SalesCompInsights

Paying for Growth in a Regulated Environment (Third in a Series)

In this series so far we’ve used the banking industry as one currently at odds with growing the business in an increasingly regulated environment.  It’s within this context that NewSigma and Varicent recently surveyed 35 regional banks on their current and projected sales compensation practices, and sponsored a webcast to review survey highlights and hear perspectives from a panel of incentive managers from within the regional banking industry.

For a rebroadcast of the web event, to go:

https://www1.gotomeeting.com/register/753683233

Based on the survey’s findings, here’s what regional banks are doing to balance growth initiatives with regulatory compliance:

1. Increased sales compensation governance:  35% of the responses said their bank has the board’s involvement in sales compensation review and decision making; 26% said their bank has resources dedicated to enhanced plan management practices (e.g., plan evaluation, redesign and communication).

2. Focus on more sophisticated reporting and analytics: 59% of the responses said that better reporting and analytical tools represented their bank’s best opportunity for improved management of the sales compensation program; 32% of the responses indicated their bank plans to adopt new systems for reporting and analytics of incentive compensation measures.

3. Shift to longer-term and organizational level measures: banks surveyed most frequently selected profitability, longer-term and organizational-level measures as new or more-emphasized components in their sales compensation program across the multiple lines of business.

4. Stronger alignment between goals and performance of the individual salesperson and that of the organization:  33% of the responses in Wealth Management, Private Banking and Investment Services, and 28% in Commercial Banking indicated goal alignment as one of the best opportunities for increased program effectiveness.

From client work and surveys we see a relatively high deviation in practices – i.e., show me five regional banks and I’ll show you five different approaches for sales compensation.  Regional banks operate in different geographic markets and thus can differ in terms of challenges and priorities.  This makes sense.  But what’s less obvious is the rationale for differences in philosophies and strategies for addressing federal regulations and local market growth opportunities.  For example, one panelist spoke of the high level of uncertainty in her market, and conservative approach (“hand holding”) for compensating and motivating the sales team.  Yet another spoke of her commercial division’s “dramatic” shift to a production focus, with sales compensation being a “driving force” so that the sales team can get back to what it was hired to do (i.e., sell).

We like to see that some banks are dusting off their playbooks for effective sales performance management.  Unfortunately for the majority of banks in the survey, many of their current sales compensation practices are at direct odds with sound principles for motivating sales behaviors.  Too much emphasis on organizational measures removes the salesperson’s individual accountability for production.  Half-baked measures for profitability leave the salesperson feeling powerless about outcomes that influence his or her pay.  Too little pay in the variable bucket makes the salesperson indifferent to high and low levels of performance.  Too heavy a reliance on manual processes for calculating payments, reporting performance and analyzing trends takes time away from selling.

Knowing what makes the salespeople tick, and what ticks them off, is a critical ingredient in the formula for getting a good return on the sales compensation investment.  Shockingly, a reported 72% of those banks surveyed said they do not seek salesperson opinion when evaluating the effectiveness of their sales compensation program.

Can you imagine rolling out out a consumer product and not knowing how your target market will respond?  Banks have done a good job recently meeting the expectations of the federal pay regulators.  Now it’s time to get with the people responsible for growing the business.

In our last post on this topic we shared ways that companies in the banking and other regulated industries change their incentive plans to address regulatory concerns.

Now we’re turning our attention to the management side of the equation — i.e., processes, standards, decision accountability and tools.

My first experience managing incentive plans in a regulated environment was with a large brokerage firm.   The industry was still reeling from a few high-profile incidences where brokers were found pushing mediocre investment products in part because those products paid them the most commissions.  Our company vowed to NEVER wind up on the front page of Section C in the Journal.

One of my first observations was the fragmented nature of our company’s incentive management practices.  For example, product groups would develop promotions and offer incentives for the salespeople to sell certain products without any consideration of how those sales could distract from other sales initiatives.  Similarly, sales managers could run their own campaigns without any thought to program ROI, regulatory compliance or sound incentive design principles.

The second issue was the degree of transparency related to how the company’s various programs paid.  While I started to build an inventory of the various incentive programs out there, it wasn’t complete and I could not easily say how much the company paid each sales person or for each product.

That last question is one that for many incentive managers falls in the “nice-to-know-but-I-have-bigger-fish-to-fry” category.  For me it did until one Tuesday in late November.  The NASD (now FINRA), governing body for the securities industry, issued a request for the payment amounts going to each salesperson for a particular bond type over the past two years.  Date request due: November 29 — the Tuesday after Thanksgiving.  I’m reading this memo on the Tuesday before Thanksgiving! Man how I would have loved to, after first ensuring the email wasn’t a prank by someone, push a button that would crunch the numbers and issue the report while I was packing up for the Thanksgiving holiday.

This wasn’t to be.  My group worked the entire weekend (downtown San Francisco is terribly depressing on Thanksgiving day — not so much as a turkey sandwich is available). We had no formal way of collecting pay program details and ensuring those programs were in line with our standards (of which we had very few).  Worse, we did not have a centralized database for storing performance and pay information.  Trying to collect this information was like a scavenger hunt.  Reporting these data in some coherent fashion was yet another humbling exercise.

Somehow I survived and the firm is still in business.  But the memory still stings.  The lesson: know what plans you have and how they pay.  This goes for regulated and unregulated firms alike.  If you can’t answer this question within 48 hours and a few easy key strokes, then prepare to miss your favorite holiday.

Better yet, take note of these steps:

Step 1: Document Who’s Accountable for Which Decisions and What Information

Critical processes such incentive plan redesign work best when the company has established clear accountability for each process step and decision.  Use a reliable accountability matrix, such as RACI (Responsible, Accountable, Consulted, Informed), to delineate roles.  Some regulatory bodies require the involvement of your company’s board or risk officer for major incentive policy decisions.

Step 2: Map and Optimize the Critical Processes

We think of processes for incentive management falling into four buckets:

1. Evaluation of Results
2. Design or Redesign of Plans/Programs
3. Implementation of New Plans
4. Administration, Reporting and Dispute Resolution

Within each bucket is a set of processes to ensure these things get done effectively.   At it’s core, incentive management focuses on the administrative processes — after all, if you’re salespeople don’t get paid, they don’t sell.  Yet there’s much more.  My Thanksgiving from Hell required processes for reporting and evaluation, but a lot of the pain came from the fact that the company had no good process for designing new programs.  Each bucket is important and requires clearly mapped processes.

Step 3: Establish Standards for What Makes A “Good” Plan

In the first part of this series we discussed many of the guidelines that banks are using in an effort to align with the Fed’s pay-risk-mitigation principles.  These address plan features and policies like base-incentive pay mix, types of performance measures and goal, etc.   There are principles and standards for the management practices as well.  E.g., number of acceptable pay adjustments per total payees, number of times the steering committee meets to review plan evaluation results.  Each of the four buckets above should have a set of standards that management compares to the company’s actual practice.  Any gaps between standard and actual form the basis for change.

Step 4: Leverage Tools Appropriate for Your Incentive Management Requirements

Many companies we encounter can effectively manage their incentive programs using spreadsheets and emails.  Many cannot.  This was certainly the case for the brokerage firm mentioned previously.  The company knew what it had was inadequate but viewed the solution as being too complex and too expensive to pursue.

Tools for incentive management can be relatively complex.  Many companies use multiple systems to determine sales performance and complex plan rules for paying the salespeople.  Yet there are good systems on the market today for managing such complexity, and you needn’t try to automate all processes at once to make an impact.   Focus on the critical processes first, optimize those processes by removing design features that add complexity but aren’t necessary for meeting your strategic goals,  principles and requirements.

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Building solid processes, decision accountability, standards and tools enables a well-functioning incentive system and just might help your work-life balance.  After all, requests for information always come right before a holiday.

Welcome to our blog. 

SalesCompInsights was created by Scott Barton and Mike Meisenheimer.  In our 30+ combined years of working on sales compensation design and management, we’ve collected a lot of  intellectual capital and developed a few opinions on the subject.  So it’s time to share.  This includes reliable information on sales compensation principles, as well as current trends and research. 

Over time SalesCompInsights will continue to evolve based on feedback we receive, specific requests and changes in the broader sales compensation world.  

From time to time, we’ll ask our clients — professionals in sales, HR, finance and sales ops — to comment on industry trends and news that impacts sales compensation policy and administration.

We’d like to hear from you.  Please let us know if there are specific topics you’d like us to cover or comment on posts you find of interest.  Share with us your own sales compensation insights as they pertain to plan design, implementation and administration – things that worked, things that didn’t or questions you’d like to get answered.  We also appreciate a good story. 

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