SMA Webcast on Sales Headcount ROI
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
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Sales Compensation in Business Services Firms
When it comes to sales compensation, business services firms pose a unique challenge. By business services firms we mean companies that provide technology implementation, design, maintenance, printing, temporary personnel, etc., to other firms. Unlike a product company that sells “widgets,” a services business essentially sells its people. Similarly, the service is often an extension of the salesperson’s relationship with the customer. Typically it’s more difficult for services firms to differentiate themselves, and these companies are less likely to experience the waves of business common to product firms, where the sales organization enjoys a growth cycle from the launch and subsequent momentum of a new product.
Maintaining and growing your existing client base is certainly going to have a lower cost of sale than acquiring new customers. Significant time and attention should be paid to cultivating and maintaining existing relationships. Unfortunately, the evil twin of relationship management can be complacency; less focus on new services, limited ability to increase prices and insufficient acquisition of new clients. We observe four key sales compensation issues within business services firms looking to re-ignite growth:
- Commission on margin: In a business where the profitability of a deal or customer can vary so significantly there may be a strong desire to pay on margin. The counter argument is that “delivery,” not sales really influences the profitability of the deal. If the delivery team provides the contracted service for a lower cost than estimated the deal will be more profitable. Less efficient, less profitable. For us, the key considerations are the role of the sales person and how much pricing discretion is available. Paying commissions, or bonuses, on margin will certainly engage the rep in the profitability discussion. It also encourages them to stay close to the delivery of the service; potentially a good or a bad thing based on the priorities of the role. From a pricing perspective, the more discretion, the stronger the argument for some kind of margin component.
- Revenue versus bookings: Revenue proponents contend that the sales team shouldn’t get paid until the company is able to invoice the customer (or in some cases until the company receives payment) and paying on revenue encourages the salesperson to better manage the relationship. Bookings advocates point to a similar rationale as not paying on margin and like to point out that bookings measures encourage both new clients and new business within existing relationships. Once again we’re back to the question of role: what is the sales person being asked to accomplish? What are their priorities and if we’re asking them to change, why?
- Quotas: We observe many business services firms where quotas are used for performance management, but are not part of the sales compensation program. Linking quotas to incentive pay is a significant tool available to drive growth. These performance expectations directly tie the productivity of the sales team to the business plan. Further, within sales organizations historically paid on revenue, new business quotas can represent a major cultural shift and drive additional changes across the organization. One cautionary note; the potential change brought by the introduction of quotas, means getting the quotas “right” should not be trivialized. Revenue based quotas have their own issues, but setting a bookings goal for the first time requires careful thought and preparation. Unrealistic or unachievable quotas can have an incredibly negative impact on the organization.
- Sales expectations for delivery teams: Within many organizations the role of the deliver team is to provide a high quality service and ensure the client’s satisfaction; can the customer be used as a “reference.” Maybe there is a referral bonus available or even a SPIFF. But in other organizations, offering new services to the client is part of the satisfaction equation. Scott’s recent experience with AAA is a perfect example (Sales is Service). For companies that believe in the service they provide, we think it a mistake to not at least consider the role of sales incentives for the delivery teams. The incentive might represent a smaller portion of total pay relative to other priorities, but its absence often represents a missed opportunity. Organizations that introduce a sales incentive need to train team members on their role in the sales process, as well as how to identify opportunities.
Beyond the question of sales compensation, role design and account assignments play critical roles in the management of a business services sales team. Effective sales compensation plans are predicated on clear roles and selling priorities. Questions about how services salespeople should spend their time must be answered before any sales compensation decisions are made. In a recent survey of incentive plan participants within a services organization, over 30% of the field said their incentive plans are not aligned with their roles and over 40% said they weren’t sure or don’t believe the plan supports the priorities of the business. As sales compensation designers, numbers like that are like a big red flare, regardless of what industry they represent.
Four Signs of a Well-Functioning Sales Incentive Plan
Getting the Most Out Of Your Newly-designed Program
As a manager or administrator of the sales compensation program, what should you care about? What measures characterize a well-functioning sales incentive plan? You’re in an excellent position to assess how well the plan is working.
Getting Started
Can you imagine a car without instrumentation? Your only indicator of success would be a safe, timely arrival at your intended destination. The scenario is analogous to a sales compensation plan where payments issued are the only measure of success. Like cars, complex incentive programs need regular monitoring and maintenance, less something unexpected goes wrong and costs dearly to fix.
Most managers of incentive compensation accept that ongoing measurement of the plan’s performance is good business practice. The problem lies in execution. What should be measured? How do we get the data? What do we do with the information?
Start by focusing on a few fundamental measures. Your car, for example, is a sophisticated piece of engineering. There are plenty of things that can go wrong. Yet most drivers focus on the speedometer, fuel gauge, service-engine light and thermostat. For each of these devices there are standards that indicategood operation and potential problems. Without these standards, the underlying information is of little value.
For your sales compensation program, we suggest four key measures and corresponding standards you monitor to ensure your plan operates properly:
- Pay Distribution
- Performance Distribution
- Return on Compensation Investment
- Sales Time Allocation
Pay Distribution
Most companies track what they pay their salespeople and standards for responsible pay. Often missing is measurement of an effective pay distribution for specific classes of salespeople.
The measure starts with acceptable ranges of pay around a midpoint or median amount. Ideally your standard comes from a published compensation survey that covers the specific jobs in your sales organization. Compensation managers often fret over the “right” survey, while sales managers usually discount any survey referenced for their team. The most important thing is to find a survey(s) that your stakeholders agree represent your industry, and then use the information. You want the midpoint (50th), 25th and 75th percentile pay amounts for eachjob. These amounts include base salary, incentive target, incentive actual, target total cash (a.k.a., on-target earnings) and actual total cash.
Pay Distribution Sample
Each quarter you want to measure the degree your pay distribution represents a normal distribution around your standard range. A compressed curve, where your 25th and 75th percentile actual incentive pay is well inside of your standard range, suggests lack of meaningful pay differentiation across your job group. A bi-modal curve, where distributions concentrate around the 35th and 65th percentiles, may reflect underlying causes such as poor goal setting or territory alignment and result in a very expensive outcome, especially when the plan uses accelerated pay rates for above-goal performers.
Performance Distribution
Similar to pay, we suggest analysis of acceptable ranges of performance. Managers fret here, too, over the right standards of performance distribution, which can be measured on a both absolute and relative basis. Don’t sweat the details. With anything close to a normal distribution across a large population of like jobs, your plan would appear to be working well relative to a performance standard. Obviously a normal distribution that is set left or right of your standard calls into question goal reasonableness, as does bi-modal or skewed (biased to the right or left of median) distributions.
Performance Distribution Sample
If your plan has multiple performance components, your options are to measure each component separately, or calculate weighted average performance using an attainment rate from each component. Either way, the more components in your plan, the less clear and consistent the company’s determination of “good” salesperson performance. It’s a reminder to keep the plan simple.
Return on Compensation Investment (ROCI)
On our sales compensation dashboard, ROCI is like the check engine light on your car. It lights up when something is amiss, and you or a trained expert must then dig a little to find out why. I once paid $130 for a mechanic to diagnose what turned out to be a loose gas cap. The ROIC measure is often not a practical means for measuring the health of your sales comp plan, but we argue it’s necessary in some form.
At the heart of this measure is an answer to the question of, “what performance (return) should we expect for the amount of compensation (investment) we spend?” Industry standards range from useful to irrelevant, depending on your business and the operational diversity of your peer group. If the standard isn’t already well known to you, it’s probably difficult to obtain. That said, published surveys with ranges of acceptable ratios for pay-to-production by job type are available for some industries. If the published survey doesn’t cover your industry or jobs, you can initiate a custom survey using a third-party to maintain participant-data confidentiality.
The majority of companies we encounter use an internal standard of ROIC based on external or market-driven standards of target pay amounts and the company’s revenue or gross-margin goals. Logic being, if the company pays competitively and hits its financial objectives, then it is “safe” — for now (i.e., the check engine light isn’t illuminated).
What if the plan uses multiple performance components? Or it includes supplementary components, like those for short-term promotional campaigns (a.k.a. “spiffs”)? Another complexity arises when performance uses measures other than financial units, making comparisons of pay-to-performance rations across multiple measures meaningless. In either case, managers can track what they pay for each component, and assess whether the spend is worth the result. The more components, the more likely one or two components will be ineffective– i.e., not producing compensation. Administratively, the company spends money supporting a plan component that isn’t producing fruit. And from the salesperson’s perspective, the opportunity isn’t worth their time.
Sales Time Allocation
“Whoa,” you say. “I manage the sales comp plan, not the salespeople.” Fair enough. But the reason you love sales comp is because of its implications for the company’s profitable growth.
- Time Allocation Sample
In a complex selling environment, each sales job should have a standard for time allocation across current and prospective customers, as well as non-sales activities. You can measure actual performance by categorizing your sales opportunities as being either part of existing business, new business from existing customers, or from new customers. Track sales activity accordingly through your CRM system. More provocative is requiring salespeople to track their non-sales time. Yet this apparent intrusion from big brother is actually an effective mechanism for helping your salespeople be more productive by helping to minimize administrative activities.
Devilish Details
Of course, you can’t rely exclusively on these four measures to ensure the health of your sales compensation program. Once you have nailed the basics, you should explore upgrades to your dashboard to include other dimensions, such as administrative expense per payee, or number disputes per incentive dollar.
The time should be now to start measuring your sales compensation plan effectiveness. Come third quarter, questions will surface around what’s working and what’s not. Armed with output from your four plan-effectiveness measures, you’ll have definitive answers.
Sales Is Service!
Would You Like a Battery with that Jump?
Living in the San Francisco Bay Area and relatively close to a market, we seldom stock many groceries in our tiny, overpriced (or is it half-overpriced now?) home. The grocery store is our pantry, and daily visits are routine. So too is my older daughter’s claim of weakness from extreme hunger. So in grabbing stuff for dinner with starving daughter in tow, I’m quick and efficient, except when something goes amiss.
Such was the case recently when my car, having worked fine only minutes before, would not start. This thing’s got enough electronic gear to power an Apollo mission. It clicks and hums when sitting in the garage. Now it was dead. No time for a 1,300-point diagnostic, we’ve got to get home. The car stays, food and kids go. I packed up my two-year-old daughter and a bunch of heavy bags; the other, starving daughter, could only manage to carry a small bag of French bread.
AAA Northern California has, over the years, built up significant brand equity in my book. The annual dues more than cover what would be the cost of jumping, towing, unlocking and refilling our cars. AAA’s Roadside Assistance is cheap insurance for absent-minded owners of unreliable cars.
So I wasn’t surprised when the AAA roadside assistance driver (RAD) arrived at my car precisely when I did, according to plan. About 60 seconds later my car is idling as if nothing happened and I’m signing a form reminding me something had. The RAD suggested I let the car idle for awhile before shutting it off and then if it’s slow to start, consider buying a new battery. Then came the pitch for AAA’s battery replacement service: for $135 another RAD will come to my home and replace the battery with a dealer-spec, three-year-warranty model. Interesting, I thought.
Indeed a few days later my car was slow to crank. Being proactive and resourceful I called the dealer from where I bought my car to compare its battery replacement charge to AAA’s quote; the dealer wanted $60 more. And I would have to go to them – something I do too frequently. I’ll save the $60 and go without a free cappuccino.
Get on with the punch line, you say? Here it is: I spend a good chunk of my career thinking through what enables a successful up-sell and service experience to co-exist. A former boss of mine avoided making the distinction. “Sales is service,” he would preach. In the case of my recent AAA encounter, he’s right. But in retail, the tag line often falls on deft ears. Employees in designated customer-service roles often balk at sales goals. “I didn’t sign up for this,” they’ll say. From a management perspective, you’re kind of stuck. Push the goals too hard and you lose valuable service employees. Not hard enough and the sales goals go unmet. In our experience, getting the inbound-sales/service role right is a tall order.
So what makes AAA and other firms successful here? The first hurdle is cultural. If your employees believe that to serve the customer means informing them of products and services they can genuine use and value, then this knowledge transfer is just an extension of their service routine. The product/service must fit with the service encounter for the customer to recognize its value. “I’m glad you told me, ‘cause I just might need a battery.” Quite a different thought process from the belief a rep is taking advantage of your needy state to sell you something you don’t want or need, or suggesting a quid pro quo. “Hmm…. if I don’t sign up for the credit protection service, will she not waive my late charge next time?” Feels sort of slimy.
The second hurdle, if it’s not yet completely obvious why I selected this week’s topic, is compensation and performance-management “alignment.” I can’t say with certainly how this AAA RAD gets paid, but know enough on this particular issue to believe his cash comp is base salary with a very modest variable piece tied to customer service scores (I received a survey about three days following my service call) and battery sales volume.
What needs to be aligned, exactly? If we have the sales/service connection set – i.e., there’s an obvious connection between the service request and the proposed sales opportunity – our performance measures and variable comp must fit the context of the job role. Take the “Fries-with-that-Coke” example. A natural connection, simple, unthreatening message (what Coke drinker wouldn’t want a delicious pouch of golden fries?) and for a national chain lots of data and surveillance opportunity to appropriately measure service quality and sales volume. Dial up the incentive opportunity for hitting the fry goal. Have it part of their target pay. There’s little that can go wrong.
Our battery example has some similarities but the role context is far different. It’s not a transitional job. I would expect some toughness and pride on the part of the employee. To say these guys are set in their ways is probably not too offensive. And you want them to sell batteries? Better dangle some incentive out there. But how much? What’s the goal? What can go wrong if these things aren’t aligned?
Take into account the customer’s perspective. I try not to generalize or stereotype based on appearances, but a tattooed, heavy-equipment operator with an aggressive sales goal and vulnerable customer in a dimly-lit parking lot sets an intimidating scene. “Would you like a broken neck with that refusal to buy a battery, sir?” Good thing I left the kids at home. Me and my car, never seen or heard from again.
Yet the thought never crossed my mind. This guy knew what he was doing, and I’m $60 richer because of it. Call it random in a world of information overload and crummy service experiences. Something tells me a lot of work went into getting this right.
Survey Says
We hope you enjoy this Q1 summary of our new Field Sales Compensation Survey Series. Clicking on the full screen button will make it easier to see some of the statistics (sorry about that).
As a reminder, you can also receive automatic updates about new posts via the email subscription option.
“We Like The Old Plan”
By Elliot Scott
A socce
r teammate of mine from high school (let’s call him Ronaldo) now works as a finance manager in a company that manufactures equipment for the construction industry. With the decline in the real estate market, times have been tough for the company and its sales force. Inside the company the pressure to change the sales incentive plan is builidng.
Several years ago, when times were good, Ronaldo’s company changed the sales incentive plan. They moved from a commission plan (sales people paid a % of revenue on each sale with the commission rate tied to level of discounting) to a plan based on % attainment of an annual revenue quota, measured on a quarterly year-to-date basis. Since that time there has been a gradual crescendo from the sales force of, “The old plan was better.” But are the salespeople complaining simply because payouts are down? Or are they right that for their situation the old plan really is better? Since I am a student of the game (sales comp, not soccer) Ronaldo asked me if I agreed.
Being a consultant, my answer was simple and direct: “Well, that depends….”
The choice of whether to use a commission or a quota-bonus mechanic is one of the cornerstone decisions in any sales comp plan design. Fortunately, there are a number of rules of thumb to help you evaluate the options, if not come to consensus. The ones most relevant to Ronaldo’s company are:
- Is their sales force a “hunting,” new business acquisition sales force, or is there more “farming,” or account management? Commission is much more common and appropriate in hunting sales forces where the immediacy of commission is a key lever to attract and retain the appropriate type of sales person.
- Well it turns out that yes, this is a hunting sales force, and management would like them to be even more aggressive. Score 1 goal for commission.
- Is territory opportunity balanced? If territory opportunity is even, and it is difficult to argue that any group or region has a far greater likelihood of selling much more than another, then commission works very well. If not, the use of quotas can level the playing field by managing the inequity in territory opportunity.
- In Ronaldo’s company, territory opportunity is not well balanced. Quotas range from $800,000 to $2.5 million. That’s not enormous variation, but score 1 goal for quota-bonus.
- Even if territories are not perfectly balanced, is there an objective and accurate way to measure territory opportunity? If not, then it will be difficult to set quotas based on anything other than past performance, which increases the perception of the “success penalty”: If sales people believe that doing well this year will cause their quotas to rise significantly next year, the motivational impact of the plan is diminished and the case for a quota-bonus mechanic is weakened.
- Ronaldo’s company lacks good data on the market potential in each territory, and quotas are based primarily on the prior year’s performance. The sales force has a high level of distrust of quotas, not only because the overall number cannot be allocated objectively and fairly to each territory, but also because the overall number has been unrealistic for a few years. Score 1 for commission.
- How “lumpy” are the sales? Quota-bonus plans work best in environments with low variability of sales performance. If a $2 million quota is expected to be attained with 1,000 sales averaging $2,000 each, a quota-bonus plan is more applicable than in an environment where a $2 million quota is expected to be attained with 2 sales of $1 million each and quota attainment might easily range from 0% to 300%.
- In Ronaldo’s company, sales range from $5,000 to $500,000, with a few outliers up to $20 million. If you can manage the outliers, a quota-bonus plan should be workable. However, sales are sufficiently variable during the year to require a quarterly year-to-date quota-bonus mechanic. This is a common mechanic but adds complexity, further diminishing motivational impact. Nevertheless, quotas are workable. So score 1 for quota-bonus.
- How important is the sales person’s role in discounting? Commissions offer a simple and effective way of focusing the sales person on discounting. A rate table based in whole or in part on level of discount allows a sales person to immediately understand the impact to his/her pocket book from each level of discounting. With a quota-bonus mechanic, the “line of sight” to discounting is seldom so clear, and often involves the calculation of an overall weighted average discount, that changes with each sale
- The sales force at Ronaldo’s company has significant influence on discounting in most sales. Score 1 for commission.
- Is it important to balance sales across product lines? Is it critical for the sales people to sell a certain specified amount or mix of products in order to meet strategic objectives, or manage production or inventory? Or is achieving maximum revenue at minimum discount the only thing that matters? Quota-bonus plans do a better job of managing the former. With a commission plan, the sales person will want to maximize commission on each sale, with little regard for the mix of sales over the course of the year, and will sell to his or her comfort level.
- In Ronaldo’s company the answer to how important overall sales are relative to the sales of each component part depends on who you talk to. No score on that one.
Based on my conversation with Ronaldo, and the final score of 3-2, I’d say the sales force has a good case for moving back to commission. A commission plan is workable in his sales environment and will be more effective at driving the results most important to the company: new business acquisition and lower discounting.
And while it is true that sales people, like the rest of us, prefer compensation plans that pay them more money, I doubt that is the only reason they prefer the old plan. In my experience, most sales people prefer commission. The motivational impact of knowing what you will make for each sale not only drives performance, it also adds interest to the job and a sense of ownership, particularly if you are money motivated and independent…as good sales people tend to be.
The company should also not overlook the following: (a) Listening and responding to the concerns of the sales force will build credibility, loyalty, and motivation. And (b) it has been several years since the plan has changed. The novelty of change and the ability to use the new plan to help communicate and reinforce key sales strategies should both have a positive impact.
As a final note, while a move towards a commission based plan appears to make sense in this case, there are also reasons to retain the influence of quota attainment in the plan. For this company, the main argument against moving to commission is territory imbalance. So the influence of quotas should be retained but made secondary. We’ll address techniques for this in a later post, but feel free to contact me at escott@newsigma.com if you have a specific question I can help you answer.
Direct Sales Influence on the Wane
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Extinction of the Sales Rep?
Like the internal combustion engine, direct selling persists despite technology and cultural shifts suggesting its demise. Certainly, many of us in direct-selling roles consider much of today’s technology critical to our selling success. But the fundamentals of sales success are as old as the wheel.
Notwithstanding there are bold pronouncements of how the internet will significantly marginalize the direct selling role. Selling Power magazine publisher Gerhard Gschwandtner goes as far to predict that in nine short years only 3 million of the roughly 18 million salespeople employed in the U.S. need report for duty. “In a digital age, every part of the sales and marketing process can be automated,” reports Selling Power.
The article goes on to say that increasingly, customers will make decisions based not on slick sales demos and well-timed follow up calls but on the advice of peers through social networking.
If you’re a salesperson reading this, you know there’s always been a social network, and you’re rather certain you’ll always be able to get a job as a sales professional. Sure, customers get a lot of information that wasn’t available before. You do also and use it to your advantage.
More at issue is how the sales compensation professional accounts for these multiple channels of influence relative to that of the salesperson. One director of compensation for a consumer products company explained, “Customers used to rely exclusively on the sales rep for a lot of the information they now get over the web. Our reps don’t have the same degree of individual influence (on customer buying decisions), but we pay them like nothing’s changed.”
Indeed, a recent study by Deloitte & Touche suggests that most companies have not found the right way to pay for sales performance, with significant implications for sales productivity.
One would think we’re not prepared for this new age. Like having bought an electric car and finding its plug incompatible with your garage electric socket. But in the world of sales comp we’re convinced that all seemingly new trails have been previously trodden. So we refer to our shelves and dust off the volume on “Alternative Channels.” Not surprising the lessons in this volume seem particularly apt to the likes of Twitter and Facebook.
It goes something like this: rep, having spent all available selling time with end users, must now shift some time to those “channel partners” influencing the customer through alternative channels. Do we pay the rep differently for this shift in behavior? Of course we do. The solution could be as simple as measuring all sales volume in a particular, geographic territory, but paying at a reduced rate in recognition of the greater efficiency (and incremental cost) associated with the alternative channel.
This is a simple example. Your reality may be a bit more complex – e.g., channel partner influence spans multiple, direct-sales territories. At a minimum you may be looking at a less-aggressive pay mix to accommodate a job role with less direct influence and a higher skill level. Or maybe performance measures not tied to transactional sales volume.
Case in point, GlaxoSmithKline reported changes to compensation for its direct sales reps, away from prescription sales volume and toward customer feedback, knowledge of the business and overall contribution to the business units they serve. While at the time of this writing we can’t be certain GSK’s changes come in response to the massive number of tweets, posts and walls related to its product, we’re pretty sure the model of putting armies of direct sales reps on the ground of healthcare facilities, loading them with free samples, pens and bagels, is long in the tooth.
And while the industry overall has pared back considerably the number of direct selling jobs over the past three years, most firms are now hiring – GSK posted ten new sales representative jobs in the last 24 hours.
In fact, many companies across multiple industries appear to be on a sales-rep-hiring binge. Far from being on its way out, the direct sales rep is in demand. Three-quarters of the respondents in SalesGravy.com’s annual survey of sales hiring trends say they plan to hire salespeople in 2011. A tech client having returned from her annual sales meeting last week said over 40% of the audience had less than 12 months’ time with the company.
Are we in a bubble-building mentality, soon to wake up and discover we have too many salespeople for the work required? In all respect to Mr. Gschwandtner, we think not and hope his prediction is way off base. The direct sales rep of the future will succeed in part by leveraging massive amounts of information that until recently didn’t really exist. It’s a different, more complex job role though, and companies hoping to reap productivity from these jobs must adopt their sales compensation programs accordingly.
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