SalesCompInsights

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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Extinction of the Sales Rep?

Like the internal combustion engine, direct selling persists despite technology and cultural shifts suggesting its demise.  Certainly, many of us in direct-selling roles consider much of today’s technology critical to our selling success.  But the fundamentals of sales success are as old as the wheel.

Notwithstanding there are bold pronouncements of how the internet will significantly marginalize the direct selling role.  Selling Power magazine publisher Gerhard Gschwandtner goes as far to predict that in nine short years only 3 million of the roughly 18 million salespeople employed in the U.S. need report for duty.  “In a digital age, every part of the sales and marketing process can be automated,” reports Selling Power.

The article goes on to say that increasingly, customers will make decisions based not on slick sales demos and well-timed follow up calls but on the advice of peers through social networking.

If you’re a salesperson reading this, you know there’s always been a social network, and you’re rather certain you’ll always be able to get a job as a sales professional.   Sure, customers get a lot of information that wasn’t available before.  You do also and use it to your advantage.

More at issue is how the sales compensation professional accounts for these multiple channels of influence relative to that of the salesperson.  One director of compensation for a consumer products company explained, “Customers used to rely exclusively on the sales rep for a lot of the information they now get over the web.  Our reps don’t have the same degree of individual influence (on customer buying decisions), but we pay them like nothing’s changed.”

Indeed, a recent study by Deloitte & Touche suggests that most companies have not found the right way to pay for sales performance, with significant implications for sales productivity. 

One would think we’re not prepared for this new age.  Like having bought an electric car and finding its plug incompatible with your garage electric socket.   But in the world of sales comp we’re convinced that all seemingly new trails have been previously trodden.  So we refer to our shelves and dust off the volume on “Alternative Channels.”  Not surprising the lessons in this volume seem particularly apt to the likes of Twitter and Facebook.

It goes something like this:  rep, having spent all available selling time with end users, must now shift some time to those “channel partners” influencing the customer through alternative channels.  Do we pay the rep differently for this shift in behavior?  Of course we do.  The solution could be as simple as measuring all sales volume in a particular, geographic territory, but paying at a reduced rate in recognition of the greater efficiency (and incremental cost) associated with the alternative channel.

This is a simple example.  Your reality may be a bit more complex – e.g., channel partner influence spans multiple, direct-sales territories.  At a minimum you may be looking at a less-aggressive pay mix to accommodate a job role with less direct influence and a higher skill level.  Or maybe performance measures not tied to transactional sales volume.

Case in point, GlaxoSmithKline reported changes to compensation for its direct sales reps, away from prescription sales volume and toward customer feedback, knowledge of the business and overall contribution to the business units they serve.  While at the time of this writing we can’t be certain GSK’s changes come in response to the massive number of tweets, posts and walls related to its product, we’re pretty sure the model of putting armies of direct sales reps on the ground of healthcare facilities, loading them with free samples, pens and bagels, is long in the tooth.

And while the industry overall has pared back considerably the number of direct selling jobs over the past three years, most firms are now hiring – GSK posted ten new sales representative jobs in the last 24 hours.

In fact, many companies across multiple industries appear to be on a sales-rep-hiring binge.   Far from being on its way out, the direct sales rep is in demand.   Three-quarters of the respondents in SalesGravy.com’s annual survey of sales hiring trends say they plan to hire salespeople in 2011.   A tech client having returned from her annual sales meeting last week said over 40% of the audience had less than 12 months’ time with the company.

Are we in a bubble-building mentality, soon to wake up and discover we have too many salespeople for the work required?  In all respect to Mr. Gschwandtner, we think not and hope his prediction is way off base.  The direct sales rep of the future will succeed in part by leveraging massive amounts of information that until recently didn’t really exist.  It’s a different, more complex job role though, and companies hoping to reap productivity from these jobs must adopt their sales compensation programs accordingly.

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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.

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.

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.

Back in May we wrote about moving from a commission to goal based incentive program (http://salescompinsights.com/2010/05/17/moving-from-commissions-to-goal-based-incentives-part-1-of-2/).  Since then, we’ve continued to receive a range of questions on this topic.   In addition, several of our clients recently completed or are in the process of transitioning out of their commission programs.   As we noted previously, some of the circumstances that suggest it might be time to change include:

• Exceeding the budget for sales compensation but falling short on product or profit objectives
• Evolution to a more solutions-based sales model
• Support from engineering, marketing, finance,  and/or product management is more prevalent in the sales process  
• Salespeople primarily focus on a legacy book of business with existing products
• High earners are not necessarily the top performers

From a salesperson’s perspective, the move to a goal based incentive program is significant.  “Management just wanted to cut my pay,” “how could they do this when we can’t set fair quotas,”  and “wow, this is more complex” are just some of the comments we hear when the transition didn’t go well.   Our advice:  once the decision to implement a goal based plan is made, do not underestimate the change management effort required. 

An effective transition plan should focus on five key elements:

1. Impact analysis:   Part of the reason you’re moving to a goal based plan may be to better align incentive payouts with your sales priorities.   Whether your new  target incentives are based on a percentage of base salary,  job role or other mechanism, individual plan participants are going to be impacted.  Understand the impact to your high, average and lower performers on an individual basis.  As an example, one recent client implemented three sales rep levels in place of the one historical role.    
2. Bridge strategy:   The wider the variability in pay levels, the more challenging the transition to a target incentive based approach.   Where necessary, the goal of the bridge program is to move everyone to the new approach without losing key team members unnecessarily.    An industrial manufacturing client faced a situation where commission earnings  varied as much as 200% or more for what the company felt were similar levels of performance.  The company implemented a two-year transition plan.  Year one target incentives  were set using the average commissions earned over the past three years.   In year two, the target incentive amounts will be standardized by role.  
3. Communication plan:   It is difficult to over state the importance of the communication approach.   Preferences for communication should be gathered in advance, during the design process if possible, a cascading communication approach put in place and multiple touch points.   Earnings examples should clearly demonstrate how to win under the new plan along with what-if calculators that plan participants can use to try out different scenarios .
4. Systems and reporting:   Few things can hurt the credibility of the new plans more than poor administration systems or reporting.   Plan participants must know how they are doing against their goals on a regular basis.   Payment calculations must be accurate and timely.    Earnings statements should include attainment results, earnings by measure and transaction details.  There should be a clear and easy process for inquiries or payment disputes. 
5. Follow up:   Post-launch surveys/focus groups/interviews with management and the field should be used to evaluate the effectiveness of both the communication approach and the new plans.   In particular, we find that field surveys typically have a good response rate; 60% – 70% or more.

David Stein, founder/CEO of ES Research Group, Inc. and publisher the popular blog “Commentary on Sales Leadership” for leaders of customer-centric enterprises, recently sat down with our own Mike Meisenheimer to discuss trends in sales compensation.

In this column, “Show Me The Money,” David and Mike observe companies having seemingly everything in place for sales success — hot product, well-oiled sales methodology, tools, support, references, technology, training, coaching, leadership.  But if the sales compensation approach is poorly designed or managed, salespeople won’t stick around, or the company faces the difficult scenario of having to correct an overpay situation (and then the salespeople won’t stick around).

Mike describes during the interview what are three common symptoms of poorly-managed plans:

“1) Under-merchandising the plan launch. Rather than a robust strategy that involves sales management and engages the field, an email comes from corporate; 2) Limited progress reporting; plan participants don’t receive regular updates on their performance; and 3) Lack of detailed incentive reporting.”

There are good insights to keep in mind as you work over the ensuing weeks to redesign your company’s sales comp plans for 2011.

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

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

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

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

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