SalesCompInsights

By Scott Barton and Matthew Zink

As we have written numerous times on these pages, quota attainment distribution is a critical diagnostic for a goal-based incentive plan.  The shape of the distribution and its position relative to target attainment impact both the plan’s motivational capabilities and its ROI.

Consider an example:

• Company A sets a goal for its sales organization to produce $100 million in revenue.  It models a normally-distributed, salesperson-attainment scenario to test the impact of pay mix (ratio of base to incentive target pay) and pay rate accelerators on total comp expense.
  • Under the “model” scenario the company pays 113% of its incentive budget at 100% attainment, due to its use of accelerated payment rates for salesperson attainment above 100%, and the model scenario placing approximately half of the sales population into accelerators;
  • Its compensation cost of sale, or CCOS, is 4.26% — i.e., Company A is spending 4.26% of each dollar of revenue on sales comp under this scenario.

•  In a wide distribution scenario, the company experiences an increase to the deviation of salesperson quota attainment – i.e., the left and right edges of the distribution curve grow outward.
  • While the company generates no more revenue in this scenario, it spends more of its incentive budget, due to more salespeople earning at accelerated payment rates;
  • The scenario also produces a less efficient CCOS, given the increased number of salespeople performing at low attainment levels, yet continuing to earn base salary.

• In a third scenario the company experiences an upward shift in average performance, such that all salespeople produce 5% more than what the company modeled under the normal scenario.
  •  Due to its accelerators, the company spends more as a percent of incentive budget than under the normal scenario;
  • The higher cost is at a lower effective rate (CCOS) than under the wide scenario, because revenue increased at a higher rate than comp expense.

• Finally, a forth scenario, and an unfortunate one, is where the average attainment is 100% of revenue target but the shape is bi-modal.  I.e., instead of one, normally-distributed curve there are two – one centered at the lower end of the performance continuum and the other at the upper end.  Think of a two-humped camel, or the tale of two cities:
  • The lower-performing camp produces relatively-high fixed cost as a percent of revenue due to base salary;
  • The higher-performing group produces relatively high variable cost as a percent of revenue due to accelerated payment rates;
  • There is no middle group to offset each, extreme group.

From a purely budgetary perspective, Company A prefers the normal distribution scenario, which provides the lowest spend rate as a percent of incentive budget and revenue.  However, the company’s sales management has a different view.  The wide scenario provides more extreme examples of performance, and pay:

• High performers pull down big pay checks and serve as a source of inspiration to average performers;
• Poor-performing reps opt out of the program (or company), saving sales leadership pain and hassle associated with administrative, “performance-management.”

Obviously, for the sales management, the right-shift scenario is preferred – beat the goal and increase the number of salespeople over quota.  But beyond some point of goal attainment the sales organization’s success carries both short- and long-term consequences.

Short-term Company A – and this is a real example – is dealing with the fact that its overall corporate growth and profitability in its last fiscal year fell below analysts’ expectations, even though a large portion of its sales organization exceeded 110% of their quota. 

How is this possible?  Goals defining company success and sales team success are not aligned.  Misalignment usually stems from: 

• Under-allocation of goal, which is the practice of assigning to the sales team a level of quota that falls short of the corporate goal;
• Excessive use of measures and goals that enable the sales team to earn what they view is sufficient pay, even when their performance on the primary goal of revenue or margin falls short.

Longer term, companies that celebrate sales team success but fail to meet Wall Street’s expectations must take radical steps to get salesperson pay and performance in line with corporate results.  Ultimately the sales team must perform more, or earn less.

The prospect of earning less doesn’t sit well – with salespeople in particular.  Therefore, sales leaders need to ensure the sales compensation program uses measures and goals that align with corporate requirements, and that the resulting performance of the sales team and the company is aligned as well.  Other components of the comp plan, including target pay mix levels and payment rate accelerators, help fine tune the pay-and-performance relationship at difference levels of average attainment. 

The cost of poor quota setting and alignment can be substantial.  In our Company A example, the firm spent about 10% more than the modeled result at 100% average attainment, enough to employ at least four salespeople.  Another scenario could have been an average attainment below 100%.  This outcome better aligns pay and performance as fewer, highly-leveraged salespeople exceed goal.  The cost here, while difficult to measure, can be high as well, as salespeople perceive they can’t meet their income expectations because the company sets its goals too high.

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:

1. Pay Distribution
2. Performance Distribution
3. Return on Compensation Investment
4. 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 (50^th), 25^th and 75^th 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 25^th and 75^th 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 35^th and 65^th 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. 

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.

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. 

While many surveys exist for benchmarking sales compensation pay levels, growth expectations and other important metrics, we find few gather input directly from the plan participants.  Field input represents an important component of our consulting work and we encourage our clients to conduct field sensing activities at various points of the year.  This month we launched Rate My Sales Comp Plan, an ongoing survey series focused on the perspectives and insights of sales professionals.  So far we’ve gathered responses from approximately 1,000 salespeople at over 200 companies. 

The early results are somewhat startling.  Fully 30% of the respondents answered false when asked whether they understand their incentive plan. 

26% disagreed with the statement that their plan contributes to the profitable revenue growth of the organization, or said they didn’t know because the strategy isn’t clear.  More than 10% indicated that their comp plan is causing them to think about leaving or are in the process of leaving because of it. 

Given the importance of the incentive program, having 30% of the field not understand how they are paid is unsettling at best.  Couple that with a quarter of the field feeling like the plan is not aligned with the priorities of the business (or not sure what those priorities are).  As plan designers, we have to ask ourselves whether this is a symptom of complexity or communication.   Perhaps it is a bit early to be thinking about 2012 just yet.  But, it might be time to take the pulse of your field organization before 2011 gets away from us.

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Sales Productivity Takes a Big Leap Forward

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

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

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

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

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

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

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

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

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

Know Which Investments Will Pay Off

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

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

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

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

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

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

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

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

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.

Facebook, WikiLeaks and the Power of Peer Pressure

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

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

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

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

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

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

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

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

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

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

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.

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.