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.

Play Audio File

Extinction of the Sales Rep?

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

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

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

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

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

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

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

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

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

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

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

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

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

Know Which Investments Will Pay Off

As referenced earlier on this site we recently hosted a web session with Steve DeMarco, VP Worldwide Sales at Xactly, and polled the 500+ registrants for their views on sales force investments.

Not surprisingly given recent economic trends, many companies are adding headcount, training those resources, and arming them with the content and collateral to help them be more successful.

Interesting, it was additional headcount or training that over 20% of the respondents found did not provide meaningful return on investment (ROI).

The good news for companies making or contemplating investment in the sales force is that many folks appear satisfied with the return on such investments. 

Whether you’re satisfied or not assumes some mechanism for tracking your ROI in this area.  Clients frequently ask how they measure ROI in the sales team.  Simply, ROI is the incremental gain in sales from each incremental dollar spent on the sales team and various support mechanisms.   More complex is the interpretation in short-term trends (“we’re spending more as a percent of revenue this quarter than last”) and competitive benchmarking (“we spend 7% and our competitors 9% — is this a good thing?”).

Making sense of data derived from sales force ROI analysis is a little like fixing your dishwasher – seems simple at first but you can quickly get in over your head and have nothing to show for your effort.  Our advice here is select one or two measures that address what’s on the mind of your executive team (related to investments in the sales force, that is).  

The CFO of a medical device distributor told us recently that he asked his head of sales comp why the company’s sales comp expense is increasing when revenues are flat.  The sales comp head apparently replied, with a somewhat blank stare, “Let me get back to you on that.”  The executive told us that was about three weeks ago.

This is a big topic with big implications.  Stay tuned for examples and cases of measuring ROI on sales investments and the implications for sales incentive design and program management.

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.

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

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

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

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

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

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

In this series so far we’ve used the banking industry as one currently at odds with growing the business in an increasingly regulated environment.  It’s within this context that NewSigma and Varicent recently surveyed 35 regional banks on their current and projected sales compensation practices, and sponsored a webcast to review survey highlights and hear perspectives from a panel of incentive managers from within the regional banking industry.

For a rebroadcast of the web event, to go:

https://www1.gotomeeting.com/register/753683233

Based on the survey’s findings, here’s what regional banks are doing to balance growth initiatives with regulatory compliance:

1. Increased sales compensation governance:  35% of the responses said their bank has the board’s involvement in sales compensation review and decision making; 26% said their bank has resources dedicated to enhanced plan management practices (e.g., plan evaluation, redesign and communication).

2. Focus on more sophisticated reporting and analytics: 59% of the responses said that better reporting and analytical tools represented their bank’s best opportunity for improved management of the sales compensation program; 32% of the responses indicated their bank plans to adopt new systems for reporting and analytics of incentive compensation measures.

3. Shift to longer-term and organizational level measures: banks surveyed most frequently selected profitability, longer-term and organizational-level measures as new or more-emphasized components in their sales compensation program across the multiple lines of business.

4. Stronger alignment between goals and performance of the individual salesperson and that of the organization:  33% of the responses in Wealth Management, Private Banking and Investment Services, and 28% in Commercial Banking indicated goal alignment as one of the best opportunities for increased program effectiveness.

From client work and surveys we see a relatively high deviation in practices – i.e., show me five regional banks and I’ll show you five different approaches for sales compensation.  Regional banks operate in different geographic markets and thus can differ in terms of challenges and priorities.  This makes sense.  But what’s less obvious is the rationale for differences in philosophies and strategies for addressing federal regulations and local market growth opportunities.  For example, one panelist spoke of the high level of uncertainty in her market, and conservative approach (“hand holding”) for compensating and motivating the sales team.  Yet another spoke of her commercial division’s “dramatic” shift to a production focus, with sales compensation being a “driving force” so that the sales team can get back to what it was hired to do (i.e., sell).

We like to see that some banks are dusting off their playbooks for effective sales performance management.  Unfortunately for the majority of banks in the survey, many of their current sales compensation practices are at direct odds with sound principles for motivating sales behaviors.  Too much emphasis on organizational measures removes the salesperson’s individual accountability for production.  Half-baked measures for profitability leave the salesperson feeling powerless about outcomes that influence his or her pay.  Too little pay in the variable bucket makes the salesperson indifferent to high and low levels of performance.  Too heavy a reliance on manual processes for calculating payments, reporting performance and analyzing trends takes time away from selling.

Knowing what makes the salespeople tick, and what ticks them off, is a critical ingredient in the formula for getting a good return on the sales compensation investment.  Shockingly, a reported 72% of those banks surveyed said they do not seek salesperson opinion when evaluating the effectiveness of their sales compensation program.

Can you imagine rolling out out a consumer product and not knowing how your target market will respond?  Banks have done a good job recently meeting the expectations of the federal pay regulators.  Now it’s time to get with the people responsible for growing the business.

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

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

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

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

SCI: How did you determine which vendors to consider?

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

SCI: Were there any that stood out?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SCI:  So sell to your sales department

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

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

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

Scott and I were recently interviewed by Marci Reynolds at The Sales Operations Blog;    http://salesoperationsblog.com/2010/04/12/5-burning-questions-sales-compensation/

Marci started the blog in 2009 with a goal of sharing sales operations related ideas, trends, opinions and best practices.    It is one of the only sites dedicated to the sales operations community and we are pleased to have the opportunity to collaborate with her.  If you are a sales operations professional or interested in the kinds of topics listed below we would encourage you to check out her site.

 Sales Strategy: Design, Planning, Execution
• Reporting, Analytics, Trending
• CRM, Sales Technology, Sales 2.0
• Sales Communication
• Sales Territory Design
• Sales Data
• Sales Training, Sales Readiness
• Sales Contests and Spiffs
• Project Management, Process Improvement
• Lead Generation, Sales Programs
• Sales Policy
• Sales Quotas
• Sales Compensation