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.

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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.

A Conversation With Howard Woolf

As a front-line salesperson, sales leader, sales operations executive, company president and CEO, Howard Woolf has spent his career achieving sales success in the technology and communications industries.  We recently had the opportunity to catch up with Howard to discuss his thoughts on effective sales incentive programs.    

MM: Howard, from your perspective, how important is the incentive program in the toolkit of a sales leader? 

HW:  The incentive program, if done right, is the fundamental way a sales manager ‘communicates’ to the salespeople in a way that is sure to get their attention.  Over time it consistently reinforces the mission and method for the organization, along with each individual’s role within it.  Further, the sales plan sets the stage for both direction and behavior, but also builds organizational ’confidence’ which is the key building block for overall success within any sales force.  Unfortunately, when done incorrectly, it has the reverse effect – so it’s important to get the incentive plan right.

MM:  Are there any guiding principles you’ve used to help with your incentive plan decisions?

HW:  Yes, the first is simplicity.  I use the traffic light example.  If a salesperson leaves a customer after getting an order and while stopped at a traffic light, s/he can’t figure out what they earned on that sale, then the plan is too complicated.

Many companies think more is better and they load up the sales incentive plan with corporate ‘good to do’ things and complex measurements. Unfortunately all that does is diffuse the message, often making it hard for a salesperson to be successful even when they are doing the right thing and actually performing well.  In fact you might end up rewarding the wrong people for doing the wrong things, which further destroys morale and can negatively impact performance.  So less is more!

MM:  What are the characteristics of the best plans you’ve seen versus ones that didn’t work so well?

HW:  Beyond being simple, a good plan has to fit within a 360 degree mapping that deals with;  1) goal setting based on each individual assignment (I prefer bottom up with top down tuning);  2) measurements that can readily be made and reported; and  3)  communication that ensures understanding, buy-in and proper execution of the desired behaviors.  Often, automation is involved so that aspect needs to fit with the three key elements as well.  IT should be an ‘enabler’ of the plan and not get in the way of a good plan, which admittedly, can be difficult.

MM:  Having observed the design process from various vantage points, what insights on the do’s or don’ts can you share?   

HW:  Sales is a key function for the company and unfortunately there can be a lot of people within the company who think they are a sales measurement expert.  They’ll suggest all kinds of bells and whistles to the plan  – this is usually how complexity creeps in.  Finance, HR, IT and even Manufacturing and Marketing are looking for a link between the sales plan and their functional goals. 

It is important that the fundamentals of what Sales Management wants to prioritize, communicate and reinforce to the sales people be the pre-eminent definition of the plan.  Keeping it simple, measurable and communicable against the goals of the sales manager  should not get lost  into the many diverse elements of running the company. 

The role of all other functions (Finance, HR, Mfg, Product Management, etc.) is to line up behind the sales manager to help him/her execute to this target without trying to take over the plan for their own needs.  Or  load it down with elements that diffuse the message and limit the potential impact.  The Sales manager should be able to take a step back and say “if the sales people on this plan do well, then the company will have done well against its key goals and the sales force will have played their role in making that happen.”

MM:  Any do’s or don’ts regarding quota setting and management?   

HW:  Yes.  The key to good quota setting is knowledgeable sales management.  When sales management accurately translates the company goals into individual quotas and structures and understands the nature of the individual assignments the plan can be both credible and successful.  Arbitrary and disconnected quota, often top down, are formulas for failure.  The best processes include a bottom up forecast and analysis that is the underlying element of planning the quotas.  Since those forecasts are based on imprecise data, the test is whether the person setting the quota truly understands the business, the customers and the assignment that make up the basis for the quota.  Further, any quota set in advance has to also have a mechanism for fair adjustments (up and down) that connect the reality of the business as it plays out.  So quota management is key to the ongoing validity of the plan and underlies the measurement system as one of the three key elements of the incentive program.

MM:  What expectations should a company have relative to communicating the plan?

HW:  Typically, the new plan provides a great rationale to pull all of the sales team together and communicate the new goals for the year, the company plan to support those goals and how the plan will work.  Usually, this is a good opportunity for workshops with senior management, functional leaders such as product management and local sales management to interact with the salespeople and relate the company deliverables, as well as help line up the background for the plan execution.

However, for plan success, there needs to be a very specific and conscientious communication strategy that starts with the kickoff but gets reinforced throughout the year.  Ongoing communication and reporting on individual and group performance is key to using the plan to reinforce the best behaviour, build morale and enthusiasm, and make any mid-course corrections that might be necessary.  Communication deliverables need to be ‘tight and right’ – written in an easy to understand fashion with crisp detail and include a personal view with clear focus on the measurement and reporting process (along with examples) that will be followed.  The plan administration should have built into its process how it will launch, sustain and communicate the necessary information and ongoing reporting.

MM:  What guidance would you offer for how to deal with the recent economic situation and the growing expectations of a turnaround? 

HW:  It’s always difficult to handle sales compensation when circumstances beyond the control of the salespeople affect their pay.  But the sales role is no different from other critical skills in the company and a sharp management team deals with the situation in a flexible way in order to retain key personnel and also lead them to make the biggest impact that can be made for the company. 

The best companies  maintain their philosophy of ‘pay for performance’ and adjust assignments according to the changing reality.  Typically, what I have seen is targeting salespeople on key and measurable objectives that provide the company the highest impact, given the circumstance, by including those goals or targets within the sales plan quota.  When a salesperson achieves those objectives they can ‘earn’ their incentive pay based on the success. 

A good plan also has timely updates of the quota contemplated within it, as assignments will change, personnel will transfer in and out and organization structures will adjust according to the needs of the business.  The plan should allow for assignment changes accordingly.   Economic changes and/or changes in customer or territory situations should all be handled fairly and promptly.

The test should be that both the ‘individual and the company’ win when the salesperson is re-directed or has their assignment changed and hence, the basis for their quota and measurement.  A good salesperson wants to ‘earn’ their pay and not get a ‘freebie.’  The company gains when salespeople are successful in the performance of their job AND fairly compensated for it.   when both conditions are met sales people tend to stick around and more importantly, they are highly motivated to perform.  Keeping the integrity of the sales plan is vital and only happens if the plan reflects assignments and measurements that are stretch but achievable even when economic conditions change.

Howard Woolf is the founder and managing partner of Howard Woolf & Associates, a professional services firm focused on helping companies improve business performance and sales effectiveness.  He can be reached at hwoolf@comcast.net.

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.

Incentive compensation management in a global organization brings its own complexity and opportunity for frustration.  On one hand is the local country manager; adamant that all things incentive related should reflect the needs of their market.  On the other we have the Vice President of Global Accounts, VP of Marketing or new head of HR who are looking to increase the consistency of customer experience and go-to-market model.   Caught in the middle is the person or group responsible for sales incentives.  As the results from a recent survey we helped with suggest, companies use a variety of approaches to manage their incentive programs. 

Looking back over the last five years, the percentages haven’t changed much.  Answering the same question in 2006, 44% of respondents used a centralized process with business unit representation and 18% had a centralized process led by corporate staff.    What’s the takeaway?  Well, for one, it appears fewer and fewer companies use a decentralized process to design their sales incentive programs.   This is consistent with what we observe; most global companies today are looking for at least some degree of consistency in their incentive plan designs.  What varies are which elements of the program should be designed centrally – whether it is corporate led or a cross-geography design team – and which elements should be left to local managers.   Consistency of customer buying practices, business priorities, culture and legal requirements can all have an impact on who makes what decision. 

Where we observe more change is the administration of the plans.  Improvements in technology, combined with a desire to reduce costs are clearly driving more companies centralize their administration efforts.  Where it gets tricky is how to handle inquires and disputes (we know – with a new technology investment shouldn’t the number of inquires/disputes go to zero).  Some companies have implemented global or regional ICM “call centers.”  In our experience the more diverse the selling environment the more difficult this becomes.  Assuming the available budget dollars, a more common approach is to centralize the technology infrastructure with local administration support.   An added benefit is the ability to evaluate the plans on a global level while retaining local insight. 

When it comes to global ICM, perhaps the most important suggestion we could make is to clarify your governance model – whatever that may be.  Whether corporate HR drives the global design process or each region participates as a member of the design team, clarity of the process, who makes what decision and how the plans will be administered will help improve the effectiveness of the program.  One last thought, lest we forget – publish and stick to the ICM calendar.   This simple, but all too often overlooked deliverable is one of the key differentiators between leading and lagging ICM organizations.

Where Robin Hood Meets Santa Clause

What on earth, you ask, do MBOs, Robin Hood and Santa have in common?  Well, it’s like this: MBO’s, when used in a large sales population, take from the rich (your successful salespeople), give to the poor (your laggards) and are a gift to sales managers that are better at being one of the guys than they are leaders to their respective teams.

By the way, if you’ve stumbled upon this site in search of a holiday-themed Robin Hood DVD or tips for pulling off your own management buyout, give us a second to define before you leave the acronym as used in the comp world:  management by objectives – a.k.a., key sales objectives.  A guy in the U.K. told me once MBO stood for “My Bloody Obstacle to driving real pay for performance in this place.”

This statement pretty much sums up the issue.  Granted, it’s just one perspective.  Ask a sales exec who has worked over a prolonged period with MBOs and you’ll hear a woeful tale of administrative complexity and undifferentiated pay distribution.  But ask a line sales manager, “How’s that MBO program workin’ for ya,” and expect praise for the flexibility and fairness provided by MBOs.

There’s both math and psychology involved here.  Crunch historical data from a group of MBO payees and you’ll see over time a trend of decreasing pay distribution.  That’s because the supervisors and managers scoring their teams don’t have the heart to tell Larry Laggard his performance blows and he’s not earning a bonus.  To keep the budget in check, the scorekeeper trims a little off of what would have gone to Slammin’ Sam (the high-performing rep) and gives it to Larry.  Steeling from the rich to give to the poor.

There are legitimate reasons for putting MBO’s into place.  For example: a technology company needs its business development reps to stimulate product development and customer engagement across different markets.  One size does not fit all reps, and the product isn’t expected to be sales worthy for at least two quarters.  The structure of an MBO allows the supervisors to customize a set of objectives for each rep that will drive future sales.

At some point though, these reps will want sales and the compensation that comes with those sales.  After all, they’re sales reps, right?  Where MBOs get misapplied is when management requires a sales professional to do the job of a marketing or product specialist.  In a small organization, that’s likely and expected.  But it’s not optimal and should be considered temporary.  Again, salespeople sell.  Other jobs do, well, other things that aren’t directly connected to sales.

Indeed there are requirements to every sales job that fall short of sales-related activity: fill out reports, dial into weekly sales calls, drive the product team from Japan around to a few customer sites, etc.  The more your salesperson earns in variable pay as a percent of base salary, the more likely he or she will look to excuse him/herself from such chores.  And then you as the manger can get into a discussion around the reason they’re paid base salary and role of being a being a good corporate citizen and so forth.  Yet they look at you with glazed eyes.  You can tell they don’t care and won’t do what you ask.

It’s tempting then to put some of these non-sales tasks into variable pay, tied up all pretty in a MBO package.  Then they’ll care, right?  Wrong, if they’re good salespeople.  They want to sell, gosh darn it, and earn good pay for those sales.  MBOs are a wing-clipping for high performers.

I’ve not yet gotten into the gritty underbelly of MBO administration.  Best case, managers articulate and document “SMART” objectives, salespeople acknowledge them, managers submit the objectives for executive approval, and later meet as a group to calibrate scores before meeting one-on-one with the reps.  Uggh.  I’ve actually seen an MBO for a manager plan with the objective being proper administration of the MBO process.  Anyway, the savvy manager will attempt to sidestep all this admin stuff.  And who can blame them?

In the early days of my incentive management stint at a large brokerage firm – and sorry to those who’ve heard me tell this story for the thousandth time, but it’s a good one and is relevant here – during a tour of retail branches, I sat across the desk of the manager for one of the firm’s Manhattan branches.  It was mid-December and starting to snow outside.

Leaning back in his reclining chair, he says, “What I need is a very simple compensation approach for these guys (financial consultants and customer service reps).  Give me a stack of hundred dollar bills and I’ll hand ‘em out to those that are getting the job done.”

He was dead serious.  And his grey hair, pinstripe shirt with suspenders and large waistband suggested he’d been at the business a while and probably knew what he was talking about.  Yet I had an image of this guy in a red suit and white beard, with a sack on his back for all those bills.  Maybe it was the time of year.  Come to think about it, the assistant manager looked an awful lot like Little John.

We subscribe to the notion of the sales compensation plan as a tool for sales management.  Whenever possible, this means that sales management should be part of the design team.  They may not own every decision, but certainly theirs is a voice that should be heard.  And perhaps more importantly, this means that sales management should lead the communications effort.    We observe many companies where sales leadership actively, and enthusiastically, participates in the evaluation and design of the new incentive plan.   They recognize the impact the plan can have and want to maximize the likelihood of success for the business, their team and themselves.  When it comes time to communicate any changes they line up in front of the organization to help people understand why the changes were made, what the changes mean and how best to win under the new plan. 

Unfortunately, “many” doesn’t mean the same thing as “all.”   Based on several years of survey data, we’ve observed that in 20% and 30% of responding companies, the incentive plans are designed by corporate staff, with limited input from line management.  These companies would argue that a corporate approach makes the most sense for a variety of reasons.    

More concerning is the design process that is supposed to include sales management but doesn’t.    There’s the scenario where the VP Sales is chartered to design the plans, but is not involved in the final decisions.   Or the scenario where the VP Sales doesn’t believe any change should be made and avoids the design team meetings.   Then there is the arms crossed passive aggressive meeting participant;  I’m here, but don’t ask me to do anything that could hurt my people.  Any of these scenarios can lead to the dreaded “look what they did to us now.”  With the credibility of the plan now in question, a significant change management opportunity is lost and the odds of success go down significantly. 

As we enter the final weeks of 2010, it is critical that sales management supports the new plans.  The bigger the change, the more important it is that you’re sales leaders are armed and ready to effectively communicate with their team members.   If there is any question about their support, address it immediately.   With so much riding on the success of your incentive program, you can’t afford to have your most important stakeholders waving goodbye as the rest of the troops head off to battle.

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.

Documenting Your Sales Comp Plans, and Preparing the People Who Must Use Them

If you’re like us, this month has you focused on documentation of new compensation plan rules.  This is a thankless yet critical endeavor.  Done exceptionally well, clear, complete documentation might put a significant dent in the numbers of queries and disputes coming from the field.  Done poorly, communication of sales comp plan changes could put a dent in your company’s sales productivity or contribute to a class-action lawsuit.

We’ve all heard the request, usually from a sales leader, to “get the plan details on one page.”  The request is reasonable from a sales manager’s perspective.  As a sales rep my attention span lasted about one page, assuming the text font was around 10 points.  If I got to Page 2 and didn’t see any dollar signs, I checked out, and trusted the company wasn’t out to screw me.

But tell your company’s legal counsel your aim is to document all the pertinent plan rules using 300 words or less, and they’ll say your setting the company up to be screwed by the sales force.

Can’t we all get along?  Indeed, you can meet both needs.  Salespeople need a concise summary of what’s changing and what they must do differently to maximize their income.  Sales managers need coaching on how to use the new plan to motivate necessary behaviors.  Lawyers need a document that leaves no room for misinterpretation of sales credit eligibility.

Sounds easy but consider a story of things going awry.  John Jones – not his real name but since this is true story I can’t have you all LinkIn-ing the real guy (and sorry to you real John Jones’s for getting drug into this by chance) – takes a job as a territory rep for a software company.  The company’s comp plan is about 20 pages.  For me, it’s a good read.  But John doesn’t think so and tosses it aside.  John understands from his boss his annual sales quota and the list of accounts he’s to target for new business.  Unbeknownst to John, one of his target accounts was recently acquired by another firm, headquartered outside of John’s territory, and covered by another territory rep.  Cut to the chase.  John discovers through some account tracking system that this target account bought a bunch of product, and thus as rep for the account he should earn credit.  Well, he didn’t because the other rep worked the target’s HQ contacts for a big deal that just happened to ship the product into John’s territory.

Any reasonable person would conclude John is not eligible for credit, because he did nothing to motivate the sale.  But John, like the loving family that went berserk when rich grandpa went on life support, turned his back on reason to focus on the big bucks at stake, and John’s attorney apparently thought the 30-page plan document enough unworthy to pursue a case against the company.  I’ll spare you the gory details.  Let’s just say you have the power to avoid such nastiness by ensuring your salespeople, sales managers and the company’s legal representatives know what they need to know about the incentive plan.

In this case, John could have gotten by just fine with the documents he actually read – nothing more than a quota sheet and list of target accounts.  Once he earned credit, the plan was such that he didn’t need an Excel spreadsheet to calculate the payment.  John’s boss should have known from the 30-page document that that accounts with locations outside the HQ’s territory are under the jurisdiction of that region’s sales manager (a peer of John’s boss, in this case).  And the company’s legal counsel might have determined – and I’m only speculating here – that the document was not sufficiently clear on the circumstances under which a territory rep does not earn credit for a sale into his/her territory.

Fortunately most of companies we work with do a good job on the 30 pager, meaning that it’s exhaustingly thorough on the conditions for credit eligibility, and ineligibility.  Their lawyers review and eventually sign off on the documents, and it stands the test of time, for a while anyway, because it pertains to all plans and programs and gets positioned as the final authority for any plan-related questions.

Unfortunately most companies do a poor job of ensuring their reps know how the plan converts sales credits into variable pay, and managers know how best to manage their people in line with the plan rules.  It’s absurd, but way too many sales managers, when asked by a rep, “Can I do this, or how do I get paid on that,” delegate the answer to a document or a phone number or a website.

Neither you nor I will solve this chronic dereliction of duty overnight.  It’s a journey, takes a village, and so on.  We have only a few more weeks, not counting Thanksgiving week, to finish documenting the plans before primping the dogs and ponies for our “Get Rich 2011” new plan rollout world tour.  Before hitting “send” to distribute your final draft to the approval powers, test 1.5 page summary and manager’s talking points with your mom.  Seriously.  She’s not going to violate your company’s confidential information, she’ll better appreciate what you do all day (my mom always says, “I think Scott does something in finance” – thus I apparently don’t walk my talk), and if she gets it, you can be reasonably assured your sales managers will also.  I’m not implying your sales managers have motherly instincts, or that they’re not capable of reacting to test material.  It’s just that I’ve found sales managers as testers of content tend to pass on the level of critique that such material deserves.  Maybe they don’t want to hurt the comp guy’s feelings for fear of getting thumbs down on a future exception request?  Or perhaps they do not want to admit they don’t understand something they think they should?  Probably they’re focused on hitting their numbers before year end.  Mom has no such agenda.  Get her on your calendar.  She’ll appreciate the gesture, and you’ll execute that much-needed simplicity check.  Two birds with one stone.

Assuming then you’re square with mom, you’ve gotten approval on your docs and decks and are ready to board the tour jet, think about how best to use the feedback you’re likely to receive during the road show.  This allows you to ditch those hypothetical Q’s that get used in the back-office production of Q’s and A’s.   Frankly, I struggle to come up with good questions during my sleep-deprived, turkey-induced late-November state of mind.  And delivering answers on the fly during the road show can come back to haunt you.  Explain you’re still working through some of the plan’s finer details, you want feedback, and that sales management can expect to get a full briefing on the complete set of questions and corresponding answers before the plan becomes effective.  Remember, you ultimately want your sales managers to answer the questions, versus passing the buck.

I could dedicate an additional 1,100 words to what needs to happen after the plans go live, since this is another area in dire need detail.  For now though, having exceeded by 1.5 page limit, I must trust that you are now prepared to or comfortable with mitigating some of the risks inherent in documenting your plans and preparing the people who must use them.

Paying for growth in a regulated environment (fourth in a series)

NewSigma had the pleasure recently to join a diverse set of leading financial institutions to discuss sales compensation and regulatory compliance trends for 2011.

This group included American Express, Chase Card Services, Citizens Financial (RBS), Discover Cards, Fifth-third Bank, RBC Royal Bank and Visa.  We discussed practices and issues pertaining to sales compensation design and governance given the increasingly regulated financial services environment.

Notwithstanding the universal challenge across this group of balancing growth initiatives with regulatory requirements, we observed a range of practices stemming from a variety of needs:

• Quickly on board salespeople and plans following acquisitions;
• Increase the efficiency of the plan design process given a distributed decision-making structure;
• Restructure the incentive management function to optimize governance and transparency;
• Stratify job roles and plans to avoid a “one-size-fits-all approach” when aligning plan structure with regulatory guidelines;
• Simplify reporting of plan performance in an increasingly complex environment.

Pertaining to plan design, there appears two prevailing principles for making plan design changes that demonstrate alignment with regulatory (the Fed, in this case) guidelines:

1. Get ahead of the regulators by proposing and getting buyoff on standards and approaches; and

2. Wait and see what other banks are going to do.

Each position has its tradeoffs.  In getting ahead of the regulators, the firm proposes to the regulators an approach that’s workable for the firm.  Remember that the Fed’s guidelines are rather vague and leave room for interpretation.  By making a proposal to the Fed, the firm says, “here’s how we plan to meet the guidelines.”  One bank in our group made this move, the Fed endorsed the firm’s proposal, and now the firm can focus its attention on other matters rather than fretting about meeting the Fed’s requirements.

The tradeoff of proposing to the regulators what you plan to do, rather than waiting to see how other banks interpret the guidelines, is you potentially put into place policy that’s unnecessarily burdensome.  Let’s say you establish a payment deferral approach for the incentive earnings on account managers.  And in reviewing your bank’s approach, account managers find another bank has no such deferral.  All things being equal the inquiring account manager is likely to select the bank that provides more earnings upfront (go figure).

Thus the advantage of waiting and seeing is you potentially are in a better position competitively, assuming your current approach does not run afoul of regulations or sound business practices.  The tradeoff here is that regulators, now having detailed practices from those “get ahead” firms, may require this level o detail from the wait-and-see firms.  Think of how this could play out — the Fed memo arrives on November 20 and requires a report demonstrating compliance two days before Thanksgiving.  D-oh!

In evaluating various plan design practices, we are heartened to see this group taking a rather pure approach to payment delivery for business development/origination-type sales jobs (i.e., “hunter”).  In principle we struggle with the notion that a hunter, when bringing down an elephant, has no idea whether his bounty will produce months of feast or a mere snack.  Management’s effort to true-up the sales credit through a deferral makes cloudy the line of sight and encourages hunters to keep an eye on the deal after he or she has made the sale.  This is exactly not what you want your hunters to be doing with their precious time.

Account or portfolio managers (“farmers”) are a different bunch.  Here you can legitimately argue for a deferral to ensure the incentive credit aligns with the underlying health of the business they’re responsible for managing.  Surprisingly only two in our group of seven use deferrals for their farmer jobs.  Both are LCBOs* and for their commercial portfolio managers and financial consultants, one bank deferred the payment for three years and paid a portion of the credit in RSUs, the other bank deferred for four years and has the deferral back-end loaded.

*LCBO = large commercial banking organizations as established by the Fed.

Clawbacks are another feature suggested in the Fed’s guidelines but seldom used within our roundtable group.  Only one firm mentioned using clawbacks.  Clawbacks as a policy are commonplace in commercial lending pay plans.  In practice, though, managers are loathe to actually claw back incentive pay if the deal went south months after having paid the rep for that deal.  So while a number of banks may say they include clawbacks, they’re probably not using them.

Following the discussion of plan design practices the group turned to incentive governance.  This includes the process, people and decision accountabilities used to ensure effective management of the incentive program.

Many of the firms in our group have significant opportunity in this area.  The struggle comes from what is a typical incentive management structure for many financial services firms – a distributed (or decentralized) organization.  By centralizing the incentive management function the bank removes some of the autonomy previously enjoyed by the lines of business.  These leaders can and often do put their feet down when a group such as HR attempts to centralize things.

One of the banks started to centralize the function last March on a mandate from its CEO.  Over the next five months the bank established these governance milestones:

1. Formed a working team including representation from the lines of business, finance, legal, risk, compensation and compensation admin/operations.  Included is a member of the bank’s strategy team, a group responsible for the field’s successful adoption of new policy.

2. Segmented all incentive plans into one of four categories, with Tier 1 (high-profile) plans receiving the highest-level (board comp committee) review and approval.

3. Established a systematic approach for reviewing and scoring the performance of all plans.  This included a simple scorecard that shows for each plan the participation rate (% of eligible participants receiving incentive pay from the plan), % spend YTD relative to budget and % to plan YTD of the business in which the plan resides.  Based on the results of these data the scorecard gives a green, yellow or red signal.  Each quarter the bank runs this report and furnishes it not only to the governance working team but also the Fed, which had reviewed and approved this approach in advance.

Thus, one of the lessons coming out of the two-day benchmarking session is to keep it simple – don’t try to impose all regulatory guidance on all plans unless required to do so, and find simple ways for communicating the health of your incentive management system.  We’re encouraged that many firms, as demonstrated by our roundtable group, are finding practical solutions to the increasing regulatory pressures while keeping an eye on sales compensation plan effectiveness.