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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.

Top Questions Answered

This season’s brutal weather hasn’t slowed the number of questions from incentive planners and sales leaders.  Team- and goal-based plans are common themes.  We’ve handpicked a number of related questions from our mailbag, and hope at least a few are on your list of open questions.

Q: What is the ideal mix of individual and team measurement?

A: The ideal mix is consistent with the mix or relative share of the job’s responsibilities that are individual versus team-based.  In our experience team-based measures often take the place of what should be individual measures because either the company cannot measure individual contribution or it wants to avoid internal competition.  Good use of team measures is when the job carries responsibility for a goal that cannot be executed exclusive of other team members.

Q: Can one plan do all?  If a company has both Key Account Reps and Territory Reps, how common is it to have different plans?

A: Not effectively if the company has dissimilar requirements across the jobs considered, and the market requires different cash targets.  It’s for this reason that most companies have different plans to serve a diverse set of sales jobs.

For example, the requirements for a Key Account Rep and Territory Rep could be the same.  That is, base salary and target incentive, performance measures and pay frequency could be identical.  While in our experience we find the performance measurement similar – sales volume in either absolute or relative to goal, the pay targets are not.  Key Account Reps typically have a more-defined pool from which to fish versus the Territory Reps where the variability across territories is higher.  This means the Territory Rep carries a higher risk/reward proposition (higher incentive target as a percent of target total cash, higher upside potential).

There is an age-old debate around what constitutes a different plan.  This is a communication and administrative issue.  We say, if a sales manager can explain the plan to both audiences simultaneously, your one plan for different jobs passes the test.   Or if you can use an identical set of requirements in your system for paying both jobs, with only differences on your rate tables, your one plan passes the test.

Q: Given sales reps often have “unequal” opportunity with respect to their existing customer base, number of customers, type of customers, markets, etc., how do you effectively “level” the playing field among various reps?  

A:  This scenario is one of the strongest arguments for a goal-based incentive program.   With a goal-based approach you set a target incentive commensurate with the role and skill level.  Let’s say Scott and I both have a target incentive of $25,000.  Our goals might be very different, taking into consideration the factors your reference in your question.   If we both meet our goals we earn our $25,000, regardless of what our goals are.   The transition from a commission program to a goal-based incentive approach is one of the more challenging that we observe given the financial and cultural implications, but long-term it can be one of the most productive.

Q: What is the preferred approach for allocating quotas?   Is this typically a process of mutual agreement between the sales rep and management, or is it something that management enforces unilaterally? 

A: Goal setting approaches vary by industry based on the availability of data, go-to-market model and selling roles.  That said, we find that the most effective approaches use a combination of bottom-up and top-down input.   It is common for there to be a gap between what the salesperson says she can do and what the company requires in terms of performance.  While not a negotiation, there should be a clear and equitable set of logic used to close the gap.   Perhaps the most important characteristic is that the salesperson understands their quota, how the gap was closed and how it ties to the overall success of the organization.  Regardless of which approach is used, if the sales manager can’t explain it to their team, the goals will be viewed as arbitrary and unrealistic. 

Q: For goal based incentive plans, would you expect a normal distribution of performance, or a bi-modal distribution?

A:  When the goals are set correctly we would expect to see a normal distribution of performance.  The range of performance varies somewhat by industry, business model and selling role.  The company’s approach to goal setting – promote a culture of winners, 100% is stretch — also play a role.  The rule of thumb we use is to strive for a bell-shaped curve with approximately 60% – 70% of the plan participants achieving their objective.   With this type of distribution, the field force typically views the goals challenging, but realistic – a key characteristic from our perspective.    What varies then is the spread of the curve.   Consider a consumer product goods (CPG) manufacturer and software company.  We expect a narrower range of performance outcomes for salespeople in the CPG organization..  Most software firms have greater variability in the business, and software salespeople experience a broader range of quota-achievement outcomes versus those in CPG.    A final point, we recommend accelerators and thresholds, if included, be set with a goal of 90% percent of the population earning “some” incentive dollars and 10% earning a significant payout, in line with your industry’s pay benchmarks. 

Q: With goal based incentives, do you advocate setting annual performance goals, or goals with shorter time-frames?

A: In general we observe shorter performance cycles (e.g., monthly) as more effective for promoting line of sight and urgency.  However, in businesses with complex, long sales cycles and infrequent but huge deal values, each month in isolation says little about performance success.  In such circumstances annual goals are typical.  To gain the benefit of more frequent performance periods, management will often tie quarterly milestones and cumulative performance to annual goals.  Rarely do we see performance cycles beyond one year due to fiscal reporting norms.

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.

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

Events playing out in the banking industry over the past 18 months serve as a reminder of how government regulation over sales and marketing can impact incentive practices.  The scenario is a familiar one to those in the retail investment and medical device industries.  There are lessons from those industries that now pertain to regional banking, or any other business, that must motivate its salespeople to sell while adhering to government regulations.

If there’s a silver lining in all this it’s that well-managed, effective sales compensation programs typically use a set of principles to guide specific practices, like which components to use in the incentive plans, and who makes what decisions regarding plan changes.

Regulations pertaining to pay usually come in the form of principles or guidelines.  In the banking industry, the Federal Reserve (Fed) and related agencies recently released its guidance for banking incentive comp practices.   Typically these memos are vague yet consequential.  If ignored, companies under jurisdiction of the agencies face enforcement action and bad publicity.

It’s no surprise then that over 85% of regional banks participating in a recent NewSigma/Varicent survey said federal legislation has had some or a significant impact on the bank’s incentive comp approach for front-line sales and service (non-executive) employees.   That leaves more than a handful of institutions trying to figure out what to do.  For those banks having taken action, many still question how best to design and manage their sales compensation plans in a way that meets the guidelines, but still promotes business growth.

Part of the dilemma when considering these and other regulatory principles is they seem to be in direct conflict with traditional principles of sound sales compensation design.  We think there is some common ground, however.

Let’s take the first principle in the Fed’s recent guidance for banks: “balanced risk taking.”

Management in all industries must strike a balance between risk and reward in the compensation plan, and use the pay mix – the amount of cash pay that base salary versus variable – as the primary lever.  The more pay that is variable, the more risk a salesperson bears in the form of income loss from poor performance.   While a higher base salary mix shifts this risk to the company, it mitigates the risk of bad behaviors that can come from lucrative upside pay.

The most common incentive plan change we observe following regulatory intervention is a reduction to the variable pay mix.  With some extreme cases aside (e.g., residential mortgage brokers), we think this is a mistake in banking.  Mix levels for most sales positions in the industry were below those for comparable jobs in other industries — before the credit crises.  Banks capped the upside pay for most if not all of these jobs, so that instances of bad behavior stemming from lucrative upside pay were remote.  The bigger problem was and still is lack of urgency by the salespeople due limited variable pay mix/risk.

Another risk comes from the misalignment of goals between the salespeople and the enterprise.  E.g., salespeople make a lot of money while the company posts a loss.  A common lever for balance is to link a portion of the salesperson’s variable pay to organizational goals, like company operating margin.  Like a reduction in variable pay mix, this shift reduces the amount of pay tied to the salesperson’s individual production.  Thus, we’re not fans of this practice, either.

Alternative practices for strengthen goal alignment include the use of qualitative, or risk-adjusted, performance measures.  The principle is to measure and pay based on the quality of the transaction or deal.  There are two general approaches for doing this.  One is based on net present value, the other on actual performance of the asset at some later point in time.  Both have tradeoffs.  Qualifying performance at the time of the initial transaction involves some guess work and can over or underpay relative to the asset’s performance over time.  We like this approach though because salespeople responsible for the transaction know up front the value of each type of deal.  We find the reconciliation approach cumbersome, particularly when “clawing back” amounts previously paid.  It makes an incentive opportunity increasingly ineffective as the time horizon, or number of variables, used to value the asset increase.

The whole point of an incentive plan is to motivate people to perform, and present real consequence when they don’t.  Reducing the variable mix, or tying variable pay to organizational measures, misses this point.

More to the point is how management defines performance.  Indeed, the amount of pay at stake can certainly drive behaviors, both good and bad.  But the sales transactions that contributed to regulatory outcomes weren’t good ones that became bad because of pay opportunity.  Paying less on these sales would not have made them better deals.

Banks and other industries faced with regulatory pay guidelines can strike a balance between paying for performance and for responsible behaviors by focusing first on the job roles and underlying performance expectations.

In our next discussion on the topic, we’ll provide an incentive-plan perspective on the the Fed’s other two principles recommended in its recent guidance.

And if you haven’t already devoured the Fed’s 47-page guidance memo, let us recommend some weekend reading:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100621a1.pdf

Welcome to our blog. 

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

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

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

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