SalesCompInsights

By Scott Barton and Matthew Zink

As we have written numerous times on these pages, quota attainment distribution is a critical diagnostic for a goal-based incentive plan.  The shape of the distribution and its position relative to target attainment impact both the plan’s motivational capabilities and its ROI.

Consider an example:

• Company A sets a goal for its sales organization to produce $100 million in revenue.  It models a normally-distributed, salesperson-attainment scenario to test the impact of pay mix (ratio of base to incentive target pay) and pay rate accelerators on total comp expense.
  • Under the “model” scenario the company pays 113% of its incentive budget at 100% attainment, due to its use of accelerated payment rates for salesperson attainment above 100%, and the model scenario placing approximately half of the sales population into accelerators;
  • Its compensation cost of sale, or CCOS, is 4.26% — i.e., Company A is spending 4.26% of each dollar of revenue on sales comp under this scenario.

•  In a wide distribution scenario, the company experiences an increase to the deviation of salesperson quota attainment – i.e., the left and right edges of the distribution curve grow outward.
  • While the company generates no more revenue in this scenario, it spends more of its incentive budget, due to more salespeople earning at accelerated payment rates;
  • The scenario also produces a less efficient CCOS, given the increased number of salespeople performing at low attainment levels, yet continuing to earn base salary.

• In a third scenario the company experiences an upward shift in average performance, such that all salespeople produce 5% more than what the company modeled under the normal scenario.
  •  Due to its accelerators, the company spends more as a percent of incentive budget than under the normal scenario;
  • The higher cost is at a lower effective rate (CCOS) than under the wide scenario, because revenue increased at a higher rate than comp expense.

• Finally, a forth scenario, and an unfortunate one, is where the average attainment is 100% of revenue target but the shape is bi-modal.  I.e., instead of one, normally-distributed curve there are two – one centered at the lower end of the performance continuum and the other at the upper end.  Think of a two-humped camel, or the tale of two cities:
  • The lower-performing camp produces relatively-high fixed cost as a percent of revenue due to base salary;
  • The higher-performing group produces relatively high variable cost as a percent of revenue due to accelerated payment rates;
  • There is no middle group to offset each, extreme group.

From a purely budgetary perspective, Company A prefers the normal distribution scenario, which provides the lowest spend rate as a percent of incentive budget and revenue.  However, the company’s sales management has a different view.  The wide scenario provides more extreme examples of performance, and pay:

• High performers pull down big pay checks and serve as a source of inspiration to average performers;
• Poor-performing reps opt out of the program (or company), saving sales leadership pain and hassle associated with administrative, “performance-management.”

Obviously, for the sales management, the right-shift scenario is preferred – beat the goal and increase the number of salespeople over quota.  But beyond some point of goal attainment the sales organization’s success carries both short- and long-term consequences.

Short-term Company A – and this is a real example – is dealing with the fact that its overall corporate growth and profitability in its last fiscal year fell below analysts’ expectations, even though a large portion of its sales organization exceeded 110% of their quota. 

How is this possible?  Goals defining company success and sales team success are not aligned.  Misalignment usually stems from: 

• Under-allocation of goal, which is the practice of assigning to the sales team a level of quota that falls short of the corporate goal;
• Excessive use of measures and goals that enable the sales team to earn what they view is sufficient pay, even when their performance on the primary goal of revenue or margin falls short.

Longer term, companies that celebrate sales team success but fail to meet Wall Street’s expectations must take radical steps to get salesperson pay and performance in line with corporate results.  Ultimately the sales team must perform more, or earn less.

The prospect of earning less doesn’t sit well – with salespeople in particular.  Therefore, sales leaders need to ensure the sales compensation program uses measures and goals that align with corporate requirements, and that the resulting performance of the sales team and the company is aligned as well.  Other components of the comp plan, including target pay mix levels and payment rate accelerators, help fine tune the pay-and-performance relationship at difference levels of average attainment. 

The cost of poor quota setting and alignment can be substantial.  In our Company A example, the firm spent about 10% more than the modeled result at 100% average attainment, enough to employ at least four salespeople.  Another scenario could have been an average attainment below 100%.  This outcome better aligns pay and performance as fewer, highly-leveraged salespeople exceed goal.  The cost here, while difficult to measure, can be high as well, as salespeople perceive they can’t meet their income expectations because the company sets its goals too high.

Tales and Tribulations in Retail Shopping

One of my first jobs was a shoe salesman in a mall store.  What motivated me?  It wasn’t the money – horrible.  It wasn’t the job content.  I could have cared less about shoes.  Rather it was a way to make a little money while I socialized with friends staffing other retail shops in the mall.  This was long before Facebook.  What else was I to do?  I took the job because the chain’s district manager sold me on the idea that I could make a lot of money selling shoes.  Didn’t hurt that he arrived to our lunch meeting in a new BMW.  His proposition didn’t pan out.  I lasted about six months.

Don't Try This at Home

Why do I share this unfortunate chapter from my past?  We get that life is difficult for the retail store sales clerk.  It’s tough for their employers, too, with turnover at many stores ranging from 200 to 300 percent.  Is this a reasonable cost of doing business, or a decent tradeoff for low prices or convenience?  Maybe so for some environments, but not businesses that require motivated, knowledgeable and courteous sales staff.

Take this scenario.  Wednesday afternoon Mike and I are killing time at the Philadelphia airport and come across a Blackberry store.  Prominently displayed is a new Playbook, RIM’s answer to Apple’s iPad.  Mike is a dedicated Blackberry user and appears particularly interested.  We start fiddling with the thing, and can’t, after about two minutes of trying, get to a web page.   All we see on the screen are photos taken by other shoppers/travelers.  By the looks on their faces, they, too, struggled to get the Playbook “playing.”

We strolled to the other side of the store, where another Playbook sat perched on a stand.  This one had what looked like a browser on its screen.  We try in vain to locate a search or address window.   All we get is a “Windows Live” login screen.  There’s a seemingly useful menu bar that sporadically appears on the screen’s header but when pulled down disappears.  Ever get a contact lense stuck behind your eye ball?   “This sucks,” we say, and walk off.

Our experience with the Playbook was short lived.  The store clerk seemed unconcerned.  Maybe she thinks the device sells itself (it doesn’t), or that we already own iPads (we don’t).  Whatever the case, she may have been able to salvage the situation…and did not. I expect that in situations where the product could use a little help to capture hearts and minds that someone is there to sell it.  Playbook needs, in its current form, a few good salespeople.

I’m loathe to use “best practice” examples, because of the “yeah, but” responses these examples might elicit.  But here it goes.

I don’t mean to pick on airport vendors, but a little kindness goes a long way.  After all, most people in airports are grumpy, and they have plenty of options for food, drink and general time-killing.  Take this sandwich shop in DEN.  I use its name, Paradise Bakery, to promote its business.  Recently I walk up to the counter and am blown away by how friendly, efficient and seemingly grateful the guy on the other side is for my business.  “Yeah, but he’s probably the owner.”  Good call.  Though I observed he wasn’t the lone friendly guy in an otherwise surely operation.  If anything he was setting a good example for the others.

Take another example: the now defunct WaMu.   Management there, in the bank’s hay day, concluded that losing a newly-hired-and-trained teller after six or eight months wasn’t good business.  The bank had spent all this money to make their branches look like an employee breakout room at EBay (lots of open space with colorful, creatively shaped chairs and little tables).  So why have the cool branch experience ruined by a service representative who could give a flip?  “Yeah, but WaMu got seized by the Feds – its management is being prosecuted.”  True.  But let’s separate the unsavory lending practices from the solid execution on the retail floor.  WaMu determined it could increase engagement and reduce turnover by paying more and demonstrating to tellers that this tough, first occupational step could lead to a meaningful career.

When the news arrived hard and fast that WaMu would cease to exist, I’m sure many of the tellers felt like I did a few weeks into my shoe-salesman career – this isn’t turning out the way I expected.  But many of these folks did continue on a path toward a meaningful career in banking, with Chase or another institution admirable of WaMu’s practices in this area.

Takeaway?  In an increasingly electronic, mobile, Facebook-Google-Amazon-Groupon marketplace, face-to-face customer experiences matter more than ever.   As a business person, who do you want facing off with the customer?  We’ll take the knowledgeable, engaged salesperson every time.  Sure, they cost a little more, but it’s a cost of doing business.

RIM Playbook, R.I.P.

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. 

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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.

On February 24th, Scott and I conducted a web presentation with Steve DeMarco, VP Worldwide Sales with Xactly.   540 people registered for the session and the week prior we distributed a flash survey on 2011 sales productivity trends.   83% of the respondents expect slight or significant growth in 2011.  Whether this reflects increased optimism or simply the “plan” they were given (assuming the two aren’t one in the same) may be cause for some debate.   Similarly, we may not know where the economy as a whole is heading, but at an individual level these companies expect improved results in the coming year.    We observe the same expectations with sales leaders we have spoken with recently.   Whether it is do or die, improved optimism or simply a requirement of the Board, fewer and fewer Sales VPs are talking about retrenching or holding their own.  They’re focused on taking advantage of an improving environment, investing in their sales force and growing the top line. 

We see this reflected in the allocation of quotas as well.  68% of the respondents raised or are raising quotas for their sales reps.  Another 12% indicated that while they may not be raising quotas, they’re increasing headcount in support of the growth objective.  

Unrealistic quotas are a common complaint regarding the incentive program.  Goal setting approaches do vary by industry and specific company based on the availability of data, go-to-market model and selling roles.  Having said that, we find the most effective approaches use a combination of bottom up and top down input.   For there to be a gap between what the salesperson says she can do and what the company requires in terms of performance shouldn’t be a surprise.  While not a negotiation, there should be a clear approach and explainable logic for how the gap is closed.   Perhaps the most important requirement is that the sales person 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 unfair.

Leveraging the Power of Sales Compensation

After a global economic meltdown we’re not surprised to hear increased questions about the utility of sales compensation.  Let’s face it.  Planning and managing sales compensation plans can be pretty painful, particularly when the business cycle is in decline.

Think of sales comp plan design and management like playing in the stock market.  Over time, sales compensation typically provides a strong return on investment.  Occasionally you can get burned, but sit on the sidelines when the market is gaining speed, and you’ll fall behind.

A good industry for this does-it-matter topic is semiconductors, where many firms do not use traditional sales compensation programs.   Instead they rely on company stock, profit sharing or discretionary mechanisms to compensate the sales force.  The semiconductor environment presents a challenge for sales compensation. Sales cycles can be over a year, and each deal represents the epitome of a solution sale – very custom and specific to a particular customer situation.  Measuring sales influence is another industry challenge.  Reps in multiple regions can influence a single design win.   Management typically measures sales contribution at the team rather than individual-rep level.

Several years ago we worked with such a company; variable cash pay for salespeople wasn’t a factor.  Generous option grants and the company’s high-performing stock fueled the compensation program, and cash incentives came in the form of management-by-objectives (MBOs).

The company reached a point in its growth where equity was neither reliable nor sustainable as a primary driver of variable comp.   To attract and retain sales talent, management needed the cash program to stand on its own, and link more closely to how the company made money: design wins.

The MBO approach paid consistently to the point where most reps expected to earn 100% of target – no more, no less.  In the view of the company’s VP of sales, the MBO approach coddled poor performers and short-changed the high performers.   The VP wanted more variability in cash pay to align with what he knew were different levels of contribution across the sales organization.

By moving to an approach that tied incentive opportunity to annual design-win quotas, management could justify higher pay for high-performers than was prudent under the activity-based, discretionary MBO approach.  This transition happened in stages.  As the company acquired more historical performance data, its confidence in setting reasonable rep-level quotas increased.  Gradually, it moved to a more pay-for-individual-rep-performance approach.

The transition was tough for many of company’s sales managers, who had enjoyed the relative simplicity of team-based, discretionary incentive approach.  Individual quotas required that sales managers analyze sales data for purposes of allocating quota and assigning sales splits.

The upshot in acquiring and analyzing sales data is management has become more educated on the business.  Sales reps and various levels of management can discuss progress in objective terms, using revenue and pipeline progress as common measures of performance.  As more data come into the system, the company has increased its investments in technology to automate functions like quota allocation.  Managers can focus more on outcomes and implications, and less on number crunching.

The results speak for themselves.  In the first year of the quota-based approach, the total number of design wins increased, as did the size of each win.  Performance has increased each year since.  While the company had always prided itself on attracting and retaining top-tier sales talent, its maturation from a pay system characteristic of an early-stage startup to one more common in a $6 billion, Fortune 500 firm happened with very little sales turnover. 

The company’s head of sales operations offers this advice for managers preferring use of a low-risk, MBO approach.  “Our best salespeople are risk takers that need stretch goals to perform.  Using a goal-based incentive compensation program is the most reliable approach for attracting these types of salespeople, identifying areas of sales weakness and growing year over year revenue.”

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.

SCI Turns One, and Steven Levitt Sends Us a Gift

One year ago we started a blog.  Our purpose was and remains to this day: exposure.  That is, to expose the mystery and audacity that surrounds the subject of sales compensation and incentive management.  Not beyond audacity ourselves we launched our blog with the gratuitous headline, “Are Incentives Dead?”  Pure nonsense of course but you’d think by reading the real headlines of the day that incentives were on their way out, given what they did to the economy and all.

One year later the Dow is scratching at 12,000, and incentives are alive and well.   Yet the madness continues and we’re grateful for folks like Steven Levitt, author of “Freakonomics,” for providing us material we can poke holes in.  He, too is not beyond the flaunting of silly headlines, beginning the speech featured here by saying incentives don’t work and what does is tricking employees into thinking what they do matters.

                http://www.youtube.com/watch?v=FdkQwQQWX9Q&feature=related

The weakness in Mr. Levitt’s argument is that he confuses incentives with entitlements via a turkey (no kidding) and offers patronage as an elixir for worthless workers.  The final straw is his case study: Google — as if anything Google does can be easily replicated.  He makes Google out to be a bastion for its users’ privacy.  Freaky indeed.

So let’s break this down.

• Incentives don’t work because payees, after receiving their first chit (e.g., a turkey), forever feel entitled, and even cheated if the subsequent award is not larger than the first. 
• There’s no meaningful application of a “stick” relative to a carrot because employees, when faced with a stick, will quit (“slavery is illegal,” he informs).
• Better to, rather than offer a carrot, “trick” employees into thinking what they do actually amounts to something.
• Google employees, motivated by the company’s values, believe it’s more important to keep customers’ data safe than to prevent the next pandemic.

Our rebuttal:

• Incentives are not entitlements.  Entitlements motivate loathing and bitterness.  Incentives motivate performance.  An employee can’t rightfully expect an incentive without having performed first.
• Sticks work.  Fear and risk of income loss can be as motivating as the opportunity for upside.  We don’t, however, promote beatings.
• Trickery in the workplace is counterproductive.  A spiteful coworker once put refried beans on my phone’s earpiece which cost at least 10 minutes of otherwise productive time not counting my scheming for revenge.  Really, can Levitt be serious on this point?  We believe it’s good practice to express appreciation for one’s hard work, and bad practice to make a deadbeat feel like they’re actually of value.  Levitt makes it sound as though you have to trick employees into thinking they contribute because they really don’t and then maybe they will (I was tricked into believing my earpiece was bean free when in fact it was not).  This stuff has no place in the workplace.  We say “stick” rather than “trick.”  If the unproductive non-contributors don’t quit, fire them.  Give tricksters twenty lashes.
• And seriously, Google employees taking a bullet before leaving the door ajar on your personal data?  Or using it against you.  I’m fearful just mentioning the mighty G in vain less I suffer broken kneecaps from their hired goons who are following my every keystroke.  Apparently Mr. Levitt, in all his work with Google, somehow missed the parade of perks ranging from morning mango-rub massages to afternoon hand-crafted beer bashes, with Jimmy Buffet working the tap.

Speaking of Google (I’m living dangerously here), a fellow consultant who had been doing a lot of work there, appeared in our office one day looking dejected.  “What’s wrong?” I said, obvious to her absence of perky demeanor.   “I went to get an Odwalla smoothie from a case at Google yesterday and saw in its place a coin-operated machine.  They’re making you pay for these things now.”

Why on earth they would do that, I wondered.  Terribly un-motivating.   Perhaps it was on Mr. Levitt’s advice, to fend off a groundswell of employee anger for eight ounce bottles not being replaced with half-gallon jugs, and so on.  Whatever the reason I was so certain this move was a bad one that I sold my Google stock. 

It closed at about $300 a share that day.  It’s above $620 now.  And Levitt probably sold 5 million copies of his book since then.

No matter.  We stand our ground on good incentive design principles and call out any cheap shot to grab attention, using blatantly-untruthful pronouncements like, “Incentives Don’t Work.”

Putting the Horse Before the Cart in the Utility Industry

Recently I exchanged messages with a colleague who was disappointed that her sales compensation design initiative for 2011 got stalled.  “All that work and nothing to show for it,” said the director of compensation for a fast-growing, mid-sized software company.  “They just weren’t ready to pull the trigger,” she said of senior management on what would have been a major change for a field-based team of technical specialists.

Those of us in the sales compensation profession often take such change requirements for granted.  Yet the pay plan governs how salespeople earn a portion of their total cash, cash used for mortgage payments, school tuition, weekly groceries, and the like.  While a change to the program might not influence the actual cash earned, the salesperson perceives he or she must now change their daily routine – difficult for anyone, and in particular for a relatively autonomous, confident sales professional.

No less challenging is the case where leadership requires behavioral change from a team of field professionals thinking of themselves not as salespeople, but rather account managers or some job role other than sales.  The utility industry provides a keen example. Take large energy utilities, like Southern California Edison, Pacific Gas and Electric Company, Florida Power & Light or Southern Company.  Historically, account managers maintained service-based relationships with large commercial users to cover rate schedules, address service issues as they came up and inform customers about the availability of various voluntary programs and services.  There was no “selling,” so to speak.  Yet with the advent of customer choice in more recent times, and an ever increasing emphasis on energy efficiency and renewable resources, utility companies started facing many of the same pressures found in competitive industries.  This included the need to motivate or change customer behaviors; field sales, or…um, account-management, was an obvious lever for doing so.

Bob Kinert is a 30-year veteran of leading sales and service organizations in the utility industry.  He reflects on a campaign at one of the nation’s largest investor owned utilities that hinged on its field account managers convincing customers to adopt discretionary programs, like energy efficiency, and demand response.

“Essentially, these are consultative sales roles: listen to the customer, understand their issues, develop and present the customer with solutions and influence them to take the desired action–help the commercial customer realize they can be more competitive if they change how the manage their energy.”

These non-threatening concepts can meet significant resistance when applied to an industry and culture that views itself as being all about service with little or nothing to do with sales.

“You’ll get an account manager that will say they’re not a sales person,” Bob continues.   “Their perception of sales is outdated and not positive.”

The irony is these professionals routinely do many of the things a salesperson has to do under the mantle of service.  What’s often lacking though is some of the key sales skills imbedded in the sales process.

In working through the transformation at a prominent Fortune 200 utility in California, Bob focused first on the process and skills enhancement, long before any consideration for changes to the compensation approach.

“We had to get people to realize they’re in a consultative selling role, without alienating them.” 

This meant focusing on organizational and individual sales capability as well as change management without overemphasizing goals and outcomes.  Good service representatives know how to establish relationships and deliver on customer driven needs, but don’t necessarily follow a structured process for proactively seeking out and capturing every opportunity. 

Each step of the transformation, compensation included, is contingent on the cultural shift.  And the shift isn’t one sided – i.e., management can’t expect to pull the account managers over to their side while holding their own position.

“Each side has a range in which they are willing to move.”  Bob references “Latitude of Acceptance,” a crucial part of the Social Justice Theory (SJT) that deals with people’s change in attitude.  “For a lot of managers, the pace of change may be slower than preferred, but for the account managers, a more gradual approach is simpler, less risky.”

Regarding a new, risk-based compensation approach, Bob expected the transition to be a gradual process as well.  “We had to see the culture shift first, and then introduce concepts such as market potential, goal-setting logic and goal reasonableness.”

I worked with Bob during this period to help design a new sales compensation program.  It was, relative to other engagements, a far more inclusive process with field management, very data driven, and conducted at a much slower pace.  Bob’s mantra was, “You have to involve the people who will be impacted by the change in the change process.   Sales compensation isn’t something you can craft behind closed doors.” “Go slow to go fast.”

As a result, the utility account managers accepted the change in the approach to compensation, taking it in stride with little fanfare.  As anticipated, some veteran account managers embraced and leveraged the compensation opportunity more than others and did quite well.  Not surprisingly, new people hired into the organization from the outside with a consultative sales mindset tended to benefit the most of all.   

I thought of how the lessons from Bob’s experiences applied to my colleague’s situation at the software firm.  She shared with me that leadership kept a tight lid on its plan to introduce the new, at-risk compensation plan, for fear of “spooking the herd.” 

“But people found out about it anyway, and what they heard wasn’t always accurate.”

The concern boiled up through field management to the company’s senior leadership.  Leadership’s initial reaction to this feedback was, “We’re going to do this, and the reps will just have to accept it.” 

So the work on designing a new compensation plan continued right through December.  But eventually the leadership believed that flipping a switch to an at-risk compensation plan would alienate the team, and felt the company couldn’t risk this group alienating customers.

“We tried to move too fast, and didn’t involve the field to the extent we should have,” she said in retrospect.  “And when we did get their feedback, things like ‘we didn’t sign up for this (sales-like job),’ we dismissed it by saying, ‘get over it.’”

The time she and others spent working on a compensation approach that wasn’t implemented could have been used instead on teaching processes and practices paramount to the job role.  Compensation is the easy part, once the organization is ready.

Bob Kinert is Principal at Kinert Consulting.   You can reach Bob at (916) 337-6929 or bobkinert@comcast.net