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.

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

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

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

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.

The new year is almost upon us.   For those companies that have a January 1 fiscal year start, December brings a combination of finishing 2010 on a strong note while at the same time preparing for 2011.  On December 14, my colleagues Scott Barton and Elliot Scott will host a free web session geared towards those organizations that are finalizing their 2011 sales compensation programs.  

Just as top skiers do a final check of body and equipment before heading out onto the icy course, top sales organizations leverage pre-launch checklists to ensure sales compensation plans will deliver pay for performance…without unpleasant surprises.   Using a combination of market practices and specific case studies, Scott and Elliot will cover topics such as:

• Calibrating measures, goals, and plan parameters with final budgets and strategies
• Finalizing mechanics to drive pay differentiation
• Communicating to address field concerns
• Testing for gaps and risks in plan administration
• Mitigation strategies for system and reporting issues

Our goal for the session is to faciliate a focused and pragmatic discussion around the activities to finalize a successful program.   You can register for the session at:  https://www3.gotomeeting.com/register/367735126.

We hope you’re able to join us.

Several of our recent clients, representing industries ranging from high tech to packaged foods, share a common business challenge:  how measure and credit sales team members with responsibility for pulling business through various distribution channels.  These “sales out” representatives promote their products and services to end user customers who then fulfill their orders through the manufacturing company’s distribution partners.   Typically the company can track “sales in” to the distributor but not which end user ultimately purchases which product.  Channel partners might be reluctant to share information on their customers, may not have the systems in place or may just have other priorities associated with the management of their own businesses.  Such circumstances leave the manufacturer with little information as to what impact the sales out rep is having with his or her assigned accounts.  

We’ve often said that whoever solves this issue on a systematic basis will be in a position to retire in a few years.  In the absence of a silver bullet, or a market-dominant position where you can dictate terms to your partners, consider some approaches that we’ve observed be relatively successful:

• Rep incentive to recruit end users.  A “Bounty” is paid when the end user is on a regular, repeat, buying cycle and the sales team all have an equal opportunity to recruit their customers;
• CRM logged opportunities.   Credit is only granted for those opportunities that are logged in the CRM system prior to closing.  The rep then “closes” the opportunity after the customer’s purchase.  Rep-identified-closes and sales in data are then reconciled/audited, along with spot auditing of specific deals, to maintain the integrity of the process;
• Channel data tied to marketing funds.  A distributor or other channel partner’s willingness to supply end user information is tied to the company’s investment in business development and marketing activities with the partner;
• Team goals with individual variances.   The sales out team is measured on a team quota for the geography or other dimension.   Individual performance against a more measurable attribute – key sales objectives, new customer wins or potentially even team evaluations  – are then used to adjust the individual payout up or down;
• Foreshadowing changes.  While paid on a team quota for the current year, the sales out team is told that individual quotas will be implemented in the coming year for those accounts where the company is able to gather the necessary data.  The sales team thus encouraged to work with their customers/distributors to collect the data.  This argument hinges on the notion that sales people, particularly higher performers, prefer individual quotas over team measures .  Good management processes must be in place to vet situations where the data can’t be gathered  versus reps preferring a team measure;
• Fixed allocation of business.  Sales leadership and/or the account team agree on the relative allocation of the business that is credited to the salesperson.  An example might be a global account that provides overall sales out information, but not at the local geography level.  The fixed allocation assigns a certain credit percentage to the US, EMEA, AP, etc. and assumes that over time things will “balance” out.

The majority of these companies would prefer to measure their salespeople on an individual quota tied to revenue, margin or some other metric.    They are continually striving for ways to improve the quality of their reporting and measurement systems.  For those companies struggling with how to pay their sales out teams,  data integrity must be a guiding factor.  Individual quotas may make sense conceptually, but if your salespeople don’t trust the information being used, then the credibility of the program suffers and your return on compensation investment drops substantially.   We advise our clients to find a workable balance between precision and simplicity.

We’ve also started a LinkedIn discussion on this topic, to collect additional examples of approaches that work, as well as some that haven’t:  http://www.linkedin.com/groupItem?view=&gid=71015&item=23883963&type=member

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

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

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

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

SCI: How did you determine which vendors to consider?

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

SCI: Were there any that stood out?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SCI:  So sell to your sales department

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

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

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

A significant amount of our consulting work involves the processes and technologies used to manage sales compensation programs.   We subscribe to the idea that the sales compensation program is not a series of disparate activities, but an integrated set of processes – design, launch, administer, report, analyze –  that should be managed on an ongoing basis.  We’re often asked about the characteristics of average and high performing organizations in this area and how they can be differentiated.     

The first question might be what do we mean by high, medium and low performers?  We can start with metrics such as the time from close of period to payment, accuracy rate, ratio of plan participants to support staff FTE,  number of disputes,  specific process benchmarks (e.g., date quotas are communicated to the field) and infrastructure dollars per FTE.   Many of these metrics vary by industry, company size and distribution model.  As an example, one of our recent surveys found that almost 60% of direct sales organizations process their incentives in three weeks or less.  Three weeks is typically not realistic for a technology company that relies on sales out partner data to pay their sales teams.   In our surveys’ we also ask about the alignment of the process with the needs of the business and the charter of the organization.  

Those companies that tend to benchmark higher against the different metrics and report higher levels of satisfaction with the alignment of their processes do share some common characteristics.   They are more proactive in their approach to managing the sales compensation process.  Their sales compensation teams commonly adopt more of a leadership position within the organization and overall the program is viewed as a differentiator rather than just a cost of doing business. 

Looking at the design process we observe that the higher performing organizations use a published calendar as an established business practice, clearly define and articulate the roles of the people who participate in that process and have a strong governance model.  There is a former owner of the design process within these organizations and significant cross-functional participation; sales, marketing, finance, HR and IT all have a voice in the final outcome.  From a technology perspective, the higher performing organizations are able to model future plan changes using both historical and forecasted data.  More and more companies are also able to run detailed scenarios and easily promote those scenarios into their production environments.   Taking advantage of newly available tools, plan information, quotas, and other job aids are available online and frequently at or before the annual sales meeting. 

For the administration of the plans, we similarly see formally defined calendars, dates that are essentially set in stone, and a clear owner of the process.   While errors are kept to a minimum (e.g., 98% + accuracy rates based on survey responses), almost as important is a clear process for addressing them.   The administration of the plans is an area where we’ve observed significant improvements in the tools available over the last few years; administrators, managers and plan participants are better able to view the details of any compensation payments on a more frequent basis, initiate a question/dispute based on the information and have that question routed to the appropriate team member.    Other advanced tools are now available to the compensation team including querying capabilities, retroactive processing, detailed auditing/tracking and robust reporting/analytics.   Due to the critical nature of the compensation roles, the leading organizations engage in significant cross-training and education for team members.  From a resourcing perspective, we observe plan participant to administration FTE ratios of 250:1 or greater, as well as the flexibility to quickly adapt to an evolving environment and changes in the sales strategy, coverage model and incentive plans.     

We look at six key elements for each phase of the compensation process when helping our clients assess the effectiveness of their own operations:  1) Process steps and deliverables;  2) Organization structure and roles; 3) Dependencies; 4) Resource efficiency; 5) Tool usage and availability and 6) Process flexibility and alignment.  Tool usage and availability can also be broken down further into elements such as data availability, data storage, functionality and fit with the technology landscape.   Each element can be evaluated on a scale of 1 – 5, helping to lay the groundwork for future projects and attention.  Now that the plans have been launched and things have (hopefully)“settled down” before the next design phase begins, it might be time to take a look at how well your own processes support your various stakeholders and needs.

Three Tips for Transitioning to a Successful Global Sales Comp Program

Have you heard the one about the newly-hired sales compensation manager who has beenasked to transition the company’s far-flung, decentralized sales compensation program to a more centrally manged global umbrella?  We’ve heard multiple versions of this scenario, some mildly humorous, some tragic.  Moving a world-wide, decentralized sales compensation structure to one that’s truly global can be a career-defining (positive or negative) event.

If you find yourself in a similar predicament, we have a few tips to offer.

First, let’s get on the same page with what we mean by global.  Various approaches span a continuum.  On one extreme, the organization has centralized its sales compensation governance, oversight and administration functions, with local (e.g., regional) management responsible for representing regional requirements during the design process.  On the other extreme, regional management has significant autonomy over the design and management of its plans, with corporate playing a support or audit role.  About 1/3 of the global companies we’ve surveyed use a largely a centralized approach.  As you’d expect, the trend is toward greater centralization.

While many regional leaders support the trend on the basis it leads to greater efficiency and, ideally, profitability, sales compensation can be a touchy subject.  Generally, sales managers have a lot vested in the existing program, as it’s a key lever for motivating their teams.  Assume, then, that your regional leadership isn’t quite ready to hand over the keys to their sales comp program.

Tip #1: Build the case for change.  Just because your company has a global head of sales, possibly a newly defined role, doesn’t mean that by default the sales comp program should be global.  Sure, it can be frustrating and exhausting to create an inventory of the various sales comp plans used throughout the company.  But this could be a function of poor recordkeeping.  What does the company hope to achieve by having a more centralized approach?  How will it measure progress toward that goal?  What are the benefits realized by the regional management?

What we’ve seen as the common drivers include:

• Greater consistency in sales execution on global accounts
• Apples-to-apples comparisons of campaign success across regions
• Rapid modeling and deployment of incentive plan changes or new product introductions
• Greater automation and sophistication of sales performance and incentive-calculation reporting
• Audit facilitation and fraud reduction

To the extent the business case appears to regional management as a ploy to lessen their autonomy, expect resistance.  You’re in for a much smoother ride if the organization has decided to undergo some big-bang event, like a major business acquisition or technology implementation.   Sales performance management (SPM) system implementations, like Varicent or Callidus, can do the trick.  Regional heads must pay to play.  Watch the regional leaders’ eyes grow wide during the demonstrations of fancy dashboards and reports.  Far be it for us to promote putting the cart before the proverbial horse, but in a world of spreadsheets, untimely data and manual adjustments, the promise of these systems can put wind in your sails.

Sure, the global head of sales or CEO can pick up the phone and say to the regional leadership, “here’s what we’re going to do.”  Yet, part of your job is figuring out how to move such mountains without having to rely on the executives.  Not that you’re going to drive this global mandate solo.   No, you’re going to get the regions to do the heavy lifting.

Tip #2: Form a Global Sales Comp Task Force.  Just don’t say what the real task is.  Position it instead as a sharing of best practices.  Most sales leaders we work around love to talk about sales compensation.  Funny thing is, two minutes into the discussion, they’re picking apart their own programs.  And for the one or two that think their region’s program is without fault?  Let them think they represent best practice.  The point here is to have your regional leadership perceive they own some of the solution.  And this is as it should be.  These are smart men and women, with years of experience managing and motivating salespeople.  Tap their expertise.

Your role in all of this is to convene the group, help set the agenda, move the discussion from strategy to tactics, and keep the meeting on track.  Demonstrate your expertise by providing pertinent data on sales compensation trends, and using a proven framework to facilitate the discussion.

This isn’t easy.  If you’ve not slogged through such meetings, beware of the frequent rat holes the discussion can fall into.  Language barriers and dialects add to the fun.  After three hours, the regional leadership may feel cleansed and rejuvenated, but you have nothing but pages of seemingly disconnected minutia.  Get help from a professional sales comp meeting facilitator if you suspect you need it.

Tip #3: Become one of them.  I keenly remember the conversation with a regional business leader who picked me up at the Frankfort airport early into one my one of my first global comp assignments.  “Wow, we’ve never had someone from corporate compensation come visit us.”  I didn’t know whether to be flattered or threatened.   

One of the most satisfying aspects of working with the sales organization is, well, actually working with the sales organization.  We find sales leadership, their managers and salespeople to be inherently positive, confident and curious.  That’s their job.  Have you ever attended a national sales meeting?  It’s all good.

Yet, spend some time, one-on-one, with a salesperson and you’ll discover that all is not thumbs up and high fives.  Pay, because a meaningful chuck of it not guaranteed, is usually an issue.  Sales leaders hear about the exceptional cases — the woman who expected to earn €20,000 on a deal for which she didn’t receive credit.  But sales organizations have a way of filtering the daily line frustrations through layers of sales management and cultural bravado.

In the conversation I referenced a moment ago, with the regional business leader, I understood later, over bratwurst and a liter-sized pilsner, that he was appreciative of my initiative to understand his operating environment.  And this is what it takes to appreciate the differences across your company’s global business.  Many factors, like job role execution, legal and labor practices, management philosophy, administrative requirements, and culture and competitive practices, can vary significantly across regions and influence the effectiveness of a particular sales compensation approach.  Good salespeople understand all this because they care deeply about what influences their variable pay.

You may choose to gather this information through surveys and a few phone calls.  We think it’s more cost effective to make the gesture and spend the time in the local market.

Be especially coordinated with the local management during the communication and change-management phase of any new program implementation.  Consistent messaging only works at a high level.  You need to customize and localize the message to clearly explain to salespeople the reasons for and details of change, what the company expects of them and how they can be successful under the new plan.

For more tips on going global, check out these other insights:

http://www.towersperrin.com/tp/showdctmdoc.jsp?url=HR_Services/United_States/News/Spotlights/2007/03_2007_Spotlight_Global_Sales_Comp.htm

http://www.compensatingthesalesforce.com/downloads/WaW_141943_EP.pdf

http://jobfunctions.bnet.com/abstract.aspx?docid=84581