SalesCompInsights

Paying for growth in a regulated environment (fourth in a series)

NewSigma had the pleasure recently to join a diverse set of leading financial institutions to discuss sales compensation and regulatory compliance trends for 2011.

This group included American Express, Chase Card Services, Citizens Financial (RBS), Discover Cards, Fifth-third Bank, RBC Royal Bank and Visa.  We discussed practices and issues pertaining to sales compensation design and governance given the increasingly regulated financial services environment.

Notwithstanding the universal challenge across this group of balancing growth initiatives with regulatory requirements, we observed a range of practices stemming from a variety of needs:

• Quickly on board salespeople and plans following acquisitions;
• Increase the efficiency of the plan design process given a distributed decision-making structure;
• Restructure the incentive management function to optimize governance and transparency;
• Stratify job roles and plans to avoid a “one-size-fits-all approach” when aligning plan structure with regulatory guidelines;
• Simplify reporting of plan performance in an increasingly complex environment.

Pertaining to plan design, there appears two prevailing principles for making plan design changes that demonstrate alignment with regulatory (the Fed, in this case) guidelines:

1. Get ahead of the regulators by proposing and getting buyoff on standards and approaches; and

2. Wait and see what other banks are going to do.

Each position has its tradeoffs.  In getting ahead of the regulators, the firm proposes to the regulators an approach that’s workable for the firm.  Remember that the Fed’s guidelines are rather vague and leave room for interpretation.  By making a proposal to the Fed, the firm says, “here’s how we plan to meet the guidelines.”  One bank in our group made this move, the Fed endorsed the firm’s proposal, and now the firm can focus its attention on other matters rather than fretting about meeting the Fed’s requirements.

The tradeoff of proposing to the regulators what you plan to do, rather than waiting to see how other banks interpret the guidelines, is you potentially put into place policy that’s unnecessarily burdensome.  Let’s say you establish a payment deferral approach for the incentive earnings on account managers.  And in reviewing your bank’s approach, account managers find another bank has no such deferral.  All things being equal the inquiring account manager is likely to select the bank that provides more earnings upfront (go figure).

Thus the advantage of waiting and seeing is you potentially are in a better position competitively, assuming your current approach does not run afoul of regulations or sound business practices.  The tradeoff here is that regulators, now having detailed practices from those “get ahead” firms, may require this level o detail from the wait-and-see firms.  Think of how this could play out — the Fed memo arrives on November 20 and requires a report demonstrating compliance two days before Thanksgiving.  D-oh!

In evaluating various plan design practices, we are heartened to see this group taking a rather pure approach to payment delivery for business development/origination-type sales jobs (i.e., “hunter”).  In principle we struggle with the notion that a hunter, when bringing down an elephant, has no idea whether his bounty will produce months of feast or a mere snack.  Management’s effort to true-up the sales credit through a deferral makes cloudy the line of sight and encourages hunters to keep an eye on the deal after he or she has made the sale.  This is exactly not what you want your hunters to be doing with their precious time.

Account or portfolio managers (“farmers”) are a different bunch.  Here you can legitimately argue for a deferral to ensure the incentive credit aligns with the underlying health of the business they’re responsible for managing.  Surprisingly only two in our group of seven use deferrals for their farmer jobs.  Both are LCBOs* and for their commercial portfolio managers and financial consultants, one bank deferred the payment for three years and paid a portion of the credit in RSUs, the other bank deferred for four years and has the deferral back-end loaded.

*LCBO = large commercial banking organizations as established by the Fed.

Clawbacks are another feature suggested in the Fed’s guidelines but seldom used within our roundtable group.  Only one firm mentioned using clawbacks.  Clawbacks as a policy are commonplace in commercial lending pay plans.  In practice, though, managers are loathe to actually claw back incentive pay if the deal went south months after having paid the rep for that deal.  So while a number of banks may say they include clawbacks, they’re probably not using them.

Following the discussion of plan design practices the group turned to incentive governance.  This includes the process, people and decision accountabilities used to ensure effective management of the incentive program.

Many of the firms in our group have significant opportunity in this area.  The struggle comes from what is a typical incentive management structure for many financial services firms – a distributed (or decentralized) organization.  By centralizing the incentive management function the bank removes some of the autonomy previously enjoyed by the lines of business.  These leaders can and often do put their feet down when a group such as HR attempts to centralize things.

One of the banks started to centralize the function last March on a mandate from its CEO.  Over the next five months the bank established these governance milestones:

1. Formed a working team including representation from the lines of business, finance, legal, risk, compensation and compensation admin/operations.  Included is a member of the bank’s strategy team, a group responsible for the field’s successful adoption of new policy.

2. Segmented all incentive plans into one of four categories, with Tier 1 (high-profile) plans receiving the highest-level (board comp committee) review and approval.

3. Established a systematic approach for reviewing and scoring the performance of all plans.  This included a simple scorecard that shows for each plan the participation rate (% of eligible participants receiving incentive pay from the plan), % spend YTD relative to budget and % to plan YTD of the business in which the plan resides.  Based on the results of these data the scorecard gives a green, yellow or red signal.  Each quarter the bank runs this report and furnishes it not only to the governance working team but also the Fed, which had reviewed and approved this approach in advance.

Thus, one of the lessons coming out of the two-day benchmarking session is to keep it simple – don’t try to impose all regulatory guidance on all plans unless required to do so, and find simple ways for communicating the health of your incentive management system.  We’re encouraged that many firms, as demonstrated by our roundtable group, are finding practical solutions to the increasing regulatory pressures while keeping an eye on sales compensation plan effectiveness.

By Elliot Scott, NewSigma

As a sales organization matures, a number of things can happen that make the original commission-based sales incentive plan increasingly problematic.  So it is not uncommon for companies to transition to a goal-based plan over time.  Mike Meisenheimer covered some of the related issues and options in a two-part series on the topic (http://salescompinsights.com/?s=from+commissions+to+a+goal+based+plan).  But while it is much less common for companies to move in the other direction—from a goal-based plan to a commission plan—it is sometimes the right choice.

What’s So Great About Commission?

It’s a fact of life that commission plans are more motivational.  “If I sell this I earn that” is a lot more immediate than “if I sell this, I retire x% of quota, which according to the payout table may get me an incremental 3%, 5%, or 10% of my target incentive at the end of the period depending upon where I end up on the payout curve.”  That immediacy can really drive sales results, particularly in aggressive, hunting-oriented sales organizations, which is one reason why they often bend over backwards to use commission.

When Your Goals Have No Credibility, One Option Is to Get Rid of Them

I recently helped a company assess and ultimately implement a transition from a goal-based plan “back” to commission.  One of the drivers was that the goal setting process had no credibility with the sales organization.  The plan measures and mechanics were sensible and in fact the goal-setting methodology was objective, data-driven, accurate, and surprisingly fair.  But the company had failed in making the methodology clear to the sales force and disproving the perception of a success penalty, i.e., “If I exceed my goal, I’ll earn some upside this period but I’ll be saddled with a much higher goal going forward, making it harder to earn even target incentive for some time to come…so why bother?”  Okay, while it is true that increasing sales tend to lead to higher quotas (as to some degree they should), the perception of success penalty is often overblown, as it was for this client.  Nevertheless, if the goals are not perceived to be fair, it hardly matters if they are.

The sales people fully understood that territory sales and potential were uneven, and would remain so, so any commission plan would probably favor the larger territories.  But they craved the immediacy and transparency of commission.  Even the sales people with smaller territories told us they would prefer commission.  Being good sales people, we could expect them to shed persuasive tears about how unfairly disadvantaged they were, but they made it quite clear they would rather control their own destiny than hold their earnings hostage to management’s black-box estimate of a fair goal.  (It should be noted that this was an aggressive sales organization, with high pay mix.  It recruited the type of independent, “coin-operated” talent for which commission is particularly attractive.)

The Results Are All That Matters

With some hesitation, we designed and implemented a new plan that was not in any way tied to manufactured territory goals.  We did so in a way that sought to minimize the effects of uneven territories, utilizing some mechanics that “taste like” commission but are a few steps removed from 5% of sales for everyone.  Most importantly, the new plan was simple and transparent.

When we came back halfway through the new plan year to audit the results, we wondered what we would find.  Moving from a goal-based plan to a commission plan is not something sales compensation consultants generally recommend.  But it was clearly the right thing to do for this client at this time.  Despite the problems inherent with commission, the plan had been very well received.  The reps were hungry and engaged, and the company was above target for the first time in years.

About The Author

Elliot Scott has 15+ years experience as a sales compensation and sales effectiveness consultant, with Towers Watson, The Alexander Group, and ZS Associates.  Elliot has worked for clients large and small in dozens of industries, leading both global and domestic projects and is a recognized leader in sales incentive plan assessment, design, and communication.  He can be reached at escott@newsigma.com.

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

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

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

An effective transition plan should focus on five key elements:

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

How to Pay for SaaS Sales in a Legacy Software/Hardware Environment

In many respects, there’s nothing particularly complex about paying salespeople for software as a service (SaaS) — determine when and by what means to credit the sale, then run this credit through the incentive scheme, whether that be a commission (sales credit x payment rate) or quota-based payment (% of quota attainment = % of target incentive).

The real fun begins when you’re trying to motivate a sales force accustomed to earning good money for selling perpetual software licenses, hardware and services.

Take a software/hardware company with its core business in perpetual software licenses.  In 2010 the company added a SaaS solution to its offering and chartered its field sales force to sell it, while continuing to offer the core business.  It’s now September and the directors of Comp and Finance are trying to figure out how to change the comp plan so that reps sell more SaaS.  I join the conversation on a hot Thursday afternoon in a windowless, poorly-ventilated conference room at the company’s headquarters.

The discussion focuses on what should be the commission rate on the monthly recurring revenue (MRR) for a SaaS deal.  At 7% it’s currently two points higher than the base rate for a perpetual license contract.  Trouble is reps get paid on average about $10k based on half of the contract value* on a core (perpetual license) deal, and only about $500 each month on an average SaaS deal. 

*Second half of the core deal credit comes when the product is installed.

I ask, “Why would a rep focus on a deal that pays less after a year than one that pays more today?

The finance director fires back, “Because the customer wants the SaaS solution, and the rep gets an annuity stream so long as that solution remains in service.”

I bit my tongue and took the high road by elevating the discussion up a few notches, for we were in the weeds talking about rates and such, when the conversation needed to clear a few items related to the sales strategy.  That is:

1. What’s the relative priority between core business and SaaS business?

2. What is the expected net present value (NPV) of a target SaaS solution sale?

3. What is the length of a SaaS sales cycle?

4. What role should the rep have in post-sales activity – i.e., motivating the customer’s adoption and use of the SaaS solution?

Fast forward to another design meeting.  This followed a few executive committee meetings in which we got some answers to the questions above.  Armed with these answers we could now sketch out the blueprint to a new comp plan.  The real meaty issue came down to SaaS deal valuation and timing of the sales credit.

We established two design principles that helped work through these issues:

• Establish parity in the credit value between core and SaaS products: A knee-jerk reaction is to equalize the commission rate, but this doesn’t recognize parity in NPV between core and SaaS deals.  It’s complicated to reach parity when the businesses are so different – contract value for core, MRR for SaaS.  For the sales team to give SaaS the focus it required there had to be parity between the two or better yet, greater NPV incentive opportunity for SaaS.
• Establish parity in the credit timing between core and SaaS deals: The primary role of the sales rep was to focus on growing new business. That’s why the company offered 50% of the sales credit on core business at the time of booking.  Per the first principle, we established that TCV would serve as the basis for SaaS sales credit.  Providing 50% of the sales credit on TCV at contract signing struck the right balance between alignment with revenue recognition (MRR) and job role focus (close the deal and move on to the next).

Remember the timing of credit for core business was half at booking, half at installation.  SaaS installation was a few weeks versus that of the average on-premise (core) system, which was eight months.  To keep the SaaS and core credit cycles aligned we selected eight months into the first year of a SaaS contract for the second half credit trigger.  Should the annualized MRR at eight months be way off from the TCV, the plan would adjust the second-half credit amount. We had to consider any significant differences in sales cycle between the two offerings, but in this case there was none within similar customer segments.

Many companies struggle with the approach of decoupling incentive credit from the revenue recognition approach.  Thus, most SaaS companies pay on MRR.  We think that’s fine in a pure-play environment.  Here though, the company’s sales force was accustomed to earning on a deal-by-deal basis.  To expect, as the finance director did, that reps would essentially buy into an annuity – sacrifice credit today for an ongoing cash stream later – wasn’t realistic given the legacy pay approach.  Even as a stand-alone system the annuity approach becomes difficult to manage over time.  Tenured sales people build up large books of business and lose their motivation to continue growing new business; young salespeople can’t earn enough to stick around.  Territory splits and trailing of the credit, where it decreases each year to eventually reach zero, can mitigate the fat-and-happy syndrome but becomes a nightmare to manage in a large sales organization.

There are still some details to iron out in this case pertaining to goals and payment schedules.  But having aligned the incentive credit approach to elements of the sales strategy, most of the heaving lifting is behind us.

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

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

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

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

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

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

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

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

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

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

David Stein, founder/CEO of ES Research Group, Inc. and publisher the popular blog “Commentary on Sales Leadership” for leaders of customer-centric enterprises, recently sat down with our own Mike Meisenheimer to discuss trends in sales compensation.

In this column, “Show Me The Money,” David and Mike observe companies having seemingly everything in place for sales success — hot product, well-oiled sales methodology, tools, support, references, technology, training, coaching, leadership.  But if the sales compensation approach is poorly designed or managed, salespeople won’t stick around, or the company faces the difficult scenario of having to correct an overpay situation (and then the salespeople won’t stick around).

Mike describes during the interview what are three common symptoms of poorly-managed plans:

“1) Under-merchandising the plan launch. Rather than a robust strategy that involves sales management and engages the field, an email comes from corporate; 2) Limited progress reporting; plan participants don’t receive regular updates on their performance; and 3) Lack of detailed incentive reporting.”

There are good insights to keep in mind as you work over the ensuing weeks to redesign your company’s sales comp plans for 2011.

For many firms, our company included, it’s planning season and time for offsite meetings to motivate focus and collaboration.

If you’re like me, you have attended many of these meetings.  And while you may appreciate the face time with people who you rarely see, the strain of long days, late nights, rich food, packed flights and being away from home leave you wondering, couldn’t we have just done that (meeting) by phone?

I’m happy to report a renewed sense of hope for the offsite, having just returned from one.

In planning the meeting we set a few, basic requirement that, in hindsight, paid off:

• Set an agenda: no out-of-the-box-thinking here but we spent a lot of time on the agenda to ensure we got the best use of our time together.   We also set a realistic set of objectives, and in the meeting stuck to the plan.  Again, basic stuff but in past meetings it seemed that offsite meant it was acceptable to be running two-hours behind schedule all the time.  I’d get distracted wondering whether I’ll get cut from the agenda or miss my flight home.
• Challenge ourselves – physically: part of what makes our leadership team work well is we share an appreciation for the outdoors and physical exercise.  In principle and for the meeting we wanted to mix things up, use different parts of our brain.  Sitting in a conference room, then on a bar stool, followed by a two-hour dinner and then a four-hour trip home isn’t mixing it up.  There’s an evening of bowling or line dancing at a dude ranch, and for some, this creates the needed balance.   Not for us.  Sequence matters also.  We wanted to do the physical stuff first so we could share a sense of accomplishment and appreciate, not dread, the hours of sitting and thinking that would follow.
• No PowerPoint: our desire to ditch the tool on which we so frequently rely fit within an overall theme.  That is, create a meeting environment radically different from what we are accustomed to.  For example, we (by accident) met in a room with only couches – no desks.  Lunch each day was off premise.  The meeting site was in a city where we’ve never before met.  Perhaps these things aren’t practical.  I’ll argue they made us more productive.
• Put it all in perspective: I know.  Nice cliché.  Granted, we didn’t bullet this one on our meeting mission statement.  We didn’t have a meeting mission statement.   Our primary goal was to free ourselves from distractions and use the power of our collective thinking to produce a good business plan.  I found in past venues that the planning and preparation for these meetings along with the lofty expectations and political posturing can takes one’s site off the goal.

Funny (to me anyway) that we met these requirements just half way through Day 1.  This was at about 7,500 feet on Mount Rainier, one of the premier volcanic peaks in the Cascade Range of the Pacific Northwest, after scaling about 2,000 vertical feet and traversing glaciers.  We had spent so long climbing that we lost sense of what lay behind us.  Upon turning around, and seeing only that which was built without human intervention, I concluded this meetings a success.

I’m not suggesting you plan your upcoming sales comp plan design kickoff meeting on the side of an active volcano.  But try kicking off the meeting with a venue that leaves your audience unable to say, “Here we go again.”