SalesCompInsights

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.

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

Top Questions Answered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Conversation With Howard Woolf

As a front-line salesperson, sales leader, sales operations executive, company president and CEO, Howard Woolf has spent his career achieving sales success in the technology and communications industries.  We recently had the opportunity to catch up with Howard to discuss his thoughts on effective sales incentive programs.    

MM: Howard, from your perspective, how important is the incentive program in the toolkit of a sales leader? 

HW:  The incentive program, if done right, is the fundamental way a sales manager ‘communicates’ to the salespeople in a way that is sure to get their attention.  Over time it consistently reinforces the mission and method for the organization, along with each individual’s role within it.  Further, the sales plan sets the stage for both direction and behavior, but also builds organizational ’confidence’ which is the key building block for overall success within any sales force.  Unfortunately, when done incorrectly, it has the reverse effect – so it’s important to get the incentive plan right.

MM:  Are there any guiding principles you’ve used to help with your incentive plan decisions?

HW:  Yes, the first is simplicity.  I use the traffic light example.  If a salesperson leaves a customer after getting an order and while stopped at a traffic light, s/he can’t figure out what they earned on that sale, then the plan is too complicated.

Many companies think more is better and they load up the sales incentive plan with corporate ‘good to do’ things and complex measurements. Unfortunately all that does is diffuse the message, often making it hard for a salesperson to be successful even when they are doing the right thing and actually performing well.  In fact you might end up rewarding the wrong people for doing the wrong things, which further destroys morale and can negatively impact performance.  So less is more!

MM:  What are the characteristics of the best plans you’ve seen versus ones that didn’t work so well?

HW:  Beyond being simple, a good plan has to fit within a 360 degree mapping that deals with;  1) goal setting based on each individual assignment (I prefer bottom up with top down tuning);  2) measurements that can readily be made and reported; and  3)  communication that ensures understanding, buy-in and proper execution of the desired behaviors.  Often, automation is involved so that aspect needs to fit with the three key elements as well.  IT should be an ‘enabler’ of the plan and not get in the way of a good plan, which admittedly, can be difficult.

MM:  Having observed the design process from various vantage points, what insights on the do’s or don’ts can you share?   

HW:  Sales is a key function for the company and unfortunately there can be a lot of people within the company who think they are a sales measurement expert.  They’ll suggest all kinds of bells and whistles to the plan  – this is usually how complexity creeps in.  Finance, HR, IT and even Manufacturing and Marketing are looking for a link between the sales plan and their functional goals. 

It is important that the fundamentals of what Sales Management wants to prioritize, communicate and reinforce to the sales people be the pre-eminent definition of the plan.  Keeping it simple, measurable and communicable against the goals of the sales manager  should not get lost  into the many diverse elements of running the company. 

The role of all other functions (Finance, HR, Mfg, Product Management, etc.) is to line up behind the sales manager to help him/her execute to this target without trying to take over the plan for their own needs.  Or  load it down with elements that diffuse the message and limit the potential impact.  The Sales manager should be able to take a step back and say “if the sales people on this plan do well, then the company will have done well against its key goals and the sales force will have played their role in making that happen.”

MM:  Any do’s or don’ts regarding quota setting and management?   

HW:  Yes.  The key to good quota setting is knowledgeable sales management.  When sales management accurately translates the company goals into individual quotas and structures and understands the nature of the individual assignments the plan can be both credible and successful.  Arbitrary and disconnected quota, often top down, are formulas for failure.  The best processes include a bottom up forecast and analysis that is the underlying element of planning the quotas.  Since those forecasts are based on imprecise data, the test is whether the person setting the quota truly understands the business, the customers and the assignment that make up the basis for the quota.  Further, any quota set in advance has to also have a mechanism for fair adjustments (up and down) that connect the reality of the business as it plays out.  So quota management is key to the ongoing validity of the plan and underlies the measurement system as one of the three key elements of the incentive program.

MM:  What expectations should a company have relative to communicating the plan?

HW:  Typically, the new plan provides a great rationale to pull all of the sales team together and communicate the new goals for the year, the company plan to support those goals and how the plan will work.  Usually, this is a good opportunity for workshops with senior management, functional leaders such as product management and local sales management to interact with the salespeople and relate the company deliverables, as well as help line up the background for the plan execution.

However, for plan success, there needs to be a very specific and conscientious communication strategy that starts with the kickoff but gets reinforced throughout the year.  Ongoing communication and reporting on individual and group performance is key to using the plan to reinforce the best behaviour, build morale and enthusiasm, and make any mid-course corrections that might be necessary.  Communication deliverables need to be ‘tight and right’ – written in an easy to understand fashion with crisp detail and include a personal view with clear focus on the measurement and reporting process (along with examples) that will be followed.  The plan administration should have built into its process how it will launch, sustain and communicate the necessary information and ongoing reporting.

MM:  What guidance would you offer for how to deal with the recent economic situation and the growing expectations of a turnaround? 

HW:  It’s always difficult to handle sales compensation when circumstances beyond the control of the salespeople affect their pay.  But the sales role is no different from other critical skills in the company and a sharp management team deals with the situation in a flexible way in order to retain key personnel and also lead them to make the biggest impact that can be made for the company. 

The best companies  maintain their philosophy of ‘pay for performance’ and adjust assignments according to the changing reality.  Typically, what I have seen is targeting salespeople on key and measurable objectives that provide the company the highest impact, given the circumstance, by including those goals or targets within the sales plan quota.  When a salesperson achieves those objectives they can ‘earn’ their incentive pay based on the success. 

A good plan also has timely updates of the quota contemplated within it, as assignments will change, personnel will transfer in and out and organization structures will adjust according to the needs of the business.  The plan should allow for assignment changes accordingly.   Economic changes and/or changes in customer or territory situations should all be handled fairly and promptly.

The test should be that both the ‘individual and the company’ win when the salesperson is re-directed or has their assignment changed and hence, the basis for their quota and measurement.  A good salesperson wants to ‘earn’ their pay and not get a ‘freebie.’  The company gains when salespeople are successful in the performance of their job AND fairly compensated for it.   when both conditions are met sales people tend to stick around and more importantly, they are highly motivated to perform.  Keeping the integrity of the sales plan is vital and only happens if the plan reflects assignments and measurements that are stretch but achievable even when economic conditions change.

Howard Woolf is the founder and managing partner of Howard Woolf & Associates, a professional services firm focused on helping companies improve business performance and sales effectiveness.  He can be reached at hwoolf@comcast.net.

Incentive compensation management in a global organization brings its own complexity and opportunity for frustration.  On one hand is the local country manager; adamant that all things incentive related should reflect the needs of their market.  On the other we have the Vice President of Global Accounts, VP of Marketing or new head of HR who are looking to increase the consistency of customer experience and go-to-market model.   Caught in the middle is the person or group responsible for sales incentives.  As the results from a recent survey we helped with suggest, companies use a variety of approaches to manage their incentive programs. 

Looking back over the last five years, the percentages haven’t changed much.  Answering the same question in 2006, 44% of respondents used a centralized process with business unit representation and 18% had a centralized process led by corporate staff.    What’s the takeaway?  Well, for one, it appears fewer and fewer companies use a decentralized process to design their sales incentive programs.   This is consistent with what we observe; most global companies today are looking for at least some degree of consistency in their incentive plan designs.  What varies are which elements of the program should be designed centrally – whether it is corporate led or a cross-geography design team – and which elements should be left to local managers.   Consistency of customer buying practices, business priorities, culture and legal requirements can all have an impact on who makes what decision. 

Where we observe more change is the administration of the plans.  Improvements in technology, combined with a desire to reduce costs are clearly driving more companies centralize their administration efforts.  Where it gets tricky is how to handle inquires and disputes (we know – with a new technology investment shouldn’t the number of inquires/disputes go to zero).  Some companies have implemented global or regional ICM “call centers.”  In our experience the more diverse the selling environment the more difficult this becomes.  Assuming the available budget dollars, a more common approach is to centralize the technology infrastructure with local administration support.   An added benefit is the ability to evaluate the plans on a global level while retaining local insight. 

When it comes to global ICM, perhaps the most important suggestion we could make is to clarify your governance model – whatever that may be.  Whether corporate HR drives the global design process or each region participates as a member of the design team, clarity of the process, who makes what decision and how the plans will be administered will help improve the effectiveness of the program.  One last thought, lest we forget – publish and stick to the ICM calendar.   This simple, but all too often overlooked deliverable is one of the key differentiators between leading and lagging ICM organizations.

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

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.

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.

By Elliott Scott, NewSigma

“It’s not rocket science” is one of the great clichés of incentive plan design.  For the most part it’s true, and when incentive plans start to look like the work of rocket scientists, it’s a good bet the sales force is not on board the spaceship…and may be at risk of alien abduction (or at least poaching by competitors).  But for companies that sell outsourcing services, the challenge of designing a simple and effective sales incentive plan can seem as daunting and unlikely as the safe return of Apollo 13.

The Fundamental Challenge

Incentive compensation in an outsourcing sales environment inolves a fundamental challenge: 

On the one hand, the sales talent and type of sales effort required demands a strong, immediate incentive.  Selling a large, complex, deal to a new customer, possibly based on a new concept or technology, which may significantly disrupt the customer’s business (on the way to enhancing it), is “missionary selling”—hunting of the most challenging sort.  Attracting and motivating this rare sales talent requires risk, very high upside earnings potential, and strong line of sight.

On the other hand, uncertainty regarding the ultimate value of the deal at the time of signing creates a serious risk of misalignment of incentive payments and the real value of the deal.  (Remember Enron?  They sure looked like rocket scientists to me.)

In my experience, every company selling outsourcing struggles with how to pay their sellers and account managers.  There is seldom a consensus among sales, finance, and HR that “we’ve got it right.”  The arguments over whether the plan is too “sales friendly” or too “CFO friendly” can reach a fever pitch.

No company wants a cumbersome plan, but the challenges of sales compensation plan design in outsourcing environments generate a dizzying array of complexities:  NPV calculations, profitability modifiers, contract length modifiers, deal decelerators, clawbacks, milestone payments, draws, commission pools, complex crediting rules, exception review boards, and deus-ex-machina discretionary adjustments.  It’s one of the few industries where the number of plan document pages routinely exceeds the sales headcount.

Questions to Ask

The plan design choices that each company makes can be as unique as the deals themselves and should be informed by (a) the nature of the outsourcing (e.g., asset acquisition vs. managed service, commodity vs. proprietary technology) and (b) the market position and culture of the company and sales organization.  But the questions that outsourcers need to ask along the way to developing their plans are quite consistent:

Pay Mix and Upside

Questions:  How do we (a) provide upside earnings that are appropriate for very large high-value deals, while (b) maintaining cash flow for the seller over a long sales cycle with few deals in the pipeline at any time?

The frequency of deals and payments under the plan should inform your answer.  When you analyze how much a seller will earn from a very large deal, consider the likely frequency of those deals.  A $300,000 incentive payment may not be excessive if it is unlikely to be repeated for several years.  And if payments for deals are stretched out over one or more years, cash flow may be smoother than deal flow, making draws and guarantees less necessary.  Nevertheless, it is probably prudent to have some provision to protect the earnings of effective sellers on an exception basis during a long sales cycle on an important deal.

Performance Measures

Questions:  What combination of performance measures balances (a) simplicity and line of sight, (b) alignment to the role of the resource within the sales and account management process, and (c) the financial and strategic interests of the company?

Typical measures include total contract value (TCV), annual contract value (ACV), contract net present value (NPV), actual revenue over a certain period, revenue growth, renewals, new customers, new products or product mix, contract length, and sales process milestones.

Unless TCV is set in stone, which it seldom if ever is, use ACV with a simple and light modifier for contract length.  Where contracts may have escape penalties, and you would like your sales people to write them in, paying on minimum contract value is also an option.  And remember that paying on actual revenue received will drive account management behavior, which you may not want from your hunters.

Mechanics

Questions:  Given that most outsourcing sales people (as opposed to account managers) are paid using a deal-based commission mechanic, the question becomes not whether to use a commission vs. a bonus plan but whether or how we should modify the commission plan to:

Introduce an element of annual goal attainment, to align sales force performance with company revenue expectations

Account for large differences in the size, length, and profitability of services and contracts

Although the revenue forecast for an outsourcing company may be predictable, the sales forecast for an individual outsourcing seller seldom is.  So tying individual incentive earnings to individual goal attainment can create a lot of frustration and under/overpayment, to say nothing of lobbying for goal adjustments.  Keep goal attainment on a team level and/or use it to determine award trip participation.  Also, don’t be afraid to use higher commission rates for more profitable or strategic services.  Although they may appear complex, they are much more easily understood and assimilated than other plan complexities.

Timing of Credit and Payment

Questions:  How much tolerance do we have for misalignment between incentive payments for contracts sold this year and the revenue and margin those contracts generate in future years?

Based on the role of the salesperson, how should we divide credit between contract signing, invoicing, customer acceptance, cash received, or revenue booked?

If we pay on contract value and true up on revenue received, how should we structure the true up process so that (a) it seldom if ever results in a clawback, (b) it does not extend payment too far into the future, and (c) both the initial estimate and the true-up calculation are as objective and consistent as possible.

Get used to the reality that in a large-deal environment, with some payment at contract signing, there will be misalignment in any given year between incentive payment % of budget and revenue % of goal.  Also, when determining the convention for estimating the value of a deal at signing, use the most conservative methodology that is reasonable.  You will save yourself a lot of trouble if the value of the deal at the true-up point always turns out to be more than the value estimated at signing.

Sharing and Adjusting Credit

Questions:  Of the many individuals who can reasonably claim to have been involved in a sale, which ones should participate in the actual commission from the deal, which ones require some recognition or incentive outside of commission, and which can be told, “thank you for doing your job”?

And how if at all should we adjust credit for deals made at the corporate level, with less sales person involvement or influence?

Remember that once you add on incentives it is hard to take them away.  Many plans for roles that are not primarily sellers become encumbered with complex add-ons that generate commission and administrative workload but do not drive behavior.  And as for corporate deals, while it is seldom necessary to pay a windfall to a seller who did not drive the deal, you don’t want a plan that discourages sellers from involving senior management.

Account Management Incentives

Questions:  How much pay at risk is appropriate for our account managers, given the selling vs. operations focus we are trying to drive?

And will specific add-on incentives for account managers drive the behaviors and results we want, or should account managers be paid entirely on the revenue growth of their accounts?

There are a wide variety of pay schemes for outsourcing account managers, from straight salary to highly leveraged plans with multiple commissions.  It all comes down to what you want your account managers to do.  Account managers may envy the high commissions that sales people earn in their accounts (because of the good account management work they do!) but if their primary responsibility is account retention and revenue retention, the pay plan should reflect that.

Beware:  It is not easy to get a consensus answer to these questions, and you can be sure the answers will be re-visited frequently.  But finding the answers that are right for each company at a given point in time, while keeping complexity to a minimum (“elegance” is too much to ask for), is the key to an effective but manageable outsourcing sales incentive plan.