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.

By Elliot Scott

A soccer teammate of mine from high school (let’s call him Ronaldo) now works as a finance manager in a company that manufactures equipment for the construction industry.  With the decline in the real estate market, times have been tough for the company and its sales force.   Inside the company the pressure to change the sales incentive plan is builidng.    

Several years ago, when times were good, Ronaldo’s company changed the sales incentive plan.  They moved from a commission plan (sales people paid a % of revenue on each sale with the commission rate tied to level of discounting) to a plan based on % attainment of an annual revenue quota, measured on a quarterly year-to-date basis.  Since that time there has been a gradual crescendo from the sales force of, “The old plan was better.”  But are the salespeople complaining simply because payouts are down?  Or are they right that for their situation the old plan really is better?  Since I am a student of the game (sales comp, not soccer) Ronaldo asked me if I agreed. 

Being a consultant, my answer was simple and direct:  “Well, that depends….”

The choice of whether to use a commission or a quota-bonus mechanic is one of the cornerstone decisions in any sales comp plan design.  Fortunately, there are a number of rules of thumb to help you evaluate the options, if not come to consensus.  The ones most relevant to Ronaldo’s company are:

1.  Is their sales force a “hunting,” new business acquisition sales force, or is there more “farming,” or account management?  Commission is much more common and appropriate in hunting sales forces where the immediacy of commission is a key lever to attract and retain the appropriate type of sales person.
   • Well it turns out that yes, this is a hunting sales force, and management would like them to be even more aggressive.  Score 1 goal for commission.
2.  Is territory opportunity balanced?  If territory opportunity is even, and it is difficult to argue that any group or region has a far greater likelihood of selling much more than another, then commission works very well.  If not, the use of quotas can level the playing field by managing the inequity in territory opportunity.
   • In Ronaldo’s company, territory opportunity is not well balanced.  Quotas range from $800,000 to $2.5 million.  That’s not enormous variation, but score 1 goal for quota-bonus.
3.  Even if territories are not perfectly balanced, is there an objective and accurate way to measure territory opportunity?  If not, then it will be difficult to set quotas based on anything other than past performance, which increases the perception of the “success penalty”:  If sales people believe that doing well this year will cause their quotas to rise significantly next year, the motivational impact of the plan is diminished and the case for a quota-bonus mechanic is weakened.
   • Ronaldo’s company lacks good data on the market potential in each territory, and quotas are based primarily on the prior year’s performance.  The sales force has a high level of distrust of quotas, not only because the overall number cannot be allocated objectively and fairly to each territory, but also because the overall number has been unrealistic for a few years.  Score 1 for commission.
4. How “lumpy” are the sales?  Quota-bonus plans work best in environments with low variability of sales performance.  If a $2 million quota is expected to be attained with 1,000 sales averaging $2,000 each, a quota-bonus plan is more applicable than in an environment where a $2 million quota is expected to be attained with 2 sales of $1 million each and quota attainment might easily range from 0% to 300%.
   • In Ronaldo’s company, sales range from $5,000 to $500,000, with a few outliers up to $20 million.  If you can manage the outliers, a quota-bonus plan should be workable. However, sales are sufficiently variable during the year to require a quarterly year-to-date quota-bonus mechanic.  This is a common mechanic but adds complexity, further diminishing motivational impact.  Nevertheless, quotas are workable.  So score 1 for quota-bonus.
5.  How important is the sales person’s role in discounting?  Commissions offer a simple and effective way of focusing the sales person on discounting.  A rate table based in whole or in part on level of discount allows a sales person to immediately understand the impact to his/her pocket book from each level of discounting.  With a quota-bonus mechanic, the “line of sight” to discounting is seldom so clear, and often involves the calculation of an overall weighted average discount, that changes with each sale
   • The sales force at Ronaldo’s company has significant influence on discounting in most sales.  Score 1 for commission.
6.  Is it important to balance sales across product lines?  Is it critical for the sales people to sell a certain specified amount or mix of products in order to meet strategic objectives, or manage production or inventory?  Or is achieving maximum revenue at minimum discount the only thing that matters?  Quota-bonus plans do a better job of managing the former.  With a commission plan, the sales person will want to maximize commission on each sale, with little regard for the mix of sales over the course of the year, and will sell to his or her comfort level.
   • In Ronaldo’s company the answer to how important overall sales are relative to the sales of each component part depends on who you talk to.  No score on that one.

Based on my conversation with Ronaldo, and the final score of 3-2, I’d say the sales force has a good case for moving back to commission.  A commission plan is workable in his sales environment and will be more effective at driving the results most important to the company:  new business acquisition and lower discounting.

And while it is true that sales people, like the rest of us, prefer compensation plans that pay them more money, I doubt that is the only reason they prefer the old plan.  In my experience, most sales people prefer commission.  The motivational impact of knowing what you will make for each sale not only drives performance, it also adds interest to the job and a sense of ownership, particularly if you are money motivated and independent…as good sales people tend to be.

The company should also not overlook the following:  (a) Listening and responding to the concerns of the sales force will build credibility, loyalty, and motivation.  And (b) it has been several years since the plan has changed.  The novelty of change and the ability to use the new plan to help communicate and reinforce key sales strategies should both have a positive impact.

As a final note, while a move towards a commission based plan appears to make sense in this case, there are also reasons to retain the influence of quota attainment in the plan.  For this company, the main argument against moving to commission is territory imbalance.  So the influence of quotas should be retained but made secondary.   We’ll address techniques for this in a later post, but feel free to contact me at escott@newsigma.com  if you have a specific question I can help you answer.

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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.

Top Questions — Answered!

We get a lot of questions through this blog and during the course of our consulting work.  Sure, we try to answer all of them in a timely and concise manner.  But this time of year, with Black Friday, plan redesign deadlines and the like, some questions fall through the cracks.  While a few are random (“Is that Tom Cruise pictured on your ‘Show Me the Money’ blog?”), most are quite common, so we’ll attempt to answer the short list of most frequently-asked questions.

1. Team-based incentives — when are they appropriate?

When one individual alone cannot achieve the objective.  Now this oversimplifies things a bit, but it’s a good rule of thumb.  We see instances where a company pays individuals based on team outcomes when it’s really the individual’s contribution that matters.  Yet the company uses a team measure because it can’t measure individual rep influence.  Unfortunate, but necessary in some cases.

In our line of work, the most common application of team-based measures is for global account teams that cover multiple buying influences.  One member of the team can only get the ball so far before having to pass it to a team member.  The company may use MBOs for measuring milestone achievement of each individual rep, but ultimately its the sale that matters and the team must work together to make it happen.

2. Thresholds — when should they be used, and how best to set?

When there is a minimum level of sales required for some level of incentive pay.   How best to set?  The exercise is similar to setting quotas.  After all, a threshold is nothing more than a type of goal.  Difference being, the threshold goal can really rile emotions if set such that too many salespeople fall below the goal.

From an academic perspective, thresholds are part of the payment slope designed to manage the pay distribution.  That is, you’d like there to be a competitive and meaningful difference in pay between a high performer, an average performer and a low performer, assuming all three have a place in your organization.

We see thresholds commonly used in plans for jobs covering accounts or territories with recurring revenue.  Management wants to motivate growth, and avoid sales complacency for earning variable pay on “guaranteed” sales, so it sets a threshold based on this recurring revenue.

An extension of this approach is to set a threshold, but use it as a point to change the rate slope.  That is, pay a discounted rate for the first sale, and all sales up to a threshold performance level, beyond which you apply an accelerated rate up to quota.  The purpose is like an accelerator but below the goal.  Get your reps motivated to push to the next level, and reduce the sting for performance below threshold.

A related question is how best to use a threshold on a cumulative, year-to-date measurement approach (this one’s for you, D.W.).  There is an approach for this, but to adequately explain would exceed my 800-word limit.  And herein lies the problem associated with using thresholds.  The company’s efforts to explain fall short of the salespeople’s capacity to understand.  The simpler approach is to manage performance such that those falling below the threshold earn nothing — no incentive, no base (as Donald Trump would say, “You’re fired”).    Often sales leaders say they’ll do this but do not, thus the logic of a threshold.  And so it goes.

3. Trailers — when and how to use on monthly recurring revenue?

Use only when your competitors do and limit the trail period to (if you can) two years.  Consider using thresholds when you can accurately predict the renewal rate.

We’ve seen a number of SaaS companies pay reps a flat commission rate on 100% of the monthly recurring revenue (MRR).   There’s no trailer, just an annuity so long as customers renew.  After Year 1 or 2 the company discovers it can no longer grow the business with the size sales force in place because reps are making plenty of money off of the annuity stream — they have no incentive to grow the business.

Trailers require the rep to sell new business as the MRR credit from old business trails off.  Simple enough.  Insurance companies have been doing it for years.

It’s a seemingly unfair transition though for people expecting a flat rate on an annuity stream.   And probably tough to fathom for early-stage companies with hungry reps that can and want to double their earnings every year.   Yet at some point the hunger goes away, and the company struggles to grow with its existing sales force.  The longer a company waits to institute a trailer, the more compounded the problem becomes, and the longer the trailer period, the more difficult to align rep and company growth expectations.

Stay tuned for more insights on FAQs.  If we missed one of yours, please let us know.

By Elliott Scott, NewSigma

“It’s not rocket science” is one of the great clichés of incentive plan design.  For the most part it’s true, and when incentive plans start to look like the work of rocket scientists, it’s a good bet the sales force is not on board the spaceship…and may be at risk of alien abduction (or at least poaching by competitors).  But for companies that sell outsourcing services, the challenge of designing a simple and effective sales incentive plan can seem as daunting and unlikely as the safe return of Apollo 13.

The Fundamental Challenge

Incentive compensation in an outsourcing sales environment inolves a fundamental challenge: 

On the one hand, the sales talent and type of sales effort required demands a strong, immediate incentive.  Selling a large, complex, deal to a new customer, possibly based on a new concept or technology, which may significantly disrupt the customer’s business (on the way to enhancing it), is “missionary selling”—hunting of the most challenging sort.  Attracting and motivating this rare sales talent requires risk, very high upside earnings potential, and strong line of sight.

On the other hand, uncertainty regarding the ultimate value of the deal at the time of signing creates a serious risk of misalignment of incentive payments and the real value of the deal.  (Remember Enron?  They sure looked like rocket scientists to me.)

In my experience, every company selling outsourcing struggles with how to pay their sellers and account managers.  There is seldom a consensus among sales, finance, and HR that “we’ve got it right.”  The arguments over whether the plan is too “sales friendly” or too “CFO friendly” can reach a fever pitch.

No company wants a cumbersome plan, but the challenges of sales compensation plan design in outsourcing environments generate a dizzying array of complexities:  NPV calculations, profitability modifiers, contract length modifiers, deal decelerators, clawbacks, milestone payments, draws, commission pools, complex crediting rules, exception review boards, and deus-ex-machina discretionary adjustments.  It’s one of the few industries where the number of plan document pages routinely exceeds the sales headcount.

Questions to Ask

The plan design choices that each company makes can be as unique as the deals themselves and should be informed by (a) the nature of the outsourcing (e.g., asset acquisition vs. managed service, commodity vs. proprietary technology) and (b) the market position and culture of the company and sales organization.  But the questions that outsourcers need to ask along the way to developing their plans are quite consistent:

Pay Mix and Upside

Questions:  How do we (a) provide upside earnings that are appropriate for very large high-value deals, while (b) maintaining cash flow for the seller over a long sales cycle with few deals in the pipeline at any time?

The frequency of deals and payments under the plan should inform your answer.  When you analyze how much a seller will earn from a very large deal, consider the likely frequency of those deals.  A $300,000 incentive payment may not be excessive if it is unlikely to be repeated for several years.  And if payments for deals are stretched out over one or more years, cash flow may be smoother than deal flow, making draws and guarantees less necessary.  Nevertheless, it is probably prudent to have some provision to protect the earnings of effective sellers on an exception basis during a long sales cycle on an important deal.

Performance Measures

Questions:  What combination of performance measures balances (a) simplicity and line of sight, (b) alignment to the role of the resource within the sales and account management process, and (c) the financial and strategic interests of the company?

Typical measures include total contract value (TCV), annual contract value (ACV), contract net present value (NPV), actual revenue over a certain period, revenue growth, renewals, new customers, new products or product mix, contract length, and sales process milestones.

Unless TCV is set in stone, which it seldom if ever is, use ACV with a simple and light modifier for contract length.  Where contracts may have escape penalties, and you would like your sales people to write them in, paying on minimum contract value is also an option.  And remember that paying on actual revenue received will drive account management behavior, which you may not want from your hunters.

Mechanics

Questions:  Given that most outsourcing sales people (as opposed to account managers) are paid using a deal-based commission mechanic, the question becomes not whether to use a commission vs. a bonus plan but whether or how we should modify the commission plan to:

Introduce an element of annual goal attainment, to align sales force performance with company revenue expectations

Account for large differences in the size, length, and profitability of services and contracts

Although the revenue forecast for an outsourcing company may be predictable, the sales forecast for an individual outsourcing seller seldom is.  So tying individual incentive earnings to individual goal attainment can create a lot of frustration and under/overpayment, to say nothing of lobbying for goal adjustments.  Keep goal attainment on a team level and/or use it to determine award trip participation.  Also, don’t be afraid to use higher commission rates for more profitable or strategic services.  Although they may appear complex, they are much more easily understood and assimilated than other plan complexities.

Timing of Credit and Payment

Questions:  How much tolerance do we have for misalignment between incentive payments for contracts sold this year and the revenue and margin those contracts generate in future years?

Based on the role of the salesperson, how should we divide credit between contract signing, invoicing, customer acceptance, cash received, or revenue booked?

If we pay on contract value and true up on revenue received, how should we structure the true up process so that (a) it seldom if ever results in a clawback, (b) it does not extend payment too far into the future, and (c) both the initial estimate and the true-up calculation are as objective and consistent as possible.

Get used to the reality that in a large-deal environment, with some payment at contract signing, there will be misalignment in any given year between incentive payment % of budget and revenue % of goal.  Also, when determining the convention for estimating the value of a deal at signing, use the most conservative methodology that is reasonable.  You will save yourself a lot of trouble if the value of the deal at the true-up point always turns out to be more than the value estimated at signing.

Sharing and Adjusting Credit

Questions:  Of the many individuals who can reasonably claim to have been involved in a sale, which ones should participate in the actual commission from the deal, which ones require some recognition or incentive outside of commission, and which can be told, “thank you for doing your job”?

And how if at all should we adjust credit for deals made at the corporate level, with less sales person involvement or influence?

Remember that once you add on incentives it is hard to take them away.  Many plans for roles that are not primarily sellers become encumbered with complex add-ons that generate commission and administrative workload but do not drive behavior.  And as for corporate deals, while it is seldom necessary to pay a windfall to a seller who did not drive the deal, you don’t want a plan that discourages sellers from involving senior management.

Account Management Incentives

Questions:  How much pay at risk is appropriate for our account managers, given the selling vs. operations focus we are trying to drive?

And will specific add-on incentives for account managers drive the behaviors and results we want, or should account managers be paid entirely on the revenue growth of their accounts?

There are a wide variety of pay schemes for outsourcing account managers, from straight salary to highly leveraged plans with multiple commissions.  It all comes down to what you want your account managers to do.  Account managers may envy the high commissions that sales people earn in their accounts (because of the good account management work they do!) but if their primary responsibility is account retention and revenue retention, the pay plan should reflect that.

Beware:  It is not easy to get a consensus answer to these questions, and you can be sure the answers will be re-visited frequently.  But finding the answers that are right for each company at a given point in time, while keeping complexity to a minimum (“elegance” is too much to ask for), is the key to an effective but manageable outsourcing sales incentive plan.

This is a big week as far as corporate earnings are concerned and, of the S&P 500 companies that have posted results, 83% have topped analyst estimates. Apple announced $20 billion in revenue this quarter -  a new record.   We observe this trend within our clients as well.   More discussions around investments for growth, hiring and new sales roles.  For those companies thinking about next year’s plan designs, one common question involves the right balance between bookings and revenue.   There are several considerations and potential trade-offs: 

Bookings measurement:  Motivates new customers and new opportunities, creates a clear line of sight between selling activities and incentives, can result in negative cash exposure

Revenue measurement:   Aligns incentives with the company financials, creates a linkage between selling efforts and delivery of the company’s products/services, can result in hunters becoming account managers, at the expense of new business

As with most incentive design questions, the right answer begins with the role of the sales person and how it supports the coverage model.  For those roles where salespeople are expected to close the deal and move on, and the risk of cancelled orders is low, a bookings measure might be very appropriate.  For those roles where salespeople are primarily responsible for growing existing relationships and winning a contract does not guarantee the revenue will follow, the most appropriate metric might be realized revenue or profit.   Below are a few examples of how bookings and revenue can be balanced based on the specific role of the sales person:

o   50% of target incentive on realized financial results

o   25% of target incentive on new bookings

o   25% of target incentive on strategic products

o   70% of target incentive on revenue (rather than cash), with finite crediting term

o   30% of target incentive paid against a booking goal

o   60% of target incentive on expected first year revenue

o   20% of target incentive on new account wins, with kickers for initial contract size

o   20% of target incentive on key sales objectives

As companies balance the tradeoffs of new business, financial requirements and ongoing relationahip management, other considerations for selecting the right performance measures should include: Emphasize financial outcomes that align with the business goals, ensure the job has a high degree of influence over the outcome, define measures and goals that reflect competitive practice and ensure systems can provide timely, accurate reporting. 

By Elliot Scott, NewSigma

As a sales organization matures, a number of things can happen that make the original commission-based sales incentive plan increasingly problematic.  So it is not uncommon for companies to transition to a goal-based plan over time.  Mike Meisenheimer covered some of the related issues and options in a two-part series on the topic (http://salescompinsights.com/?s=from+commissions+to+a+goal+based+plan).  But while it is much less common for companies to move in the other direction—from a goal-based plan to a commission plan—it is sometimes the right choice.

What’s So Great About Commission?

It’s a fact of life that commission plans are more motivational.  “If I sell this I earn that” is a lot more immediate than “if I sell this, I retire x% of quota, which according to the payout table may get me an incremental 3%, 5%, or 10% of my target incentive at the end of the period depending upon where I end up on the payout curve.”  That immediacy can really drive sales results, particularly in aggressive, hunting-oriented sales organizations, which is one reason why they often bend over backwards to use commission.

When Your Goals Have No Credibility, One Option Is to Get Rid of Them

I recently helped a company assess and ultimately implement a transition from a goal-based plan “back” to commission.  One of the drivers was that the goal setting process had no credibility with the sales organization.  The plan measures and mechanics were sensible and in fact the goal-setting methodology was objective, data-driven, accurate, and surprisingly fair.  But the company had failed in making the methodology clear to the sales force and disproving the perception of a success penalty, i.e., “If I exceed my goal, I’ll earn some upside this period but I’ll be saddled with a much higher goal going forward, making it harder to earn even target incentive for some time to come…so why bother?”  Okay, while it is true that increasing sales tend to lead to higher quotas (as to some degree they should), the perception of success penalty is often overblown, as it was for this client.  Nevertheless, if the goals are not perceived to be fair, it hardly matters if they are.

The sales people fully understood that territory sales and potential were uneven, and would remain so, so any commission plan would probably favor the larger territories.  But they craved the immediacy and transparency of commission.  Even the sales people with smaller territories told us they would prefer commission.  Being good sales people, we could expect them to shed persuasive tears about how unfairly disadvantaged they were, but they made it quite clear they would rather control their own destiny than hold their earnings hostage to management’s black-box estimate of a fair goal.  (It should be noted that this was an aggressive sales organization, with high pay mix.  It recruited the type of independent, “coin-operated” talent for which commission is particularly attractive.)

The Results Are All That Matters

With some hesitation, we designed and implemented a new plan that was not in any way tied to manufactured territory goals.  We did so in a way that sought to minimize the effects of uneven territories, utilizing some mechanics that “taste like” commission but are a few steps removed from 5% of sales for everyone.  Most importantly, the new plan was simple and transparent.

When we came back halfway through the new plan year to audit the results, we wondered what we would find.  Moving from a goal-based plan to a commission plan is not something sales compensation consultants generally recommend.  But it was clearly the right thing to do for this client at this time.  Despite the problems inherent with commission, the plan had been very well received.  The reps were hungry and engaged, and the company was above target for the first time in years.

About The Author

Elliot Scott has 15+ years experience as a sales compensation and sales effectiveness consultant, with Towers Watson, The Alexander Group, and ZS Associates.  Elliot has worked for clients large and small in dozens of industries, leading both global and domestic projects and is a recognized leader in sales incentive plan assessment, design, and communication.  He can be reached at escott@newsigma.com.

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