the field.” Management restructured the way in which marketing and sales worked together in goal setting by setting up a core team and calendar, with shared accountability for revenue goals across functional groups.  This helped the entire process become more transparent – a criterion for effective goal management in the sales organization. 

 “Managers often fear they’ll lose their best salespeople by making incentive pay contingent on goal achievement.  You have to take risks, and work through the fear.  If you have solid relationships – salespeople with customers and management with salespeople – fear of losing sales talent is probably overblown.” 

The company lost some salespeople during the transition, but most are back. They’re excited about the culture and being a part of what the company now stands for: a high-performing organization.  Setting goals at the sales rep level enabled the company to take a big leap forward.

Know Which Investments Will Pay Off

As referenced earlier on this site we recently hosted a web session with Steve DeMarco, VP Worldwide Sales at Xactly, and polled the 500+ registrants for their views on sales force investments.

Not surprisingly given recent economic trends, many companies are adding headcount, training those resources, and arming them with the content and collateral to help them be more successful.

Interesting, it was additional headcount or training that over 20% of the respondents found did not provide meaningful return on investment (ROI).

The good news for companies making or contemplating investment in the sales force is that many folks appear satisfied with the return on such investments. 

Whether you’re satisfied or not assumes some mechanism for tracking your ROI in this area.  Clients frequently ask how they measure ROI in the sales team.  Simply, ROI is the incremental gain in sales from each incremental dollar spent on the sales team and various support mechanisms.   More complex is the interpretation in short-term trends (“we’re spending more as a percent of revenue this quarter than last”) and competitive benchmarking (“we spend 7% and our competitors 9% — is this a good thing?”).

Making sense of data derived from sales force ROI analysis is a little like fixing your dishwasher – seems simple at first but you can quickly get in over your head and have nothing to show for your effort.  Our advice here is select one or two measures that address what’s on the mind of your executive team (related to investments in the sales force, that is).  

The CFO of a medical device distributor told us recently that he asked his head of sales comp why the company’s sales comp expense is increasing when revenues are flat.  The sales comp head apparently replied, with a somewhat blank stare, “Let me get back to you on that.”  The executive told us that was about three weeks ago.

This is a big topic with big implications.  Stay tuned for examples and cases of measuring ROI on sales investments and the implications for sales incentive design and program management.

Leveraging the Power of Sales Compensation

After a global economic meltdown we’re not surprised to hear increased questions about the utility of sales compensation.  Let’s face it.  Planning and managing sales compensation plans can be pretty painful, particularly when the business cycle is in decline.

Think of sales comp plan design and management like playing in the stock market.  Over time, sales compensation typically provides a strong return on investment.  Occasionally you can get burned, but sit on the sidelines when the market is gaining speed, and you’ll fall behind.

A good industry for this does-it-matter topic is semiconductors, where many firms do not use traditional sales compensation programs.   Instead they rely on company stock, profit sharing or discretionary mechanisms to compensate the sales force.  The semiconductor environment presents a challenge for sales compensation. Sales cycles can be over a year, and each deal represents the epitome of a solution sale – very custom and specific to a particular customer situation.  Measuring sales influence is another industry challenge.  Reps in multiple regions can influence a single design win.   Management typically measures sales contribution at the team rather than individual-rep level.

Several years ago we worked with such a company; variable cash pay for salespeople wasn’t a factor.  Generous option grants and the company’s high-performing stock fueled the compensation program, and cash incentives came in the form of management-by-objectives (MBOs).

The company reached a point in its growth where equity was neither reliable nor sustainable as a primary driver of variable comp.   To attract and retain sales talent, management needed the cash program to stand on its own, and link more closely to how the company made money: design wins.

The MBO approach paid consistently to the point where most reps expected to earn 100% of target – no more, no less.  In the view of the company’s VP of sales, the MBO approach coddled poor performers and short-changed the high performers.   The VP wanted more variability in cash pay to align with what he knew were different levels of contribution across the sales organization.

By moving to an approach that tied incentive opportunity to annual design-win quotas, management could justify higher pay for high-performers than was prudent under the activity-based, discretionary MBO approach.  This transition happened in stages.  As the company acquired more historical performance data, its confidence in setting reasonable rep-level quotas increased.  Gradually, it moved to a more pay-for-individual-rep-performance approach.

The transition was tough for many of company’s sales managers, who had enjoyed the relative simplicity of team-based, discretionary incentive approach.  Individual quotas required that sales managers analyze sales data for purposes of allocating quota and assigning sales splits.

The upshot in acquiring and analyzing sales data is management has become more educated on the business.  Sales reps and various levels of management can discuss progress in objective terms, using revenue and pipeline progress as common measures of performance.  As more data come into the system, the company has increased its investments in technology to automate functions like quota allocation.  Managers can focus more on outcomes and implications, and less on number crunching.

The results speak for themselves.  In the first year of the quota-based approach, the total number of design wins increased, as did the size of each win.  Performance has increased each year since.  While the company had always prided itself on attracting and retaining top-tier sales talent, its maturation from a pay system characteristic of an early-stage startup to one more common in a $6 billion, Fortune 500 firm happened with very little sales turnover. 

The company’s head of sales operations offers this advice for managers preferring use of a low-risk, MBO approach.  “Our best salespeople are risk takers that need stretch goals to perform.  Using a goal-based incentive compensation program is the most reliable approach for attracting these types of salespeople, identifying areas of sales weakness and growing year over year revenue.”

Flexible With the Course While Staying True to Plan

Joe Glenn has been managing field-based and inbound-phone salespeople for over five years.  During that time his company, specializing in communications and computer-services, measured sales performance on a product-unit basis.  The approach is common in retail and consumer-sales environments, and can be effective for driving transactional behavior from salespeople.  Where the unit-based approach falls short, though, is on goal alignment.  That is, the sales organization can exceed its unit goals while the company misses its revenue target.  In many such unit-based incentive plans, reps focus on those products they can most easily sell without appreciating the financial consequences to the company.

Changing a sales force’s incentive plan can be dicey stuff, particularly when the company adopts new measures of performance.  In Joe’s case, not only did he have to onboard a new measure, but each rep would carry a quota and minimum performance standard.

“We have a very flexible, adaptable sales force, which makes annual changes to the sales comp plans relatively straightforward,” said Joe, who about one year ago started sharing with his sales teams the revenue-plan concept.  “They were on board – it made complete sense to them.”  New goals and a goal-setting paradigm raise the stakes, however.  “Salespeople want to know the goals are reasonable and ultimately, do-able.”  Without the benefit of historical data, salespeople didn’t really know whether their revenue-based quotas were in line.  Adding to the anxiety the plan featured a 75%-of-quota threshold.

Creating quotas was another issue.  Joe’s colleagues in sales operations used the company’s billing system as the source for transactional revenue data, a formable task that didn’t come on line until December.   The new incentive plan was slated for rollout the following month.  Joe was forced to use a limited set of historical data for setting Q1 quotas.

The company launched its new plans during the final weeks of December 2010.  Early into January, salespeople, checking their progress against quota on a daily basis, were becoming concerned.  For most reps, their performance was trending well below where they needed to be to reach the threshold, and earn incentive pay.

Rather than waiting until quarter or even month end, Joe took action.  He and his operations colleagues dove back into the data in search of assumptions that, given the benefit of hindsight, might be off.  

The prospect of adjusting quotas mid-cycle is typically fraught with issues.  While in principle Joe believes an organization should stick to its goals, the revenue quotas were new, and he couldn’t risk the organization having a poor Q1 – a likely scenario should the salespeople disengage after perceiving they couldn’t hit the threshold.

“For the quotas to be effective, we had to be open to regular course corrections,” Joe says.  “This could not be a ‘set-it-and-forget-it’ approach.”  He used a transparent process with company leadership to keep them appraised on the evolving quota-setting methodology.  As more data became available, Joe revised his assumptions.  This included expectations for optimal business mix at the assignment level, and factoring customer churn into a four-year, revenue-per-unit (RPU) projection for acquisitions, where discounted monthly recurring revenue in the first year gives way to more typical RPU rates in Year 2 of the contract.

Joe also added a feature to the plan threshold by including a relative-ranking threshold by market.  Threshold would now be either the 75^th percentile performer in each market group, or the absolute approach (75% of individual quota), whichever was lower in the period.  This tactic provided a reality check to performance in the greater Kansas City market, where unusually harsh weather hammered field sales efforts.

While January revenue results came in below even the revised plan number, February’s pipeline is strong, and Joe projects a record Q1.  His sales teams viewed the revised goals challenging but reasonable, and after shaking off the initial anxiety, set out to beat them.  From leadership’s perspective, the additional analysis and revised goals provided a level of granularity that helps each salesperson focus on the right mix of business.  Reps are selling smarter, and thinking more long term.

One can argue that if the company hits its revenue plan, which in Joe’s case appears very likely for Q1, the course taken to get there doesn’t really matter.  Joe will tell you his approach of staying flexible, transparent and course correcting as he goes has everything to do with a favorable outcome.

Joe Glenn is a director of sales for a communications and computer-services company serving California, Kansas and Missouri.

SCI Turns One, and Steven Levitt Sends Us a Gift

One year ago we started a blog.  Our purpose was and remains to this day: exposure.  That is, to expose the mystery and audacity that surrounds the subject of sales compensation and incentive management.  Not beyond audacity ourselves we launched our blog with the gratuitous headline, “Are Incentives Dead?”  Pure nonsense of course but you’d think by reading the real headlines of the day that incentives were on their way out, given what they did to the economy and all.

One year later the Dow is scratching at 12,000, and incentives are alive and well.   Yet the madness continues and we’re grateful for folks like Steven Levitt, author of “Freakonomics,” for providing us material we can poke holes in.  He, too is not beyond the flaunting of silly headlines, beginning the speech featured here by saying incentives don’t work and what does is tricking employees into thinking what they do matters.

                http://www.youtube.com/watch?v=FdkQwQQWX9Q&feature=related

The weakness in Mr. Levitt’s argument is that he confuses incentives with entitlements via a turkey (no kidding) and offers patronage as an elixir for worthless workers.  The final straw is his case study: Google — as if anything Google does can be easily replicated.  He makes Google out to be a bastion for its users’ privacy.  Freaky indeed.

So let’s break this down.

• Incentives don’t work because payees, after receiving their first chit (e.g., a turkey), forever feel entitled, and even cheated if the subsequent award is not larger than the first. 
• There’s no meaningful application of a “stick” relative to a carrot because employees, when faced with a stick, will quit (“slavery is illegal,” he informs).
• Better to, rather than offer a carrot, “trick” employees into thinking what they do actually amounts to something.
• Google employees, motivated by the company’s values, believe it’s more important to keep customers’ data safe than to prevent the next pandemic.

Our rebuttal:

• Incentives are not entitlements.  Entitlements motivate loathing and bitterness.  Incentives motivate performance.  An employee can’t rightfully expect an incentive without having performed first.
• Sticks work.  Fear and risk of income loss can be as motivating as the opportunity for upside.  We don’t, however, promote beatings.
• Trickery in the workplace is counterproductive.  A spiteful coworker once put refried beans on my phone’s earpiece which cost at least 10 minutes of otherwise productive time not counting my scheming for revenge.  Really, can Levitt be serious on this point?  We believe it’s good practice to express appreciation for one’s hard work, and bad practice to make a deadbeat feel like they’re actually of value.  Levitt makes it sound as though you have to trick employees into thinking they contribute because they really don’t and then maybe they will (I was tricked into believing my earpiece was bean free when in fact it was not).  This stuff has no place in the workplace.  We say “stick” rather than “trick.”  If the unproductive non-contributors don’t quit, fire them.  Give tricksters twenty lashes.
• And seriously, Google employees taking a bullet before leaving the door ajar on your personal data?  Or using it against you.  I’m fearful just mentioning the mighty G in vain less I suffer broken kneecaps from their hired goons who are following my every keystroke.  Apparently Mr. Levitt, in all his work with Google, somehow missed the parade of perks ranging from morning mango-rub massages to afternoon hand-crafted beer bashes, with Jimmy Buffet working the tap.

Speaking of Google (I’m living dangerously here), a fellow consultant who had been doing a lot of work there, appeared in our office one day looking dejected.  “What’s wrong?” I said, obvious to her absence of perky demeanor.   “I went to get an Odwalla smoothie from a case at Google yesterday and saw in its place a coin-operated machine.  They’re making you pay for these things now.”

Why on earth they would do that, I wondered.  Terribly un-motivating.   Perhaps it was on Mr. Levitt’s advice, to fend off a groundswell of employee anger for eight ounce bottles not being replaced with half-gallon jugs, and so on.  Whatever the reason I was so certain this move was a bad one that I sold my Google stock. 

It closed at about $300 a share that day.  It’s above $620 now.  And Levitt probably sold 5 million copies of his book since then.

No matter.  We stand our ground on good incentive design principles and call out any cheap shot to grab attention, using blatantly-untruthful pronouncements like, “Incentives Don’t Work.”

Putting the Horse Before the Cart in the Utility Industry

Recently I exchanged messages with a colleague who was disappointed that her sales compensation design initiative for 2011 got stalled.  “All that work and nothing to show for it,” said the director of compensation for a fast-growing, mid-sized software company.  “They just weren’t ready to pull the trigger,” she said of senior management on what would have been a major change for a field-based team of technical specialists.

Those of us in the sales compensation profession often take such change requirements for granted.  Yet the pay plan governs how salespeople earn a portion of their total cash, cash used for mortgage payments, school tuition, weekly groceries, and the like.  While a change to the program might not influence the actual cash earned, the salesperson perceives he or she must now change their daily routine – difficult for anyone, and in particular for a relatively autonomous, confident sales professional.

No less challenging is the case where leadership requires behavioral change from a team of field professionals thinking of themselves not as salespeople, but rather account managers or some job role other than sales.  The utility industry provides a keen example. Take large energy utilities, like Southern California Edison, Pacific Gas and Electric Company, Florida Power & Light or Southern Company.  Historically, account managers maintained service-based relationships with large commercial users to cover rate schedules, address service issues as they came up and inform customers about the availability of various voluntary programs and services.  There was no “selling,” so to speak.  Yet with the advent of customer choice in more recent times, and an ever increasing emphasis on energy efficiency and renewable resources, utility companies started facing many of the same pressures found in competitive industries.  This included the need to motivate or change customer behaviors; field sales, or…um, account-management, was an obvious lever for doing so.

Bob Kinert is a 30-year veteran of leading sales and service organizations in the utility industry.  He reflects on a campaign at one of the nation’s largest investor owned utilities that hinged on its field account managers convincing customers to adopt discretionary programs, like energy efficiency, and demand response.

“Essentially, these are consultative sales roles: listen to the customer, understand their issues, develop and present the customer with solutions and influence them to take the desired action–help the commercial customer realize they can be more competitive if they change how the manage their energy.”

These non-threatening concepts can meet significant resistance when applied to an industry and culture that views itself as being all about service with little or nothing to do with sales.

“You’ll get an account manager that will say they’re not a sales person,” Bob continues.   “Their perception of sales is outdated and not positive.”

The irony is these professionals routinely do many of the things a salesperson has to do under the mantle of service.  What’s often lacking though is some of the key sales skills imbedded in the sales process.

In working through the transformation at a prominent Fortune 200 utility in California, Bob focused first on the process and skills enhancement, long before any consideration for changes to the compensation approach.

“We had to get people to realize they’re in a consultative selling role, without alienating them.” 

This meant focusing on organizational and individual sales capability as well as change management without overemphasizing goals and outcomes.  Good service representatives know how to establish relationships and deliver on customer driven needs, but don’t necessarily follow a structured process for proactively seeking out and capturing every opportunity. 

Each step of the transformation, compensation included, is contingent on the cultural shift.  And the shift isn’t one sided – i.e., management can’t expect to pull the account managers over to their side while holding their own position.

“Each side has a range in which they are willing to move.”  Bob references “Latitude of Acceptance,” a crucial part of the Social Justice Theory (SJT) that deals with people’s change in attitude.  “For a lot of managers, the pace of change may be slower than preferred, but for the account managers, a more gradual approach is simpler, less risky.”

Regarding a new, risk-based compensation approach, Bob expected the transition to be a gradual process as well.  “We had to see the culture shift first, and then introduce concepts such as market potential, goal-setting logic and goal reasonableness.”

I worked with Bob during this period to help design a new sales compensation program.  It was, relative to other engagements, a far more inclusive process with field management, very data driven, and conducted at a much slower pace.  Bob’s mantra was, “You have to involve the people who will be impacted by the change in the change process.   Sales compensation isn’t something you can craft behind closed doors.” “Go slow to go fast.”

As a result, the utility account managers accepted the change in the approach to compensation, taking it in stride with little fanfare.  As anticipated, some veteran account managers embraced and leveraged the compensation opportunity more than others and did quite well.  Not surprisingly, new people hired into the organization from the outside with a consultative sales mindset tended to benefit the most of all.   

I thought of how the lessons from Bob’s experiences applied to my colleague’s situation at the software firm.  She shared with me that leadership kept a tight lid on its plan to introduce the new, at-risk compensation plan, for fear of “spooking the herd.” 

“But people found out about it anyway, and what they heard wasn’t always accurate.”

The concern boiled up through field management to the company’s senior leadership.  Leadership’s initial reaction to this feedback was, “We’re going to do this, and the reps will just have to accept it.” 

So the work on designing a new compensation plan continued right through December.  But eventually the leadership believed that flipping a switch to an at-risk compensation plan would alienate the team, and felt the company couldn’t risk this group alienating customers.

“We tried to move too fast, and didn’t involve the field to the extent we should have,” she said in retrospect.  “And when we did get their feedback, things like ‘we didn’t sign up for this (sales-like job),’ we dismissed it by saying, ‘get over it.’”

The time she and others spent working on a compensation approach that wasn’t implemented could have been used instead on teaching processes and practices paramount to the job role.  Compensation is the easy part, once the organization is ready.

Bob Kinert is Principal at Kinert Consulting.   You can reach Bob at (916) 337-6929 or bobkinert@comcast.net

Like healthcare costs, state university tuitions keep rising in an otherwise non-inflationary period, and taxpayers want accountability.  The Wall Street Journal described in an editorial on Monday how Texas A&M is attempting to measure professor productivity and performance, and tie it incentive compensation. 

http://online.wsj.com/article/SB10001424052748703860104575508052117098986.html

Critics of the plan say it’s too simple and dangerous, and a threat to the university’s integrity.  Some believe if the university must tie pay to performance, that it spread the bonus pool across a larger population of professors.

Sound familiar?  Critics of pay for performance believe it’s best to toss the baby if the measurement system isn’t perfect.  Or, if a bonus must apply, give a little something to everyone, making the pay program more of a gesture than a mechanism for behavioral modification.

In the competitive marketplace, we hear this occasionally but for the most part it’s accepted that jobs with measurable contribution to the organization’s value have a portion of their pay tied to performance.  Customers and shareholders assess firsthand the cost-benefit tradeoff, and determine the organization’s value accordingly.

Intriguing in the case of state-sponsored education is the consumer isn’t necessarily the payer, making a first-hand benefits analysis difficult.  Regardless, the payer has limited elasticity.  Jack the costs high enough and something’s got to give.  Take employers’ reaction to ballooning healthcare costs.  Rather than increase their budgets proportionately, they passed a larger chunk onto the employees.  Similarly, states are passing a higher and higher share of their college subsidy to the consumer, or parents of the consumer.  But unlike insurance, colleges are not regulated.  If the consumer doesn’t recognize value for the spend he or she can take their business elsewhere.

That’s why the regents of Texas A&M, and we suspect those in other colleges, are taking a hard look at the tried-and-true system of pay for performance.

Santa’s View on Pay for Performance

By Jason Kearns, Canidium, and Scott Barton, NewSigma

It’s the most highly anticipated time of the year: year end, holidays, bonuses and token gifts.  This year, many cash-hording companies will open their purse strings to say thanks to their overworked masses.  It takes the form of monetary bonus, gift card or Honey Baked Ham.  IKEA recently announced that it was gifting all employees a new set of wheels (two per, to be precise, 12,400 sets of bikes total in the US alone).

http://www.msnbc.msn.com/id/40641253/ns/business-going_green/

The uniqueness and relative infrequency of these “gifts” make them special.  A smart organization can realize and expect benefits from seemingly random acts of kindness that far exceed the initial investment.  No surprise that Tammy happily put in her whole Saturday after receiving that Starbucks card.

Whether it’s a card, check or Christmas dinner, by giving the gift the company says and ideally the employees hear some very positive stuff:

• We are a strong company.
• We care about our employees.  Even at the expense of our bottom line.
• We value your loyalty.

In the context of a total compensation package, holiday bonuses for most companies are a footnote.  But start a rumor of empty stockings this year and get ready for mutiny.  It’s as if some employees would rather have the annual Butter Ball than this year’s merit increase, regardless of the incremental number of birds such merit would procure.  We savor our traditions.

For our purposes of sales force effectiveness, what is the value of extending unconditional holiday gifts to the sales individuals who presumably already qualify for bonuses throughout the year?

Sales people are motivated by compensation and they are compensated based on performance.  Is there value to treating sales people as “normal” employees for this annual occasion?

The negative argument is made by the economist posing as a psychologist.  Sales people won’t appreciate a token award.  They already strive for significant performance awards and they’ll view a small gift as an insignificant gesture.  Besides, sales people get rewarded for company success as a direct result of their performance.  Token gifts are a waste of money.

The positive argument is rooted in culture.  Gestures of good will pay forward — employees say good things about the company to each other, their friends and their family.  Sales people speak of the company  favorably to their “family”– the company’s customers.  A united culture drives teamwork and overall performance.  We’re all in this together.

As you consider that holiday-gift line item tied to the sales segment of your employee population, think about the degree to which your sales culture represents the company culture at large.  Even within the sales force you may have different animals: field sales, inside sales, technical sales support, and so on.

Are we splitting hairs?  Who wouldn’t appreciate a holiday ham?  We argue that sales people are different based on their expectations of pay for performance.  There’s less risk of entitlement coming into play, and more danger of mixed messages when you award the low performer that special gift.  How would the accompanying note read?  “We made our profit target despite your weak contribution,” or, “Thanks for your poor performance.”   There’s a chance that your gift giving to low performers could alienate your super stars.   After all, even ole Saint Nick himself discriminates between the naughty and nice.

If we could put a bow around this topic, it is that whether or not they view themselves as different, your sales people are, or rather should be, treated differently from those who don’t have pay at risk and generally have no idea of their overall worth to the business relative to their pay.  Intrinsic rewards certainly have a legitimate place in the sales performance management portfolio; how you play that gift card requires more thought for those employees with a direct connection to the company’s top line.

This post represents the first is a series published in conjunction with Canidium, an SPM technology and business-process improvement firm.  www.canidium.com

Where Robin Hood Meets Santa Clause

What on earth, you ask, do MBOs, Robin Hood and Santa have in common?  Well, it’s like this: MBO’s, when used in a large sales population, take from the rich (your successful salespeople), give to the poor (your laggards) and are a gift to sales managers that are better at being one of the guys than they are leaders to their respective teams.

By the way, if you’ve stumbled upon this site in search of a holiday-themed Robin Hood DVD or tips for pulling off your own management buyout, give us a second to define before you leave the acronym as used in the comp world:  management by objectives – a.k.a., key sales objectives.  A guy in the U.K. told me once MBO stood for “My Bloody Obstacle to driving real pay for performance in this place.”

This statement pretty much sums up the issue.  Granted, it’s just one perspective.  Ask a sales exec who has worked over a prolonged period with MBOs and you’ll hear a woeful tale of administrative complexity and undifferentiated pay distribution.  But ask a line sales manager, “How’s that MBO program workin’ for ya,” and expect praise for the flexibility and fairness provided by MBOs.

There’s both math and psychology involved here.  Crunch historical data from a group of MBO payees and you’ll see over time a trend of decreasing pay distribution.  That’s because the supervisors and managers scoring their teams don’t have the heart to tell Larry Laggard his performance blows and he’s not earning a bonus.  To keep the budget in check, the scorekeeper trims a little off of what would have gone to Slammin’ Sam (the high-performing rep) and gives it to Larry.  Steeling from the rich to give to the poor.

There are legitimate reasons for putting MBO’s into place.  For example: a technology company needs its business development reps to stimulate product development and customer engagement across different markets.  One size does not fit all reps, and the product isn’t expected to be sales worthy for at least two quarters.  The structure of an MBO allows the supervisors to customize a set of objectives for each rep that will drive future sales.

At some point though, these reps will want sales and the compensation that comes with those sales.  After all, they’re sales reps, right?  Where MBOs get misapplied is when management requires a sales professional to do the job of a marketing or product specialist.  In a small organization, that’s likely and expected.  But it’s not optimal and should be considered temporary.  Again, salespeople sell.  Other jobs do, well, other things that aren’t directly connected to sales.

Indeed there are requirements to every sales job that fall short of sales-related activity: fill out reports, dial into weekly sales calls, drive the product team from Japan around to a few customer sites, etc.  The more your salesperson earns in variable pay as a percent of base salary, the more likely he or she will look to excuse him/herself from such chores.  And then you as the manger can get into a discussion around the reason they’re paid base salary and role of being a being a good corporate citizen and so forth.  Yet they look at you with glazed eyes.  You can tell they don’t care and won’t do what you ask.

It’s tempting then to put some of these non-sales tasks into variable pay, tied up all pretty in a MBO package.  Then they’ll care, right?  Wrong, if they’re good salespeople.  They want to sell, gosh darn it, and earn good pay for those sales.  MBOs are a wing-clipping for high performers.

I’ve not yet gotten into the gritty underbelly of MBO administration.  Best case, managers articulate and document “SMART” objectives, salespeople acknowledge them, managers submit the objectives for executive approval, and later meet as a group to calibrate scores before meeting one-on-one with the reps.  Uggh.  I’ve actually seen an MBO for a manager plan with the objective being proper administration of the MBO process.  Anyway, the savvy manager will attempt to sidestep all this admin stuff.  And who can blame them?

In the early days of my incentive management stint at a large brokerage firm – and sorry to those who’ve heard me tell this story for the thousandth time, but it’s a good one and is relevant here – during a tour of retail branches, I sat across the desk of the manager for one of the firm’s Manhattan branches.  It was mid-December and starting to snow outside.

Leaning back in his reclining chair, he says, “What I need is a very simple compensation approach for these guys (financial consultants and customer service reps).  Give me a stack of hundred dollar bills and I’ll hand ‘em out to those that are getting the job done.”

He was dead serious.  And his grey hair, pinstripe shirt with suspenders and large waistband suggested he’d been at the business a while and probably knew what he was talking about.  Yet I had an image of this guy in a red suit and white beard, with a sack on his back for all those bills.  Maybe it was the time of year.  Come to think about it, the assistant manager looked an awful lot like Little John.

Facebook, WikiLeaks and the Power of Peer Pressure

During Thanksgiving dinner my extended family (NOT pictured left) seemed intent on discussing Facebook.  How it’s necessary, how it’s evil.  Why in heck does Uncle Lou have a page?  Dude — stop texting at the table!  And so on.  The following week I’m inundated with news on the latest WikiLeak — scandal, crises, gossip — over state department wires.   Then yesterday I’m in a debate with a company’s sales and HR leadership over company policy on employees sharing their earnings info with co-workers.

So we’re in a controversial age over privacy and promotion of personal data.  I hadn’t thought this subject yet hit the shores of sales compensation land.  But  having now thrown it around our brain trust here at SCI (pictured above left), I’m confident saying the trends that have seeped into so many areas of our daily lives, driven mostly by technology and the Internet, has applicability to policy and preferences over the privacy of pay data.

Let’s be clear.  We’re talking about sales compensation specifically.  Please don’t go posting all your employees’ base salary levels on the company’s website as a way of demonstrating your hipness.

There are varying degrees of appropriateness and purpose here based on the structure of your comp plan.  To be safe, take base salary out of the equation.  So then do we socialize actual incentive earnings?

Many companies frown upon the idea.  Some go as far as suggesting that if a sales rep utters a word over his or her earnings to anyone other than spouse, then they’re fired.  This was basically the declaration of one executive in the meeting yesterday.  He had reason to be upset.  Despite the company’s efforts to keep its sales compensation data confidential, someone on the inside — a salesperson presumably — was disclosing details on Vault.com.  Management could try to fire the person or people responsible but had no way of identifying the perpetrators.

Consider companies where using personal pay references during team coaching and recognition events is encouraged, and celebrated.  My first experience with this was during a job interview for a sales position where the hiring manager said, “Our top salespeople made $xxx,xxx, $yyy,yyy and $zzz,zzz last year.  Here are their names.  You can call them.”  I felt a rush then, and always have since in meetings and ceremonies where personal pay is put forth for consideration.

If your salespeople are driven by both internal and external competition, and you have statistics to be proud of, then post it.  Get it out there.  Not only the ranked performance levels, but the corresponding pay also.  Attach names.  Get personal.   Your average performer will react differently to the pay figure versus the performance of Rep #1.   And for #23 out of 200?  Shame on him.  Perhaps the DMV is hiring.

This sounds harsh, but it’s characteristic of the increasingly-transparent world in which we live.   I took quite a beating over stuffing and cranberries due to the low number of “friends” reported on my Facebook page.   And that’s probably okay if this metric is important to me.  Point is, variable pay opportunity should be important to your salespeople, as should peer pressure be effective for motivating action.

Granted, details on your company’s incentive pay opportunity may not be ready for public consumption.  Maybe comparing competitors’ pay to your company’s own reveals a weakness, or your salespeople can’t figure out how the top five reps in the ranks made what they did.  Better then that you don’t publish this stuff.  Ignorance is bliss.

We caution such policies of secrecy, if only because everywhere we turn, it seems the genie is out of the bottle.