SalesCompInsights

Ah . . . . sales comp, quotas and territories.  Three important legs of the productivity stool.  While sales compensation and quotas share time in the design process spotlight, many salespeople will tell you that their territory assignment has as much, if not more, impact on their success.  We recently had the opportunity to catch up with Ken Kramer, Director of Business Development at TerrAlign, a software and services company focused on sales resource optimization.  

Mike:  From your perspective, how important is territory management for increasing or maximizing sales productivity?

Ken:   While I might be a bit biased, territory management is critical for maximizing sales productivity and revenues.  But it might be helpful to first clarify the differences between Territory Management and Territory Alignment or Optimization.  I think of Territory Management as the broad umbrella term for all things related to territories – assignment, tracking, definition.  Or alternatively Territory Management can specifically relate to the tracking of who owns what and storage of the information in the system of record while integrating to CRM, ERP, ICM and similar systems.   Territory Alignment or Optimization is more focused on the design aspect; creating territories to optimize the utilization of the entire sales force.  TerrAlign focuses on territory optimization and is the reason for my first statement.  To maximize overall sales productivity, each sales rep needs to be leveraged to their fullest capacity.  Companies need to provide roughly the same amount of ‘work’ in each territory, while minimizing drive time and maximizing the number of accounts or prospects a rep can service.

Mike: Are there any examples you can share where companies have been able to quantify the impact?

Ken:  Our research, as well as that from other organizations, typically shows companies increasing revenues 5-15% without increasing headcount.  At the same time, they are able to reduce travel related sales costs up to 15%.  The results are incredibly strategic, typically producing ROI’s that are so big, they verge on unbelievable.  But, for companies doing millions of dollars in revenue, even a small increase in productivity can have a very significant impact.

Mike: Are there some guiding principles for organizations that want to evaluate the effectiveness of their current alignment approach?

Ken:  From an evaluation perspective, I’d recommend companies focus on a few things.  They might vary based on company and industry, but should include metrics related to work, opportunity, and revenue.  Ideally, you want to understand if each rep is making the same number of calls or producing a proportional amount of revenue for the number of accounts they are servicing.

As an example, one guideline we see in life sciences or consumer goods is to target 32-35 hours of work per week.  This allows for vacation or sick time, training, or other non-selling time.  When we talk about work or workload, we consider this to include the number of calls, duration of those calls and drive time to get to each call.  In high tech, companies typically look for a relatively similar number of prospect companies across territories that meet a particular profile.  We also recommend that variables used for balancing territories reflect those measures in sales comp plans; that is, design the territories around what you’re also paying for.

Mike: What are the characteristics of the most effective approaches versus ones that didn’t work so well?

Ken:  Where possible, build the territories based on a workload factor.  It will lead to better territories where customers will be better served for a longer period of time.  Don’t build territories around reps, they often don’t last as long your customers.  Also, build territories from the ground up, if you start at top and go down, the ability to create balanced territories is greatly reduced.

Mike: How has technology impacted the process?

Ken: While we have been applying technology to this issue for over 20 years, technology solutions for territory design are nowhere near as well-known, as say CRM or ERP.  However, technology has had a major impact on territory optimization.  Previously, and in many organizations today, alignment decisions are largely based one or two factors – neither of which is particularly desirable; 1) gut feel or  2) that’s way the it’s always been done.  The truth of the matter is that sales managers have largely driven the process based on what they think makes sense, an effort to not upset the over performers and their memory from when they were in the field.

Not too long ago, sales managers would generate complex spreadsheets and attempt to create some degree equity across the territories.  Then generic mapping tools arrived so they could plot accounts and visualize things.  Both tools helped, but didn’t reflect the combination of variables and algorithms that could balance each territory, allowing for a consistent workload across the team while minimizing drive time.

As an aside, our organization provides consulting in this area.  I remember one field session  in particular.  As we worked to  adjust and finalize the alignments I observed the field managers taking on a new perspective and focusing on alignments that would benefit both their teams and the company as a whole.  The managers realized they could communicate the changes to their teams and recognized the potential benefits of a more systematic approach.  Prior to that, I had mostly experienced sales managers in a land grab because they knew quotas wouldn’t keep up with
opportunity, so the more the better.  Also, by involving field managers and providing them an integrated tool to make changes, Sales Ops doesn’t become a bottleneck.  So, the technology helps to change thinking, validates (or negates) gut feel and provides better results in a shorter time
period.

Mike:  What lessons learned can you share around the connection between territory alignment and compensation planning and goal setting?

Ken:  Compensation can be a touchy subject.  While reps wait for their Territory, Quota and Comp Plan to be distributed at the sales kick off meetings it is easy to complain about their territory assignments – what accounts they’re going to lose or how little opportunity exists.  Most reps expect their quota to be similar to their colleagues, so they can commiserate about that.  And, they dissect their Comp Plan, figuring out how to ‘beat’ it.  What they often miss is that regardless of the comp plan design, the tie between their quota and territory is what will have the greatest impact on if and how much they will exceed their target.  A territory in the rural Midwest could have the same amount of workload as one in New Jersey, but significantly less opportunity, so the quota better reflect that.

As I mentioned earlier, comp plans and territories need to share common measures and these should also drive the quota setting process.  Quotas should reflect the opportunity per territory.  The impact of unbalanced territories on quota attainment distribution and the cost of incentive comp can be disastrous for a company.  Most comp plans have accelerators that far outweigh any decelerators associated with below quota performance.  When reps outperform their goal, the related expense is significantly higher than what a company ‘saves’ when a rep misses.

Mike:  Have you observed any trends or shifts in how companies approach this topic given the recent economic environment (e.g., entering the downturn, dealing the trough and now what appears to be a period of higher growth expectations)?

Ken:  Change is a trigger for products and services like ours.   The recent downturn forced many companies to figure out how to do more with less.  We recently worked with several companies charged with reducing headcount, but determined to maintain revenues and  effectively service their customers.  Aligning territories to allow each rep to visit the most number of accounts is critical to this effort.  Growth, which we prefer to see our clients enjoy, also forces the issue of how to realign territories – and how to do it in a way that the sales team doesn’t feel penalized.  Regardless of the change, companies want to minimize the level of disruption – the number accounts being reassigned from one rep to another.  Our technology can do that while also balancing the new territories and making them geographically compact.  One other point worth mentioning;  when things are good companies are less conscious about ”optimization” than when headcount is being cut.  We encourage our customers and prospects to continually focus on how to get the most from their sales headcount.

Mike:  Any final thoughts on what companies should be thinking about as they go into the 2012 planning process?

Ken:  Customer segmentation, sales force sizing, territory alignment, compensation plans and quota setting all part of the sales planning process – a new year represents an opportunity to revisit each piece of your sales coverage model and support programs.  Typically, the companies that come out of a downturn in the best shape are those that used their resources more effectively and invested while others pulled back.  Much like any other year, it’s critical to do the analysis, set the company strategy and then put your sales team in place to execute.  There are a lot of pieces to consider, but also an awful lot of upside when done well.

Ken can be reached at kramer@terralign.com

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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Extinction of the Sales Rep?

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

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

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

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

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

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

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

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

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

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

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

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

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

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Sales Productivity Takes a Big Leap Forward

One of the most challenging decisions facing sales leadership is whether to move from a commission to a goal-based plan.  By commission, we mean the relatively simple approach of sales x payment rate = payment.  In a commission plan, payment rate gets the focus – bigger the better for a salesperson.  In a goal-based plan, it’s all about the goal or quota: goal achievement = payment.  There are derivations of these approaches: variable-rate commission schemes where the payment rate changes based on a goal-achievement threshold.  But fundamentally, the commission plan provides a target share of each sale to the rep, where the goal-based plan provides a target payment when the rep has met the required goal.

Two years ago we worked with the sales force of an incumbent local exchange carrier (ILEC).  In 2009 the sales organization adopted a quota-based plan after having used a commission plan.  The firm’s head of HR said moving to a goal based sales compensation program was relatively simple, and one of the better things they’ve done.

In 2008 the company was struggling.  Yet most salespeople earned variable pay based on recurring revenue from previously-done deals.  Many in management thought reps viewed their variable pay as an entitlement, and were not sufficiently motivated to grow new business. 

The program changes for 2009 included a minimum performance threshold for incentive eligibility, and use of both cumulative and discrete goals for monthly payments, depending on the job role.  The new program simplified the calculation methodology by using a standard approach across various performance measures, whereas the previous plan used a variety of calculation rules.  In exchange for the threshold, the plan offered higher payouts for over-goal performance.

During 2009 the company operated under bankruptcy protection in one of history’s worst recessions.  Yet the sales organization performed admirably, coming in for the year just below the goal.  In 2010, management kept the same basic plan structure but increased the goals and minimum performance threshold.   The company emerged from bankruptcy in October and finished the year at 107% of plan.

The company’s mood for 2011 is bullish.  Management has refined the sales comp plans to place more focus on strategic product sales.  A benefit to goal-based plans is management can shift strategic emphasis by changing the quotas and payment rates, without structural changes to the program.  This consistency is a welcome change for reps that grew accustomed to constant changes to the plan, and given all organizational changes. 

Goal setting and allocation is never easy.  “We did a lot of work behind the scenes,” says the head of HR.  “But this paid off in making the program appear simple and sensible to the field.” Management restructured the way in which marketing and sales worked together in goal setting by setting up a core team and calendar, with shared accountability for revenue goals across functional groups.  This helped the entire process become more transparent – a criterion for effective goal management in the sales organization. 

 “Managers often fear they’ll lose their best salespeople by making incentive pay contingent on goal achievement.  You have to take risks, and work through the fear.  If you have solid relationships – salespeople with customers and management with salespeople – fear of losing sales talent is probably overblown.” 

The company lost some salespeople during the transition, but most are back. They’re excited about the culture and being a part of what the company now stands for: a high-performing organization.  Setting goals at the sales rep level enabled the company to take a big leap forward.

By Howard Woolf

Sales has to be one of the most difficult professions of all white collar jobs within a company.   You have all the responsibility, nothing that you can control and you are directly measured on the results. 

Think of the many influences on the sales outcome ranging from tough customers that always want more (and sometimes have very difficult and varied personalities), to the competition that is constantly pressing on your offering, to product issues or internal execution.  Arguably sales controls none of which, but is given responsibility to conquer and succeed.

When good companies recognize they have a ‘sales problem’ it may be that multiple issues within the business are resulting in poor performance. Unfortunately, the salesforce is often viewed as both the victim and the cause.  Given the myth that any good salesperson can sell anything to anybody, at times it becomes personal for management towards the sales leadership and the salespeople.  Often the salespeople criticize themselves.  After all, a good salesperson never makes excuses.

The cure requires focus on two elements.  First, understand the fundamentals that are causing the company sales to suffer.  This requires an honest assessment of all the factors from the quality and functionality of the offering to the competitive environment and the market conditions.   Given the results of the assessment, determine what it would take to maximize the success of the salesforce, short and longer term, and take those actions quickly.

The second area, maximizing sales performance, often draws much attention and many opinions. Many people believe they are experts at sales (even if they never ‘carried a bag’) and I have my opinion as well.  However, I carried a bag and successfully led salesforces in both direct and channel sales for products and professional services over decades. 

At the core of sales success, I believe, is consistently building the confidence of the sales professional.  It sounds simple but it is a rather complex set of issues.  Starting with the psychology of sales people who are in one the most cocky and confident while being also the most insecure people on earth.  Without Sales confidence, there can be no success in sales.  

Increasing the confidence of the sales force requires that the company first understand the attitude of the company’s functional leadership and down through their organizations.  They must look at their salesforce and respect them for the impossible job that they take on and the inability to make any excuses for lack of performance – despite the cause within or outside the company.  There is a key role for the CEO to play in making sure the organizational attitude is focused properly.

I once marveled at a Finance professional who tried to put in place ‘punishment’ for the salesforce by cutting their compensation as a cost containment tool after the salespeople had accomplished the goal they were asked to achieve.  I asked the person at the time, why aren’t we also cutting ‘your’ pay given the company had cost problems even though you did your job.

The lesson here is each job is valuable and should be treated as such – if the company is going to reduce compensation or any other reduction, the salesforce should participate equally (not more equally) than all functions of the organization – so if you cut everyone, it is ok to cut them too.  If you don’t cut everyone, sales should not be singled out   – they only get paid if the company is successful, even if the particular success was not part of their compensation plan.  Salespeople need to feel valued and supported – if you want them to face the odds and maximize the performance of the company. 

A high performance salesforce must have confidence and trust that their management will treat them fairly and with appreciation.   In fact, everything that the company does has to be for the Customer.  How a company treats their salesforce is the clearest indication of how they are treating their Customers.  If the salesforce is well supported, has the respect of the organization, are rewarded properly for performance (both upside and down) and have the backing of the company management – they will have the confidence that they can achieve great things and overcome many obstacles.

The most tangible way a company shows its support for its salesforce is in the sales plan and the related measurement and compensation.  It’s worth pointing out that it isn’t the absolute amount of the compensation that delivers the message but rather the fairness and accuracy of it. This provides a key management tool that enables sales success or if done poorly, destroys the fundamentals necessary for sales confidence and related success.

Sales compensation plans are easy to do – they are just not easy to do ‘right’.  One of the key ingredients to any good compensation plan is to limit the number of people who can ‘tune’ the plan.  Keep the plan simple and make sure it can be implemented well.  It always amazes me how many people think they are ‘experts’ in sales compensation but have never had to live on a sales plan.  The best way to keep it simple and straight is to avoid having too many cooks in the kitchen.

Company management may mistake sales compensation plans by themselves as the ultimate vehicle for making sales successful.  I would argue that the bigger problem is making sure the sales compensation system doesn’t get in the way and that it reinforces the confidence of the salespeople.  The mission for the Sales Plan is to provide the proper ‘aid to the sales manager’ who has the challenge of leading the salesforce to success.  As they say, the magic is in the magician, not in the wand.

A good sales plan includes:

• Appropriate Goals (based on details of each assignment)
• Clear and accurate Measurements
• Related compensation rules
• Performance analysis
• Clear communication and reporting – timely and accurate
• Feedback on an ongoing basis
• Corrective action that is timely and visibly taken

Well intended plans fail when they are too complex or can’t be explained simply and the performance easily demonstrated.  A good way to tell if your plan is too ‘sophisticated’ is to weigh it – if it takes more than a few pages to document, it is probably too complex. 

Another area of concern is when management confuses ‘sophistication’ with the overall company performance needs.  This usually leads to ‘throwing’ all kinds of measurements and targets into the mix to the point where the key objectives are lost.   While appropriate Human Relations and Financial and Operational aspects should be embedded in the plan, the point of the plan is to support the ‘sales manager’ in leading the salesforce.

Successful plans are where the goal and desired behavior for the salesforce is clear, the communication and measurements reinforce it and the outcome rewards proper performance.  A successful plan protects the salesforce from being negatively impacted by forces beyond their control – given they were doing everything right for what the company asked them to do.

Having a simple plan is a risky thing for management, as it requires sales and company management declare specifically ‘what’ they really want the sales force to do.  Clear and explicitly stated priorities prevent future questions around, ‘why didn’t you measure (hold accountable) your salesforce on that?’  But, if you have management that is in touch with the market and knows the business and they can declare cleanly what they want sales to do, then the Sales Plan becomes a strong tool to get the core mission accomplished.

In the end, if you treat the salespeople the same way you would like to be treated on your compensation, you have the right solution at hand.  The weapon of choice is to do as much as possible to build the confidence of the salespeople.  From that flows competence and commitment that will maximize short and long term performance for the business.

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.  

Know Which Investments Will Pay Off

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

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

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

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

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

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

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

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

Leveraging the Power of Sales Compensation

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

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

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

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

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

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

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

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

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

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

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

Flexible With the Course While Staying True to Plan

Joe Glenn has been managing field-based and inbound-phone salespeople for over five years.  During that time his company, specializing in communications and computer-services, measured sales performance on a product-unit basis.  The approach is common in retail and consumer-sales environments, and can be effective for driving transactional behavior from salespeople.  Where the unit-based approach falls short, though, is on goal alignment.  That is, the sales organization can exceed its unit goals while the company misses its revenue target.  In many such unit-based incentive plans, reps focus on those products they can most easily sell without appreciating the financial consequences to the company.

Changing a sales force’s incentive plan can be dicey stuff, particularly when the company adopts new measures of performance.  In Joe’s case, not only did he have to onboard a new measure, but each rep would carry a quota and minimum performance standard.

“We have a very flexible, adaptable sales force, which makes annual changes to the sales comp plans relatively straightforward,” said Joe, who about one year ago started sharing with his sales teams the revenue-plan concept.  “They were on board – it made complete sense to them.”  New goals and a goal-setting paradigm raise the stakes, however.  “Salespeople want to know the goals are reasonable and ultimately, do-able.”  Without the benefit of historical data, salespeople didn’t really know whether their revenue-based quotas were in line.  Adding to the anxiety the plan featured a 75%-of-quota threshold.

Creating quotas was another issue.  Joe’s colleagues in sales operations used the company’s billing system as the source for transactional revenue data, a formable task that didn’t come on line until December.   The new incentive plan was slated for rollout the following month.  Joe was forced to use a limited set of historical data for setting Q1 quotas.

The company launched its new plans during the final weeks of December 2010.  Early into January, salespeople, checking their progress against quota on a daily basis, were becoming concerned.  For most reps, their performance was trending well below where they needed to be to reach the threshold, and earn incentive pay.

Rather than waiting until quarter or even month end, Joe took action.  He and his operations colleagues dove back into the data in search of assumptions that, given the benefit of hindsight, might be off.  

The prospect of adjusting quotas mid-cycle is typically fraught with issues.  While in principle Joe believes an organization should stick to its goals, the revenue quotas were new, and he couldn’t risk the organization having a poor Q1 – a likely scenario should the salespeople disengage after perceiving they couldn’t hit the threshold.

“For the quotas to be effective, we had to be open to regular course corrections,” Joe says.  “This could not be a ‘set-it-and-forget-it’ approach.”  He used a transparent process with company leadership to keep them appraised on the evolving quota-setting methodology.  As more data became available, Joe revised his assumptions.  This included expectations for optimal business mix at the assignment level, and factoring customer churn into a four-year, revenue-per-unit (RPU) projection for acquisitions, where discounted monthly recurring revenue in the first year gives way to more typical RPU rates in Year 2 of the contract.

Joe also added a feature to the plan threshold by including a relative-ranking threshold by market.  Threshold would now be either the 75^th percentile performer in each market group, or the absolute approach (75% of individual quota), whichever was lower in the period.  This tactic provided a reality check to performance in the greater Kansas City market, where unusually harsh weather hammered field sales efforts.

While January revenue results came in below even the revised plan number, February’s pipeline is strong, and Joe projects a record Q1.  His sales teams viewed the revised goals challenging but reasonable, and after shaking off the initial anxiety, set out to beat them.  From leadership’s perspective, the additional analysis and revised goals provided a level of granularity that helps each salesperson focus on the right mix of business.  Reps are selling smarter, and thinking more long term.

One can argue that if the company hits its revenue plan, which in Joe’s case appears very likely for Q1, the course taken to get there doesn’t really matter.  Joe will tell you his approach of staying flexible, transparent and course correcting as he goes has everything to do with a favorable outcome.

Joe Glenn is a director of sales for a communications and computer-services company serving California, Kansas and Missouri.

SCI Turns One, and Steven Levitt Sends Us a Gift

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

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

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

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

So let’s break this down.

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

Our rebuttal:

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

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

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

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

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

Putting the Horse Before the Cart in the Utility Industry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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