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.

We hope you enjoy this Q1 summary of our new Field Sales Compensation Survey Series.  Clicking on the full screen button will make it easier to see some of the statistics (sorry about that). 

As a reminder, you can also receive automatic updates about new posts via the email subscription option. 

Play Audio File

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.

Flexible With the Course While Staying True to Plan

Joe Glenn has been managing field-based and inbound-phone salespeople for over five years.  During that time his company, specializing in communications and computer-services, measured sales performance on a product-unit basis.  The approach is common in retail and consumer-sales environments, and can be effective for driving transactional behavior from salespeople.  Where the unit-based approach falls short, though, is on goal alignment.  That is, the sales organization can exceed its unit goals while the company misses its revenue target.  In many such unit-based incentive plans, reps focus on those products they can most easily sell without appreciating the financial consequences to the company.

Changing a sales force’s incentive plan can be dicey stuff, particularly when the company adopts new measures of performance.  In Joe’s case, not only did he have to onboard a new measure, but each rep would carry a quota and minimum performance standard.

“We have a very flexible, adaptable sales force, which makes annual changes to the sales comp plans relatively straightforward,” said Joe, who about one year ago started sharing with his sales teams the revenue-plan concept.  “They were on board – it made complete sense to them.”  New goals and a goal-setting paradigm raise the stakes, however.  “Salespeople want to know the goals are reasonable and ultimately, do-able.”  Without the benefit of historical data, salespeople didn’t really know whether their revenue-based quotas were in line.  Adding to the anxiety the plan featured a 75%-of-quota threshold.

Creating quotas was another issue.  Joe’s colleagues in sales operations used the company’s billing system as the source for transactional revenue data, a formable task that didn’t come on line until December.   The new incentive plan was slated for rollout the following month.  Joe was forced to use a limited set of historical data for setting Q1 quotas.

The company launched its new plans during the final weeks of December 2010.  Early into January, salespeople, checking their progress against quota on a daily basis, were becoming concerned.  For most reps, their performance was trending well below where they needed to be to reach the threshold, and earn incentive pay.

Rather than waiting until quarter or even month end, Joe took action.  He and his operations colleagues dove back into the data in search of assumptions that, given the benefit of hindsight, might be off.  

The prospect of adjusting quotas mid-cycle is typically fraught with issues.  While in principle Joe believes an organization should stick to its goals, the revenue quotas were new, and he couldn’t risk the organization having a poor Q1 – a likely scenario should the salespeople disengage after perceiving they couldn’t hit the threshold.

“For the quotas to be effective, we had to be open to regular course corrections,” Joe says.  “This could not be a ‘set-it-and-forget-it’ approach.”  He used a transparent process with company leadership to keep them appraised on the evolving quota-setting methodology.  As more data became available, Joe revised his assumptions.  This included expectations for optimal business mix at the assignment level, and factoring customer churn into a four-year, revenue-per-unit (RPU) projection for acquisitions, where discounted monthly recurring revenue in the first year gives way to more typical RPU rates in Year 2 of the contract.

Joe also added a feature to the plan threshold by including a relative-ranking threshold by market.  Threshold would now be either the 75^th percentile performer in each market group, or the absolute approach (75% of individual quota), whichever was lower in the period.  This tactic provided a reality check to performance in the greater Kansas City market, where unusually harsh weather hammered field sales efforts.

While January revenue results came in below even the revised plan number, February’s pipeline is strong, and Joe projects a record Q1.  His sales teams viewed the revised goals challenging but reasonable, and after shaking off the initial anxiety, set out to beat them.  From leadership’s perspective, the additional analysis and revised goals provided a level of granularity that helps each salesperson focus on the right mix of business.  Reps are selling smarter, and thinking more long term.

One can argue that if the company hits its revenue plan, which in Joe’s case appears very likely for Q1, the course taken to get there doesn’t really matter.  Joe will tell you his approach of staying flexible, transparent and course correcting as he goes has everything to do with a favorable outcome.

Joe Glenn is a director of sales for a communications and computer-services company serving California, Kansas and Missouri.

By Elliot Scott, NewSigma

On January 1, 2011, many of the provisions of the Patient Protection and Affordable Care Act (PPACA), a.k.a. Healthcare Reform, go into effect.  From the standpoint of incentive compensation professionals, the most significant piece of the legislation is the Medical Loss Ratio (MLR) requirement.  It specifies that in the Large Group market, 85% of premium must be spent on medical expenses.  In the Small Group and Individual markets, the number is 80%.  The rest can go to administrative expenses, profit, marketing, and…direct sales, account management, and broker compensation.  Adding to the complexity is the fact that the Obama administration has yet to issue formal guidelines regarding how MLR is to be calculated.  And there has been much lobbying around what is to be included and excluded.

Nevertheless, companies that are already near or below these minimums or who may be at risk of being below them are considering a variety of steps to help ensure compliance.  For sales and marketing organizations, this means taking cost out without decreasing overall productivity.

How Are Health Insurance Sales Organizations Reducing Overall Compensation Cost?

1.       Lowering Broker Costs

Commissions to brokers are perhaps the most significant line item, but hard to affect.  No insurer wants to be the first to make an across-the-board reduction in broker commission rates, particularly during a time of change and uncertainty, when employers are relatively open to change and reliant on the guidance of their brokers.  Nevertheless, there appears to be a consensus that rates will come down, particularly in the individual and small group markets, where MLRs are generally farther from their targets than in the large group market.  One change that has already been implemented by some insurers is moving from a commission that is a percent of premium to a flat commission per new member. 

But for many companies, cutting administrative costs related to brokers, particularly those that are less important to the company or less dominant in their markets, is a less risky approach.  To lower broker costs, companies are examining their portfolios to see where they can de-commission underperformers with minimal impact.   They are analyzing which brokers are really growing the business and which are maintaining or potentially even eroding it.

2.       Lowering Direct Sales Costs

By the same token, an across-the-board reduction in total cash compensation to the direct sales force is seldom a winning strategy.  It causes the best performers to leave and de-motivates the rest.  More effective and less damaging steps include re-aligning coverage, modifying compensation performance measures, and increasing the pay-for-performance orientation of the plans.

a.       Changing Coverage

Cost reduction from changes in coverage come from moving coverage responsibility to lower cost channels (e.g., inside sales) for certain segments, reducing the number of specialized sales roles and increasing the product responsibility of generalists, and reducing field force headcount.  There are few health insurers operating at peak sales force efficiency, and healthcare reform is providing the motivation to get there.  And when headcount goes down, the goals and commission rates need to be carefully re-calibrated to guard against windfalls and ensure equitable incentive opportunity. 

Cost pressures are also pushing insurers to give up the notion of trying to cover the entire universe.  They are abandoning some segments entirely so they can focus more resources on those where they have an advantage.  For sales operations groups, that means identifying and prioritizing accounts, brokers, and consultants within the attractive segments, determining the level of sales force effort required, and sizing and deploying the sales force accordingly.

b.      Modifying Performance Measures

Although changing performance measures is seldom seen as a way to lower costs, many companies have found that changing the performance measure definitions can be useful.  For example, some companies have recently moved from paying a commission on premium to paying a commission on contracts.  When premiums go up due pricing changes, and commission rates are not adjusted, there is increased compensation cost for the same level of performance.

c.       Increasing the Pay-for Performance Orientation of the Plans

Even without changing the compensation budget, paying more to top performers and less to lower performers will generally result in a decrease in overall compensation cost as a percentage of revenue.  In recent years, base salaries have drifted upward relative to incentive pay, and the below-target part of the payout curve has in some cases been flattened, to retain individuals who might have suffered during the economic downturn.  But with heightened cost pressure brought on by the MLR requirements, more companies are saying they cannot afford that and are taking a good look at thresholds and payouts below 100%.  Others are looking for ways to lower fixed pay over time, perhaps with the use of temporary draws, to make a tighter alignment between pay and financial results.

3.       Reducing Compensation Administration Costs

A final area worth mentioning is plan administration cost.  Gathering and validating performance data, making adjustments, calculating payouts, getting sign-offs, communicating payment, and processing corrections multiple times per year can require significant administrative man-hours in a company with multiple channels, products, and customer segments.  Few companies do this as efficiently as they could and most understand that if they did things differently, significant administrative cost could be taken out…”but we can’t think about that right now, we’re too busy calculating commission payments!”

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.

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.

*   *   *   *

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.

Anyone who has ever managed an ICM system transformation has a story to tell, and some advice to pass on.  We find particularly interesting those cases where the management considered third-party vendors – Callidus, Varicent, Synygy, Xactly and the like – but ultimately decided to build the system in house.

We recently caught up with Linda Quong, who as VP of incentives for a major brokerage firm helped lead a build-versus-buy decision that resulted in a build.  Her advice: consider the new system a means to an end, sell to your sales force and keep expectations in check.

SalesCompInsights: What was the situation when you were considering a new system?

Linda Quong: “We had new, very ambitious leadership that wanted a revolutionary compensation approach.  The plan we ended up designing required precise, daily data – actually intra-daily data – and included over 100,000 transactions each day.”

SCI: How did you determine which vendors to consider?

LQ: “ICM is a very niche, specialized market.  There were only a handful of vendors that had done anything close to what we were asking for.”

SCI: Were there any that stood out?

LQ: “Not really.  All of these applications appeared to do the same things, though each one got there a little differently.

SCI: What was the deciding factor to build a system in house?

LQ: “Budget and time.  The upfront costs of a third-party solution just didn’t compare to what we could do in house.  Plus, we had an extremely aggressive deadline to deliver the system.  To try and implement a new third-party solution in that timeframe would have been extremely risky.”

SCI: What about the ROI from reduced errors, more sales productivity and less administrative effort because of a more flexible system?

LQ: “Here’s the thing: we had very complex plans, unreliable data and deference to the sales force.  These were major barriers to getting a sufficient return on the investment.”

SCI: Understood, but didn’t the vended solutions offer a lot more flexibility and scalability?

LQ:  “Scalability, yes.  Flexibility, not in all cases, and certainly not without a steep price for customization and the potential issues that might have caused with future upgrades. Our in-house team could fulfill most one-off customizations we requested, whereas some of the third-party solutions hesitated a bit when confronted with some of our requirements. Ultimately, the vendors thought they could deliver, but in most cases we would have been the guinea pigs for their development teams.  To me, this defeated part of the purpose for using a third-party system, which was to rely on their established technology. That said, I think in hindsight that we would have been better off long term with a third-party system.  But in the short run, we couldn’t base ROI on reducing our administrative headcount 30%.  That just wasn’t going to happen unless the out-of-system issues I mentioned earlier were resolved.”

SCI: Interesting – if you had to do it all over again, you’d go with a vended solution.

LQ:  “That’s right, especially with the way the business environment has changed in the last couple of years.  Non-core functions are getting cut back, and more jobs are being outsourced.  And I think the vended solutions have continued to evolve and are much stronger now.  Before, we had a well-staffed, responsive IT team almost completely dedicated to us.  We could hire administrators to build a new plan in the system.  The company runs those functions pretty lean now.  More and more, outsourcing of non-core functions makes good economic sense.”

SCI:  Has the company simplified the plans, and become stricter on allowable adjustments and exceptions?

LQ:  “Not really, but I think a vended solution can more effectively address these things.  If you’re paying big bucks for a new system whose success is contingent on these issues getting addressed, well, those things had better get addressed.  Suddenly, there’s a lot more riding on resolving these issues than just background dissatisfaction.”

How do you do this?  What makes the vended solution different?  Certainly you were investing big bucks in your home-grown system to make it work.

LQ:  “The vendors do a very good job at showing off all the application’s bells and whistles.  This wasn’t so compelling for our finance team, because they were comfortable with their own models and access to data.  The sales force was a different story,  though. They had no comprehensive reporting or analytical tools, and were using various one-off solutions. Had we sold reporting and analytics to them, then sales leadership would have been powerful allies in fighting for the required budget.”

SCI:  We hear a lot of companies say that they’re skeptical of vendor demos, because demos are not a good reflection of how the system will run in the company’s environment.

LQ:  “Companies should be skeptical.  Otherwise, people get bowled over by all the cool features and lose sight of the work and the importance of having the right source data necessary to make these systems work correctly.  My point is sales and other functions in the company, like our business intelligence group, had a lot to gain from the reporting and analytical features in the system.  We had a very prominent sales leader who, if he thought a tool was critical, could see that we made it happen.”

SCI:  So sell to your sales department

LQ:  “Yes, if sales has a lot of influence in corporate decisions.  Keep in mind it’s a slippery slope.  If you oversell the system capabilities and then can’t deliver, you may be out of a job.”

SCI: Any other advice you’d provide to our readers?

LQ:  “Focus on one or two core functions, like reporting and analytics, which are really broken in the company today.  Build very detailed requirements on those functions and make sure vendors can convincingly demonstrate how their system addresses these issues.  Use your network to find companies using the application that you’re considering, and spend some time with those administrators and sales people to understand the application’s benefits and tradeoffs.  Take a hard look at where you will be in 3-5 years.  It’s easy to stay with the status quo to get you from quarter to quarter, but is that going to be good enough to meet future business needs? Finally, look at a system as a lever for addressing non-systemic issue, like unreliable source systems or burdensome management processes.  There’s no silver bullet, but a new system can be the impetus for a real transformation.”

A significant amount of our consulting work involves the processes and technologies used to manage sales compensation programs.   We subscribe to the idea that the sales compensation program is not a series of disparate activities, but an integrated set of processes – design, launch, administer, report, analyze –  that should be managed on an ongoing basis.  We’re often asked about the characteristics of average and high performing organizations in this area and how they can be differentiated.     

The first question might be what do we mean by high, medium and low performers?  We can start with metrics such as the time from close of period to payment, accuracy rate, ratio of plan participants to support staff FTE,  number of disputes,  specific process benchmarks (e.g., date quotas are communicated to the field) and infrastructure dollars per FTE.   Many of these metrics vary by industry, company size and distribution model.  As an example, one of our recent surveys found that almost 60% of direct sales organizations process their incentives in three weeks or less.  Three weeks is typically not realistic for a technology company that relies on sales out partner data to pay their sales teams.   In our surveys’ we also ask about the alignment of the process with the needs of the business and the charter of the organization.  

Those companies that tend to benchmark higher against the different metrics and report higher levels of satisfaction with the alignment of their processes do share some common characteristics.   They are more proactive in their approach to managing the sales compensation process.  Their sales compensation teams commonly adopt more of a leadership position within the organization and overall the program is viewed as a differentiator rather than just a cost of doing business. 

Looking at the design process we observe that the higher performing organizations use a published calendar as an established business practice, clearly define and articulate the roles of the people who participate in that process and have a strong governance model.  There is a former owner of the design process within these organizations and significant cross-functional participation; sales, marketing, finance, HR and IT all have a voice in the final outcome.  From a technology perspective, the higher performing organizations are able to model future plan changes using both historical and forecasted data.  More and more companies are also able to run detailed scenarios and easily promote those scenarios into their production environments.   Taking advantage of newly available tools, plan information, quotas, and other job aids are available online and frequently at or before the annual sales meeting. 

For the administration of the plans, we similarly see formally defined calendars, dates that are essentially set in stone, and a clear owner of the process.   While errors are kept to a minimum (e.g., 98% + accuracy rates based on survey responses), almost as important is a clear process for addressing them.   The administration of the plans is an area where we’ve observed significant improvements in the tools available over the last few years; administrators, managers and plan participants are better able to view the details of any compensation payments on a more frequent basis, initiate a question/dispute based on the information and have that question routed to the appropriate team member.    Other advanced tools are now available to the compensation team including querying capabilities, retroactive processing, detailed auditing/tracking and robust reporting/analytics.   Due to the critical nature of the compensation roles, the leading organizations engage in significant cross-training and education for team members.  From a resourcing perspective, we observe plan participant to administration FTE ratios of 250:1 or greater, as well as the flexibility to quickly adapt to an evolving environment and changes in the sales strategy, coverage model and incentive plans.     

We look at six key elements for each phase of the compensation process when helping our clients assess the effectiveness of their own operations:  1) Process steps and deliverables;  2) Organization structure and roles; 3) Dependencies; 4) Resource efficiency; 5) Tool usage and availability and 6) Process flexibility and alignment.  Tool usage and availability can also be broken down further into elements such as data availability, data storage, functionality and fit with the technology landscape.   Each element can be evaluated on a scale of 1 – 5, helping to lay the groundwork for future projects and attention.  Now that the plans have been launched and things have (hopefully)“settled down” before the next design phase begins, it might be time to take a look at how well your own processes support your various stakeholders and needs.