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.

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.

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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.

A Conversation With Howard Woolf

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Wait . . . what’s that?  The holidays are over already?  But there are still plenty of cookies to be eaten and I’m positive Scott is hiding a present or two that he meant to give me but just forgot.  Ah well, Happy New Year and welcome to 2011.  

For many companies, the next several weeks will be busy with sales meetings and new plan rollouts.  A cross-functional team worked on the designs, the CEO agrees the new plans will help him make his bonus and the CFO signed off on the numbers.   All we need to do now is send out the announcement email, right?  Wrong.  Three more boxes still need to be checked:

• Program documentation:  At a minimum, the communication package should include a participant guide, terms and conditions and a participant calculator.  The participant guide provides an overview of the plan, highlights performance expectations and explains the reward opportunity.  Also known as the 1 – 2 pager, the participant guide is role and sometimes person specific.  The terms and conditions document on the other hand details sales crediting rules, eligibility and other related policies.  Normally it can be applied across the program participants.  And the calculator is just that – a way for plan participants to run what-if scenarios and determine what they can earn in the coming year.  More and more the participant calculator is being integrated into the administration system.   FAQs, presentation materials and administrator play books should also be on the list if time permits. 
• Communication approach:  We can’t say it enough times; sales management needs to take the lead on communicating any plan changes.  The more significant the change, the more comprehensive the communication strategy.  Ideally the timing works out where the VP Sales can present the plan at the national sales meeting, followed up by breakout groups where sales leaders can discuss the details with their teams.  If not, we recommend an all hands conference call/WebEx, with similar follow up meetings.   When the change is really significant and part of a broader sales transformation, it might be time to think about a road show, job aides and other events.  In any case, we like to conduct a post-launch survey to test people’s understanding of the plans, find out what worked and what didn’t and if necessary, prepare a contingency plan.
• Administration preparation:  Hopefully your administration team and IT group  participated in the design process, gathered the associated requirements and made any necessary process/system changes.  If not, hopefully they received the new requirements and will have the process/system changes  ready for the first payout.  In either case, the changes must be tested and validated prior to opening up the system to the field.  Nothing will kill the new program faster than incorrect checks (except for maybe a sales leader that opens with “well, guess what they did to us this year”).   Once the calculation rules are correct, the next order of business should be an easy to use, easy to understand incentive statement where a participant can see a summary of their performance, earnings for the period and the details that went into calculating the payment (i.e., the transactions).  Managers should be able to easily see the results for their team and other stakeholders will likely have a list of reports that they need. 

Unfortunately, we observe many companies that invest significant amounts of time and money into the design process and assume they are finished.  Certainly the finish line is near, but next several weeks will have a big impact on the success of your new plans.

Where Robin Hood Meets Santa Clause

What on earth, you ask, do MBOs, Robin Hood and Santa have in common?  Well, it’s like this: MBO’s, when used in a large sales population, take from the rich (your successful salespeople), give to the poor (your laggards) and are a gift to sales managers that are better at being one of the guys than they are leaders to their respective teams.

By the way, if you’ve stumbled upon this site in search of a holiday-themed Robin Hood DVD or tips for pulling off your own management buyout, give us a second to define before you leave the acronym as used in the comp world:  management by objectives – a.k.a., key sales objectives.  A guy in the U.K. told me once MBO stood for “My Bloody Obstacle to driving real pay for performance in this place.”

This statement pretty much sums up the issue.  Granted, it’s just one perspective.  Ask a sales exec who has worked over a prolonged period with MBOs and you’ll hear a woeful tale of administrative complexity and undifferentiated pay distribution.  But ask a line sales manager, “How’s that MBO program workin’ for ya,” and expect praise for the flexibility and fairness provided by MBOs.

There’s both math and psychology involved here.  Crunch historical data from a group of MBO payees and you’ll see over time a trend of decreasing pay distribution.  That’s because the supervisors and managers scoring their teams don’t have the heart to tell Larry Laggard his performance blows and he’s not earning a bonus.  To keep the budget in check, the scorekeeper trims a little off of what would have gone to Slammin’ Sam (the high-performing rep) and gives it to Larry.  Steeling from the rich to give to the poor.

There are legitimate reasons for putting MBO’s into place.  For example: a technology company needs its business development reps to stimulate product development and customer engagement across different markets.  One size does not fit all reps, and the product isn’t expected to be sales worthy for at least two quarters.  The structure of an MBO allows the supervisors to customize a set of objectives for each rep that will drive future sales.

At some point though, these reps will want sales and the compensation that comes with those sales.  After all, they’re sales reps, right?  Where MBOs get misapplied is when management requires a sales professional to do the job of a marketing or product specialist.  In a small organization, that’s likely and expected.  But it’s not optimal and should be considered temporary.  Again, salespeople sell.  Other jobs do, well, other things that aren’t directly connected to sales.

Indeed there are requirements to every sales job that fall short of sales-related activity: fill out reports, dial into weekly sales calls, drive the product team from Japan around to a few customer sites, etc.  The more your salesperson earns in variable pay as a percent of base salary, the more likely he or she will look to excuse him/herself from such chores.  And then you as the manger can get into a discussion around the reason they’re paid base salary and role of being a being a good corporate citizen and so forth.  Yet they look at you with glazed eyes.  You can tell they don’t care and won’t do what you ask.

It’s tempting then to put some of these non-sales tasks into variable pay, tied up all pretty in a MBO package.  Then they’ll care, right?  Wrong, if they’re good salespeople.  They want to sell, gosh darn it, and earn good pay for those sales.  MBOs are a wing-clipping for high performers.

I’ve not yet gotten into the gritty underbelly of MBO administration.  Best case, managers articulate and document “SMART” objectives, salespeople acknowledge them, managers submit the objectives for executive approval, and later meet as a group to calibrate scores before meeting one-on-one with the reps.  Uggh.  I’ve actually seen an MBO for a manager plan with the objective being proper administration of the MBO process.  Anyway, the savvy manager will attempt to sidestep all this admin stuff.  And who can blame them?

In the early days of my incentive management stint at a large brokerage firm – and sorry to those who’ve heard me tell this story for the thousandth time, but it’s a good one and is relevant here – during a tour of retail branches, I sat across the desk of the manager for one of the firm’s Manhattan branches.  It was mid-December and starting to snow outside.

Leaning back in his reclining chair, he says, “What I need is a very simple compensation approach for these guys (financial consultants and customer service reps).  Give me a stack of hundred dollar bills and I’ll hand ‘em out to those that are getting the job done.”

He was dead serious.  And his grey hair, pinstripe shirt with suspenders and large waistband suggested he’d been at the business a while and probably knew what he was talking about.  Yet I had an image of this guy in a red suit and white beard, with a sack on his back for all those bills.  Maybe it was the time of year.  Come to think about it, the assistant manager looked an awful lot like Little John.