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.

When it comes to sales compensation, business services firms pose a unique challenge.  By business services firms we mean companies that provide technology implementation, design, maintenance, printing, temporary personnel, etc., to other firms.   Unlike a product company that sells “widgets,” a services business essentially sells its people.   Similarly, the service is often an extension of the salesperson’s relationship with the customer.  Typically it’s more difficult for services firms to differentiate themselves, and these companies are less likely to experience the waves of business common to product firms, where the sales organization enjoys a growth cycle from the launch and subsequent momentum of a new product.

Maintaining and growing your existing client base is certainly going to have a lower cost of sale than acquiring new customers.  Significant time and attention should be paid to cultivating and maintaining existing relationships.  Unfortunately, the evil twin of relationship management can be  complacency; less focus on new services, limited ability to increase prices and insufficient acquisition of new clients.  We observe four key sales compensation issues within business services firms looking to re-ignite growth:  

• Commission on margin:   In a business where the profitability of a deal or customer can vary so significantly there may be a strong desire to pay on margin.  The counter argument is that “delivery,” not sales really influences the profitability of the deal.  If the delivery team provides the contracted service for a lower cost than estimated the deal will be more profitable.  Less efficient, less profitable.   For us, the key considerations are the role of the sales person and how much pricing discretion is available.  Paying commissions, or bonuses, on margin will certainly engage the rep in the profitability discussion.  It also encourages them to stay close to the delivery of the service; potentially a good or a bad thing based on the priorities of the role.  From a pricing perspective, the more discretion, the stronger the argument for some kind of margin component.
• Revenue versus bookings:  Revenue proponents contend that the sales team shouldn’t get paid until the company is able to invoice the customer (or in some cases until the company receives payment) and paying on revenue encourages the salesperson to better manage the relationship.  Bookings advocates point to a similar rationale as not paying on margin and like to point out that bookings measures encourage both new clients and new business within existing relationships.  Once again we’re back to the question of role:  what is the sales person being asked to accomplish?  What are their priorities and if we’re asking them to change, why? 
• Quotas:  We observe many business services firms where quotas are used for performance management, but are not part of the sales compensation program.   Linking quotas to incentive pay is a significant tool available to drive growth.   These performance expectations directly tie the productivity of the sales team to the business plan.  Further, within sales organizations historically paid on revenue, new business quotas can represent a major cultural shift and drive additional changes across the organization.   One cautionary note; the potential change brought by the introduction of quotas, means getting the quotas “right” should not be trivialized.   Revenue based quotas have their own issues, but setting a bookings goal for the first time requires careful thought and preparation.  Unrealistic or unachievable quotas can have an incredibly negative impact on the organization.    
• Sales expectations for delivery teams:  Within many organizations the role of the deliver team is to provide a high quality service and ensure the client’s satisfaction; can the customer be used as a “reference.”   Maybe there is a referral bonus available or even a SPIFF.  But in other organizations, offering new services to the client is part of the satisfaction equation.  Scott’s recent experience with AAA is a perfect example (Sales is Service).  For companies that believe in the service they provide, we think it a mistake to not at least consider the role of sales incentives for the delivery teams.  The incentive might represent a smaller portion of total pay relative to other priorities, but its absence often represents a missed opportunity.  Organizations that introduce a sales incentive need to train team members on their role in the sales process, as well as how to identify opportunities.      

Beyond the question of sales compensation, role design and account assignments play critical roles in the management of a business services sales team.  Effective sales compensation plans are predicated on clear roles and selling priorities.  Questions about how services salespeople should spend their time must be answered before any sales compensation decisions are made.   In a recent survey of incentive plan participants within a services organization, over 30% of the field said their incentive plans are not aligned with their roles and over 40% said they weren’t sure or don’t believe the plan supports the priorities of the business.  As sales compensation designers, numbers like that are like a big red flare, regardless of what industry they represent.

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.

Would You Like a Battery with that Jump?

Living in the San Francisco Bay Area and relatively close to a market, we seldom stock many groceries in our tiny, overpriced (or is it half-overpriced now?) home.  The grocery store is our pantry, and daily visits are routine.  So too is my older daughter’s claim of weakness from extreme hunger.   So in grabbing stuff for dinner with starving daughter in tow, I’m quick and efficient, except when something goes amiss.  

Such was the case recently when my car, having worked fine only minutes before, would not start.  This thing’s got enough electronic gear to power an Apollo mission.  It clicks and hums when sitting in the garage.  Now it was dead.  No time for a 1,300-point diagnostic, we’ve got to get home.  The car stays, food and kids go.  I packed up my two-year-old daughter and a bunch of heavy bags; the other, starving daughter, could only manage to carry a small bag of French bread.

AAA Northern California has, over the years, built up significant brand equity in my book.  The annual dues more than cover what would be the cost of jumping, towing, unlocking and refilling our cars.  AAA’s Roadside Assistance is cheap insurance for absent-minded owners of unreliable cars.

So I wasn’t surprised when the AAA roadside assistance driver (RAD) arrived at my car precisely when I did, according to plan.  About 60 seconds later my car is idling as if nothing happened and I’m signing a form reminding me something had.  The RAD suggested I let the car idle for awhile before shutting it off and then if it’s slow to start, consider buying a new battery.  Then came the pitch for AAA’s battery replacement service: for $135 another RAD will come to my home and replace the battery with a dealer-spec, three-year-warranty model.  Interesting, I thought.

Indeed a few days later my car was slow to crank.  Being proactive and resourceful I called the dealer from where I bought my car to compare its battery replacement charge to AAA’s quote; the dealer wanted $60 more.  And I would have to go to them – something I do too frequently.  I’ll save the $60 and go without a free cappuccino.

Get on with the punch line, you say?   Here it is:  I spend a good chunk of my career thinking through what enables a successful up-sell and service experience to co-exist.   A former boss of mine avoided making the distinction.  “Sales is service,” he would preach.  In the case of my recent AAA encounter, he’s right.  But in retail, the tag line often falls on deft ears.  Employees in designated customer-service roles often balk at sales goals.  “I didn’t sign up for this,” they’ll say.  From a management perspective, you’re kind of stuck.  Push the goals too hard and you lose valuable service employees.  Not hard enough and the sales goals go unmet.  In our experience, getting the inbound-sales/service role right is a tall order.

So what makes AAA and other firms successful here?  The first hurdle is cultural.  If your employees believe that to serve the customer means informing them of products and services they can genuine use and value, then this knowledge transfer is just an extension of their service routine.  The product/service must fit with the service encounter for the customer to recognize its value.  “I’m glad you told me, ‘cause I just might need a battery.”  Quite a different thought process from the belief a rep is taking advantage of your needy state to sell you something you don’t want or need, or suggesting a quid pro quo.  “Hmm…. if I don’t sign up for the credit protection service, will she not waive my late charge next time?”  Feels sort of slimy.

The second hurdle, if it’s not yet completely obvious why I selected this week’s topic, is compensation and performance-management “alignment.”  I can’t say with certainly how this AAA RAD gets paid, but know enough on this particular issue to believe his cash comp is base salary with a very modest variable piece tied to customer service scores (I received a survey about three days following my service call) and battery sales volume.

What needs to be aligned, exactly?  If we have the sales/service connection set – i.e., there’s an obvious connection between the service request and the proposed sales opportunity – our performance measures and variable comp must fit the context of the job role.  Take the “Fries-with-that-Coke” example.  A natural connection, simple, unthreatening message (what Coke drinker wouldn’t want a delicious pouch of golden fries?) and for a national chain lots of data and surveillance opportunity to appropriately measure service quality and sales volume.  Dial up the incentive opportunity for hitting the fry goal.  Have it part of their target pay.  There’s little that can go wrong.

Our battery example has some similarities but the role context is far different.  It’s not a transitional job.  I would expect some toughness and pride on the part of the employee.  To say these guys are set in their ways is probably not too offensive.  And you want them to sell batteries?  Better dangle some incentive out there.  But how much?  What’s the goal?  What can go wrong if these things aren’t aligned?

Take into account the customer’s perspective.  I try not to generalize or stereotype based on appearances, but a tattooed, heavy-equipment operator with an aggressive sales goal and vulnerable customer in a dimly-lit parking lot sets an intimidating scene.  “Would you like a broken neck with that refusal to buy a battery, sir?”  Good thing I left the kids at home.    Me and my car, never seen or heard from again.

Yet the thought never crossed my mind.  This guy knew what he was doing, and I’m $60 richer because of it.  Call it random in a world of information overload and crummy service experiences.  Something tells me a lot of work went into getting this right.

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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.

While many surveys exist for benchmarking sales compensation pay levels, growth expectations and other important metrics, we find few gather input directly from the plan participants.  Field input represents an important component of our consulting work and we encourage our clients to conduct field sensing activities at various points of the year.  This month we launched Rate My Sales Comp Plan, an ongoing survey series focused on the perspectives and insights of sales professionals.  So far we’ve gathered responses from approximately 1,000 salespeople at over 200 companies. 

The early results are somewhat startling.  Fully 30% of the respondents answered false when asked whether they understand their incentive plan. 

26% disagreed with the statement that their plan contributes to the profitable revenue growth of the organization, or said they didn’t know because the strategy isn’t clear.  More than 10% indicated that their comp plan is causing them to think about leaving or are in the process of leaving because of it. 

Given the importance of the incentive program, having 30% of the field not understand how they are paid is unsettling at best.  Couple that with a quarter of the field feeling like the plan is not aligned with the priorities of the business (or not sure what those priorities are).  As plan designers, we have to ask ourselves whether this is a symptom of complexity or communication.   Perhaps it is a bit early to be thinking about 2012 just yet.  But, it might be time to take the pulse of your field organization before 2011 gets away from us.

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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.

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.”

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.