SalesCompInsights

Ah . . . . sales comp, quotas and territories.  Three important legs of the productivity stool.  While sales compensation and quotas share time in the design process spotlight, many salespeople will tell you that their territory assignment has as much, if not more, impact on their success.  We recently had the opportunity to catch up with Ken Kramer, Director of Business Development at TerrAlign, a software and services company focused on sales resource optimization.  

Mike:  From your perspective, how important is territory management for increasing or maximizing sales productivity?

Ken:   While I might be a bit biased, territory management is critical for maximizing sales productivity and revenues.  But it might be helpful to first clarify the differences between Territory Management and Territory Alignment or Optimization.  I think of Territory Management as the broad umbrella term for all things related to territories – assignment, tracking, definition.  Or alternatively Territory Management can specifically relate to the tracking of who owns what and storage of the information in the system of record while integrating to CRM, ERP, ICM and similar systems.   Territory Alignment or Optimization is more focused on the design aspect; creating territories to optimize the utilization of the entire sales force.  TerrAlign focuses on territory optimization and is the reason for my first statement.  To maximize overall sales productivity, each sales rep needs to be leveraged to their fullest capacity.  Companies need to provide roughly the same amount of ‘work’ in each territory, while minimizing drive time and maximizing the number of accounts or prospects a rep can service.

Mike: Are there any examples you can share where companies have been able to quantify the impact?

Ken:  Our research, as well as that from other organizations, typically shows companies increasing revenues 5-15% without increasing headcount.  At the same time, they are able to reduce travel related sales costs up to 15%.  The results are incredibly strategic, typically producing ROI’s that are so big, they verge on unbelievable.  But, for companies doing millions of dollars in revenue, even a small increase in productivity can have a very significant impact.

Mike: Are there some guiding principles for organizations that want to evaluate the effectiveness of their current alignment approach?

Ken:  From an evaluation perspective, I’d recommend companies focus on a few things.  They might vary based on company and industry, but should include metrics related to work, opportunity, and revenue.  Ideally, you want to understand if each rep is making the same number of calls or producing a proportional amount of revenue for the number of accounts they are servicing.

As an example, one guideline we see in life sciences or consumer goods is to target 32-35 hours of work per week.  This allows for vacation or sick time, training, or other non-selling time.  When we talk about work or workload, we consider this to include the number of calls, duration of those calls and drive time to get to each call.  In high tech, companies typically look for a relatively similar number of prospect companies across territories that meet a particular profile.  We also recommend that variables used for balancing territories reflect those measures in sales comp plans; that is, design the territories around what you’re also paying for.

Mike: What are the characteristics of the most effective approaches versus ones that didn’t work so well?

Ken:  Where possible, build the territories based on a workload factor.  It will lead to better territories where customers will be better served for a longer period of time.  Don’t build territories around reps, they often don’t last as long your customers.  Also, build territories from the ground up, if you start at top and go down, the ability to create balanced territories is greatly reduced.

Mike: How has technology impacted the process?

Ken: While we have been applying technology to this issue for over 20 years, technology solutions for territory design are nowhere near as well-known, as say CRM or ERP.  However, technology has had a major impact on territory optimization.  Previously, and in many organizations today, alignment decisions are largely based one or two factors – neither of which is particularly desirable; 1) gut feel or  2) that’s way the it’s always been done.  The truth of the matter is that sales managers have largely driven the process based on what they think makes sense, an effort to not upset the over performers and their memory from when they were in the field.

Not too long ago, sales managers would generate complex spreadsheets and attempt to create some degree equity across the territories.  Then generic mapping tools arrived so they could plot accounts and visualize things.  Both tools helped, but didn’t reflect the combination of variables and algorithms that could balance each territory, allowing for a consistent workload across the team while minimizing drive time.

As an aside, our organization provides consulting in this area.  I remember one field session  in particular.  As we worked to  adjust and finalize the alignments I observed the field managers taking on a new perspective and focusing on alignments that would benefit both their teams and the company as a whole.  The managers realized they could communicate the changes to their teams and recognized the potential benefits of a more systematic approach.  Prior to that, I had mostly experienced sales managers in a land grab because they knew quotas wouldn’t keep up with
opportunity, so the more the better.  Also, by involving field managers and providing them an integrated tool to make changes, Sales Ops doesn’t become a bottleneck.  So, the technology helps to change thinking, validates (or negates) gut feel and provides better results in a shorter time
period.

Mike:  What lessons learned can you share around the connection between territory alignment and compensation planning and goal setting?

Ken:  Compensation can be a touchy subject.  While reps wait for their Territory, Quota and Comp Plan to be distributed at the sales kick off meetings it is easy to complain about their territory assignments – what accounts they’re going to lose or how little opportunity exists.  Most reps expect their quota to be similar to their colleagues, so they can commiserate about that.  And, they dissect their Comp Plan, figuring out how to ‘beat’ it.  What they often miss is that regardless of the comp plan design, the tie between their quota and territory is what will have the greatest impact on if and how much they will exceed their target.  A territory in the rural Midwest could have the same amount of workload as one in New Jersey, but significantly less opportunity, so the quota better reflect that.

As I mentioned earlier, comp plans and territories need to share common measures and these should also drive the quota setting process.  Quotas should reflect the opportunity per territory.  The impact of unbalanced territories on quota attainment distribution and the cost of incentive comp can be disastrous for a company.  Most comp plans have accelerators that far outweigh any decelerators associated with below quota performance.  When reps outperform their goal, the related expense is significantly higher than what a company ‘saves’ when a rep misses.

Mike:  Have you observed any trends or shifts in how companies approach this topic given the recent economic environment (e.g., entering the downturn, dealing the trough and now what appears to be a period of higher growth expectations)?

Ken:  Change is a trigger for products and services like ours.   The recent downturn forced many companies to figure out how to do more with less.  We recently worked with several companies charged with reducing headcount, but determined to maintain revenues and  effectively service their customers.  Aligning territories to allow each rep to visit the most number of accounts is critical to this effort.  Growth, which we prefer to see our clients enjoy, also forces the issue of how to realign territories – and how to do it in a way that the sales team doesn’t feel penalized.  Regardless of the change, companies want to minimize the level of disruption – the number accounts being reassigned from one rep to another.  Our technology can do that while also balancing the new territories and making them geographically compact.  One other point worth mentioning;  when things are good companies are less conscious about ”optimization” than when headcount is being cut.  We encourage our customers and prospects to continually focus on how to get the most from their sales headcount.

Mike:  Any final thoughts on what companies should be thinking about as they go into the 2012 planning process?

Ken:  Customer segmentation, sales force sizing, territory alignment, compensation plans and quota setting all part of the sales planning process – a new year represents an opportunity to revisit each piece of your sales coverage model and support programs.  Typically, the companies that come out of a downturn in the best shape are those that used their resources more effectively and invested while others pulled back.  Much like any other year, it’s critical to do the analysis, set the company strategy and then put your sales team in place to execute.  There are a lot of pieces to consider, but also an awful lot of upside when done well.

Ken can be reached at kramer@terralign.com

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

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

Topics include:

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

Register today

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

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

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

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

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

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

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

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

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

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

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

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

o   50% of target incentive on realized financial results

o   25% of target incentive on new bookings

o   25% of target incentive on strategic products

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

o   30% of target incentive paid against a booking goal

o   60% of target incentive on expected first year revenue

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

o   20% of target incentive on key sales objectives

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

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.

Several of our recent clients, representing industries ranging from high tech to packaged foods, share a common business challenge:  how measure and credit sales team members with responsibility for pulling business through various distribution channels.  These “sales out” representatives promote their products and services to end user customers who then fulfill their orders through the manufacturing company’s distribution partners.   Typically the company can track “sales in” to the distributor but not which end user ultimately purchases which product.  Channel partners might be reluctant to share information on their customers, may not have the systems in place or may just have other priorities associated with the management of their own businesses.  Such circumstances leave the manufacturer with little information as to what impact the sales out rep is having with his or her assigned accounts.  

We’ve often said that whoever solves this issue on a systematic basis will be in a position to retire in a few years.  In the absence of a silver bullet, or a market-dominant position where you can dictate terms to your partners, consider some approaches that we’ve observed be relatively successful:

• Rep incentive to recruit end users.  A “Bounty” is paid when the end user is on a regular, repeat, buying cycle and the sales team all have an equal opportunity to recruit their customers;
• CRM logged opportunities.   Credit is only granted for those opportunities that are logged in the CRM system prior to closing.  The rep then “closes” the opportunity after the customer’s purchase.  Rep-identified-closes and sales in data are then reconciled/audited, along with spot auditing of specific deals, to maintain the integrity of the process;
• Channel data tied to marketing funds.  A distributor or other channel partner’s willingness to supply end user information is tied to the company’s investment in business development and marketing activities with the partner;
• Team goals with individual variances.   The sales out team is measured on a team quota for the geography or other dimension.   Individual performance against a more measurable attribute – key sales objectives, new customer wins or potentially even team evaluations  – are then used to adjust the individual payout up or down;
• Foreshadowing changes.  While paid on a team quota for the current year, the sales out team is told that individual quotas will be implemented in the coming year for those accounts where the company is able to gather the necessary data.  The sales team thus encouraged to work with their customers/distributors to collect the data.  This argument hinges on the notion that sales people, particularly higher performers, prefer individual quotas over team measures .  Good management processes must be in place to vet situations where the data can’t be gathered  versus reps preferring a team measure;
• Fixed allocation of business.  Sales leadership and/or the account team agree on the relative allocation of the business that is credited to the salesperson.  An example might be a global account that provides overall sales out information, but not at the local geography level.  The fixed allocation assigns a certain credit percentage to the US, EMEA, AP, etc. and assumes that over time things will “balance” out.

The majority of these companies would prefer to measure their salespeople on an individual quota tied to revenue, margin or some other metric.    They are continually striving for ways to improve the quality of their reporting and measurement systems.  For those companies struggling with how to pay their sales out teams,  data integrity must be a guiding factor.  Individual quotas may make sense conceptually, but if your salespeople don’t trust the information being used, then the credibility of the program suffers and your return on compensation investment drops substantially.   We advise our clients to find a workable balance between precision and simplicity.

We’ve also started a LinkedIn discussion on this topic, to collect additional examples of approaches that work, as well as some that haven’t:  http://www.linkedin.com/groupItem?view=&gid=71015&item=23883963&type=member

Anyone who has ever managed an ICM system transformation has a story to tell, and some advice to pass on.  We find particularly interesting those cases where the management considered third-party vendors – Callidus, Varicent, Synygy, Xactly and the like – but ultimately decided to build the system in house.

We recently caught up with Linda Quong, who as VP of incentives for a major brokerage firm helped lead a build-versus-buy decision that resulted in a build.  Her advice: consider the new system a means to an end, sell to your sales force and keep expectations in check.

SalesCompInsights: What was the situation when you were considering a new system?

Linda Quong: “We had new, very ambitious leadership that wanted a revolutionary compensation approach.  The plan we ended up designing required precise, daily data – actually intra-daily data – and included over 100,000 transactions each day.”

SCI: How did you determine which vendors to consider?

LQ: “ICM is a very niche, specialized market.  There were only a handful of vendors that had done anything close to what we were asking for.”

SCI: Were there any that stood out?

LQ: “Not really.  All of these applications appeared to do the same things, though each one got there a little differently.

SCI: What was the deciding factor to build a system in house?

LQ: “Budget and time.  The upfront costs of a third-party solution just didn’t compare to what we could do in house.  Plus, we had an extremely aggressive deadline to deliver the system.  To try and implement a new third-party solution in that timeframe would have been extremely risky.”

SCI: What about the ROI from reduced errors, more sales productivity and less administrative effort because of a more flexible system?

LQ: “Here’s the thing: we had very complex plans, unreliable data and deference to the sales force.  These were major barriers to getting a sufficient return on the investment.”

SCI: Understood, but didn’t the vended solutions offer a lot more flexibility and scalability?

LQ:  “Scalability, yes.  Flexibility, not in all cases, and certainly not without a steep price for customization and the potential issues that might have caused with future upgrades. Our in-house team could fulfill most one-off customizations we requested, whereas some of the third-party solutions hesitated a bit when confronted with some of our requirements. Ultimately, the vendors thought they could deliver, but in most cases we would have been the guinea pigs for their development teams.  To me, this defeated part of the purpose for using a third-party system, which was to rely on their established technology. That said, I think in hindsight that we would have been better off long term with a third-party system.  But in the short run, we couldn’t base ROI on reducing our administrative headcount 30%.  That just wasn’t going to happen unless the out-of-system issues I mentioned earlier were resolved.”

SCI: Interesting – if you had to do it all over again, you’d go with a vended solution.

LQ:  “That’s right, especially with the way the business environment has changed in the last couple of years.  Non-core functions are getting cut back, and more jobs are being outsourced.  And I think the vended solutions have continued to evolve and are much stronger now.  Before, we had a well-staffed, responsive IT team almost completely dedicated to us.  We could hire administrators to build a new plan in the system.  The company runs those functions pretty lean now.  More and more, outsourcing of non-core functions makes good economic sense.”

SCI:  Has the company simplified the plans, and become stricter on allowable adjustments and exceptions?

LQ:  “Not really, but I think a vended solution can more effectively address these things.  If you’re paying big bucks for a new system whose success is contingent on these issues getting addressed, well, those things had better get addressed.  Suddenly, there’s a lot more riding on resolving these issues than just background dissatisfaction.”

How do you do this?  What makes the vended solution different?  Certainly you were investing big bucks in your home-grown system to make it work.

LQ:  “The vendors do a very good job at showing off all the application’s bells and whistles.  This wasn’t so compelling for our finance team, because they were comfortable with their own models and access to data.  The sales force was a different story,  though. They had no comprehensive reporting or analytical tools, and were using various one-off solutions. Had we sold reporting and analytics to them, then sales leadership would have been powerful allies in fighting for the required budget.”

SCI:  We hear a lot of companies say that they’re skeptical of vendor demos, because demos are not a good reflection of how the system will run in the company’s environment.

LQ:  “Companies should be skeptical.  Otherwise, people get bowled over by all the cool features and lose sight of the work and the importance of having the right source data necessary to make these systems work correctly.  My point is sales and other functions in the company, like our business intelligence group, had a lot to gain from the reporting and analytical features in the system.  We had a very prominent sales leader who, if he thought a tool was critical, could see that we made it happen.”

SCI:  So sell to your sales department

LQ:  “Yes, if sales has a lot of influence in corporate decisions.  Keep in mind it’s a slippery slope.  If you oversell the system capabilities and then can’t deliver, you may be out of a job.”

SCI: Any other advice you’d provide to our readers?

LQ:  “Focus on one or two core functions, like reporting and analytics, which are really broken in the company today.  Build very detailed requirements on those functions and make sure vendors can convincingly demonstrate how their system addresses these issues.  Use your network to find companies using the application that you’re considering, and spend some time with those administrators and sales people to understand the application’s benefits and tradeoffs.  Take a hard look at where you will be in 3-5 years.  It’s easy to stay with the status quo to get you from quarter to quarter, but is that going to be good enough to meet future business needs? Finally, look at a system as a lever for addressing non-systemic issue, like unreliable source systems or burdensome management processes.  There’s no silver bullet, but a new system can be the impetus for a real transformation.”

A significant amount of our consulting work involves the processes and technologies used to manage sales compensation programs.   We subscribe to the idea that the sales compensation program is not a series of disparate activities, but an integrated set of processes – design, launch, administer, report, analyze –  that should be managed on an ongoing basis.  We’re often asked about the characteristics of average and high performing organizations in this area and how they can be differentiated.     

The first question might be what do we mean by high, medium and low performers?  We can start with metrics such as the time from close of period to payment, accuracy rate, ratio of plan participants to support staff FTE,  number of disputes,  specific process benchmarks (e.g., date quotas are communicated to the field) and infrastructure dollars per FTE.   Many of these metrics vary by industry, company size and distribution model.  As an example, one of our recent surveys found that almost 60% of direct sales organizations process their incentives in three weeks or less.  Three weeks is typically not realistic for a technology company that relies on sales out partner data to pay their sales teams.   In our surveys’ we also ask about the alignment of the process with the needs of the business and the charter of the organization.  

Those companies that tend to benchmark higher against the different metrics and report higher levels of satisfaction with the alignment of their processes do share some common characteristics.   They are more proactive in their approach to managing the sales compensation process.  Their sales compensation teams commonly adopt more of a leadership position within the organization and overall the program is viewed as a differentiator rather than just a cost of doing business. 

Looking at the design process we observe that the higher performing organizations use a published calendar as an established business practice, clearly define and articulate the roles of the people who participate in that process and have a strong governance model.  There is a former owner of the design process within these organizations and significant cross-functional participation; sales, marketing, finance, HR and IT all have a voice in the final outcome.  From a technology perspective, the higher performing organizations are able to model future plan changes using both historical and forecasted data.  More and more companies are also able to run detailed scenarios and easily promote those scenarios into their production environments.   Taking advantage of newly available tools, plan information, quotas, and other job aids are available online and frequently at or before the annual sales meeting. 

For the administration of the plans, we similarly see formally defined calendars, dates that are essentially set in stone, and a clear owner of the process.   While errors are kept to a minimum (e.g., 98% + accuracy rates based on survey responses), almost as important is a clear process for addressing them.   The administration of the plans is an area where we’ve observed significant improvements in the tools available over the last few years; administrators, managers and plan participants are better able to view the details of any compensation payments on a more frequent basis, initiate a question/dispute based on the information and have that question routed to the appropriate team member.    Other advanced tools are now available to the compensation team including querying capabilities, retroactive processing, detailed auditing/tracking and robust reporting/analytics.   Due to the critical nature of the compensation roles, the leading organizations engage in significant cross-training and education for team members.  From a resourcing perspective, we observe plan participant to administration FTE ratios of 250:1 or greater, as well as the flexibility to quickly adapt to an evolving environment and changes in the sales strategy, coverage model and incentive plans.     

We look at six key elements for each phase of the compensation process when helping our clients assess the effectiveness of their own operations:  1) Process steps and deliverables;  2) Organization structure and roles; 3) Dependencies; 4) Resource efficiency; 5) Tool usage and availability and 6) Process flexibility and alignment.  Tool usage and availability can also be broken down further into elements such as data availability, data storage, functionality and fit with the technology landscape.   Each element can be evaluated on a scale of 1 – 5, helping to lay the groundwork for future projects and attention.  Now that the plans have been launched and things have (hopefully)“settled down” before the next design phase begins, it might be time to take a look at how well your own processes support your various stakeholders and needs.

Three Tips for Transitioning to a Successful Global Sales Comp Program

Have you heard the one about the newly-hired sales compensation manager who has beenasked to transition the company’s far-flung, decentralized sales compensation program to a more centrally manged global umbrella?  We’ve heard multiple versions of this scenario, some mildly humorous, some tragic.  Moving a world-wide, decentralized sales compensation structure to one that’s truly global can be a career-defining (positive or negative) event.

If you find yourself in a similar predicament, we have a few tips to offer.

First, let’s get on the same page with what we mean by global.  Various approaches span a continuum.  On one extreme, the organization has centralized its sales compensation governance, oversight and administration functions, with local (e.g., regional) management responsible for representing regional requirements during the design process.  On the other extreme, regional management has significant autonomy over the design and management of its plans, with corporate playing a support or audit role.  About 1/3 of the global companies we’ve surveyed use a largely a centralized approach.  As you’d expect, the trend is toward greater centralization.

While many regional leaders support the trend on the basis it leads to greater efficiency and, ideally, profitability, sales compensation can be a touchy subject.  Generally, sales managers have a lot vested in the existing program, as it’s a key lever for motivating their teams.  Assume, then, that your regional leadership isn’t quite ready to hand over the keys to their sales comp program.

Tip #1: Build the case for change.  Just because your company has a global head of sales, possibly a newly defined role, doesn’t mean that by default the sales comp program should be global.  Sure, it can be frustrating and exhausting to create an inventory of the various sales comp plans used throughout the company.  But this could be a function of poor recordkeeping.  What does the company hope to achieve by having a more centralized approach?  How will it measure progress toward that goal?  What are the benefits realized by the regional management?

What we’ve seen as the common drivers include:

• Greater consistency in sales execution on global accounts
• Apples-to-apples comparisons of campaign success across regions
• Rapid modeling and deployment of incentive plan changes or new product introductions
• Greater automation and sophistication of sales performance and incentive-calculation reporting
• Audit facilitation and fraud reduction

To the extent the business case appears to regional management as a ploy to lessen their autonomy, expect resistance.  You’re in for a much smoother ride if the organization has decided to undergo some big-bang event, like a major business acquisition or technology implementation.   Sales performance management (SPM) system implementations, like Varicent or Callidus, can do the trick.  Regional heads must pay to play.  Watch the regional leaders’ eyes grow wide during the demonstrations of fancy dashboards and reports.  Far be it for us to promote putting the cart before the proverbial horse, but in a world of spreadsheets, untimely data and manual adjustments, the promise of these systems can put wind in your sails.

Sure, the global head of sales or CEO can pick up the phone and say to the regional leadership, “here’s what we’re going to do.”  Yet, part of your job is figuring out how to move such mountains without having to rely on the executives.  Not that you’re going to drive this global mandate solo.   No, you’re going to get the regions to do the heavy lifting.

Tip #2: Form a Global Sales Comp Task Force.  Just don’t say what the real task is.  Position it instead as a sharing of best practices.  Most sales leaders we work around love to talk about sales compensation.  Funny thing is, two minutes into the discussion, they’re picking apart their own programs.  And for the one or two that think their region’s program is without fault?  Let them think they represent best practice.  The point here is to have your regional leadership perceive they own some of the solution.  And this is as it should be.  These are smart men and women, with years of experience managing and motivating salespeople.  Tap their expertise.

Your role in all of this is to convene the group, help set the agenda, move the discussion from strategy to tactics, and keep the meeting on track.  Demonstrate your expertise by providing pertinent data on sales compensation trends, and using a proven framework to facilitate the discussion.

This isn’t easy.  If you’ve not slogged through such meetings, beware of the frequent rat holes the discussion can fall into.  Language barriers and dialects add to the fun.  After three hours, the regional leadership may feel cleansed and rejuvenated, but you have nothing but pages of seemingly disconnected minutia.  Get help from a professional sales comp meeting facilitator if you suspect you need it.

Tip #3: Become one of them.  I keenly remember the conversation with a regional business leader who picked me up at the Frankfort airport early into one my one of my first global comp assignments.  “Wow, we’ve never had someone from corporate compensation come visit us.”  I didn’t know whether to be flattered or threatened.   

One of the most satisfying aspects of working with the sales organization is, well, actually working with the sales organization.  We find sales leadership, their managers and salespeople to be inherently positive, confident and curious.  That’s their job.  Have you ever attended a national sales meeting?  It’s all good.

Yet, spend some time, one-on-one, with a salesperson and you’ll discover that all is not thumbs up and high fives.  Pay, because a meaningful chuck of it not guaranteed, is usually an issue.  Sales leaders hear about the exceptional cases — the woman who expected to earn €20,000 on a deal for which she didn’t receive credit.  But sales organizations have a way of filtering the daily line frustrations through layers of sales management and cultural bravado.

In the conversation I referenced a moment ago, with the regional business leader, I understood later, over bratwurst and a liter-sized pilsner, that he was appreciative of my initiative to understand his operating environment.  And this is what it takes to appreciate the differences across your company’s global business.  Many factors, like job role execution, legal and labor practices, management philosophy, administrative requirements, and culture and competitive practices, can vary significantly across regions and influence the effectiveness of a particular sales compensation approach.  Good salespeople understand all this because they care deeply about what influences their variable pay.

You may choose to gather this information through surveys and a few phone calls.  We think it’s more cost effective to make the gesture and spend the time in the local market.

Be especially coordinated with the local management during the communication and change-management phase of any new program implementation.  Consistent messaging only works at a high level.  You need to customize and localize the message to clearly explain to salespeople the reasons for and details of change, what the company expects of them and how they can be successful under the new plan.

For more tips on going global, check out these other insights:

http://www.towersperrin.com/tp/showdctmdoc.jsp?url=HR_Services/United_States/News/Spotlights/2007/03_2007_Spotlight_Global_Sales_Comp.htm

http://www.compensatingthesalesforce.com/downloads/WaW_141943_EP.pdf

http://jobfunctions.bnet.com/abstract.aspx?docid=84581

Large-scale disasters, like those we’ve witness this week in the Gulf Coast and southern U.S., remind us about the importance of being prepared.  When it comes to quota-setting, being prepared includes having an adjustment policy for large-scale, unexpected events.

Monday morning in Nashville (photo courtesy of The Tennessean / Zuma Press)

Years ago we were asked by a global shipping company to help develop a quota-adjustment policy for its worldwide sales force.  The company had no objective, consistent policy for quota-adjustments, but on a global scale it often experienced major disruptions to its business due to fires, floods, tsunamis, political strife and other natural and man-made disasters.  Cultural norms seemed to play the greatest influence in whether and to what degree management adjusted sales quotas.   Regional finance and sales teams often quarreled about the appropriate balance between shareholder and salespeople interests.

In Japan, for example, management would not adjust quotas for any event other than territory remapping.   So when a regional airport closed for three weeks because of earthquake damage, all the region’s salespeople missed quota for the quarter, and their opportunity to participate in the annual club trip.  Management reasoned that because shareholders and customers suffered from the closure, the sales team must also.

In France, after a flood wiped out two of a salesperson’s major accounts, management adjusted his quota to neutralize the impact.  Here management’s rationale was it needed to keep this salesperson “in the game” to achieve its annual, regional quota.

While Japan’s regional management was adamant about the no-adjustment policy, many reps across the country felt they should receive a goal increase in order to level the playing field with those who suffered a business setback.  Most of the regional managers in France felt they could not attract, motivate and retain sales talent without a flexible goal-adjustment policy.  Germany sided with Japan on the position to leave goals intact, though its reps did not believe in sharing the pain.  Most U.K. regions fell somewhere in the middle, based on each circumstance.

Cultural norms aside, corporate leadership required some definition of “large-scale.”  Historical analysis found that 97% of the quota-adjustment requests were for five percent or less of a reduction.  In the remaining 3% of cases, management requested a quota reduction of between 6% and 30%.  Granted, not all business disruptions resulted in quota-adjustment requests; we felt available data were representative of the frequency and magnitude of events, though we needed to account for differences between developed and under-developed countries.

From this analysis and subsequent management interviews we were not able to identify any system or formula for forecasting business loss, and the appropriate relationship between the expected amount of business loss and the requested quota relief.  Perceptions ranged from 3:1 to 1:1.

After much consideration and debate, leadership established that any event forecast to reduce a territory’s sales by 20% or more would result in that territory’s quota being reduced by at least 10%, with a non-linear scale such that larger events would receive greater proportional adjustment, and a forecast of 50%+ in lost sales would result in a 50%+ (1:1) quota reduction.

As one approach seldom fits all regional practices, leadership was sensitive to forcing this global policy on all regional teams.  It required instead that regional management follow the adjust guidelines when it chose to adjust; regional management could elect to leave quotas in place following a large-scale event.  If it planned to adjust a salesperson’s quota, it needed to follow the guidelines.  Events considered smaller in scale – i.e., those forecast to have less than a 20% impact on the business – could not be adjusted, on the principle of “you win some, you lose some.”

This “opt-out” approach for large-scale events pleased the Japanese management.  The hard line of no adjustments for smaller-scale events was, as you’d expect, very controversial in regions having a history of frequent adjustments.  France, in particular, felt the policy would drive away its sales talent.  Yet leadership argued that regional management needed a mechanism to bring incentive costs more in line with global standards, as a percent of revenue.  Seems many of the adjustments were to get a salesperson to the next, higher bracket of the incentive rate table.

In October of 2005, about six months after the company adopted the global policy, I spoke to the head of sales operations for North America.  He was pleased when, two months earlier, they had systematic way for adjusting quotas of salespeople based in New Orleans.  Apparently some of those salespeople suffered significant material loss following Katrina, but did not have to fret about how the disaster would impact their earnings ability in the near term.