SalesCompInsights

Getting the Most Out Of Your Newly-designed Program

As a manager or administrator of the sales compensation program, what should you care about?  What measures characterize a well-functioning sales incentive plan?  You’re in an excellent position to assess how well the plan is working.

Getting Started

Can you imagine a car without instrumentation?  Your only indicator of success would be a safe, timely arrival at your intended destination.  The scenario is analogous to a sales compensation plan where payments issued are the only measure of success.  Like cars, complex incentive programs need regular monitoring and maintenance, less something unexpected goes wrong and costs dearly to fix.

Most managers of incentive compensation accept that ongoing measurement of the plan’s performance is good business practice.   The problem lies in execution.  What should be measured?  How do we get the data?  What do we do with the information?

Start by focusing on a few fundamental measures.   Your car, for example, is a sophisticated piece of engineering.  There are plenty of things that can go wrong.  Yet most drivers focus on the speedometer, fuel gauge, service-engine light and thermostat.  For each of these devices there are standards that indicategood operation and potential problems.  Without these standards, the underlying information is of little value.

For your sales compensation program, we suggest four key measures and corresponding standards you monitor to ensure your plan operates properly:

1. Pay Distribution
2. Performance Distribution
3. Return on Compensation Investment
4. Sales Time Allocation

Pay Distribution

Most companies track what they pay their salespeople and  standards for responsible pay.  Often missing is measurement of an effective pay distribution for specific classes of salespeople.

The measure starts with acceptable ranges of pay around a midpoint or median amount.  Ideally your standard comes from a published compensation survey that covers the specific jobs in your sales organization.   Compensation managers often fret over the “right” survey, while sales managers usually discount any survey referenced for their team.  The most important thing is to find a survey(s) that your stakeholders agree represent your industry, and then use the information. You want the midpoint (50^th), 25^th and 75^th percentile pay amounts for eachjob.  These amounts include base salary, incentive target, incentive actual, target total cash (a.k.a., on-target earnings) and actual total cash.

Pay Distribution Sample

Each quarter you want to measure the degree your pay distribution represents a normal distribution around your standard range.  A compressed curve, where your 25^th and 75^th percentile actual incentive pay is well inside of your standard range, suggests lack of meaningful pay differentiation across your job group.  A bi-modal curve, where distributions concentrate around the 35^th and 65^th percentiles, may reflect underlying causes such as poor goal setting or territory alignment and result in a very expensive outcome, especially when the plan uses accelerated pay rates for above-goal performers.

Performance Distribution

Similar to pay, we suggest analysis of acceptable ranges of performance.  Managers fret here, too, over the right standards of performance distribution, which can be measured on a both absolute and relative basis.  Don’t sweat the details.  With anything close to a normal distribution across a large population of like jobs, your plan would appear to be working well relative to a performance standard.  Obviously a normal distribution that is set left or right of your standard calls into question goal reasonableness, as does bi-modal or skewed (biased to the right or left of median) distributions.

Performance Distribution Sample

If your plan has multiple performance components, your options are to measure each component separately, or calculate weighted average performance using an attainment rate from each component.  Either way, the more components in your plan, the less clear and consistent the company’s determination of “good” salesperson performance.   It’s a reminder to keep the plan simple.

Return on Compensation Investment (ROCI)

On our sales compensation dashboard, ROCI is like the check engine light on your car.  It lights up when something is amiss, and you or a trained expert must then dig a little to find out why.  I once paid $130 for a mechanic to diagnose what turned out to be a loose gas cap.  The ROIC measure is often not a practical means for measuring the health of your sales comp plan, but we argue it’s necessary in some form.

At the heart of this measure is an answer to the question of, “what performance (return) should we expect for the amount of compensation (investment) we spend?”  Industry standards range from useful to irrelevant, depending on your business and the operational diversity of your peer group. If the standard isn’t already well known to you, it’s probably difficult to obtain.  That said,  published surveys with ranges of acceptable ratios for pay-to-production by job type are available for some industries.  If the published survey doesn’t cover your industry or jobs, you can initiate a custom survey using a third-party to maintain participant-data confidentiality.

The majority of companies we encounter use an internal standard of ROIC based on external or market-driven standards of target pay amounts and the company’s revenue or gross-margin goals.  Logic being, if the company pays competitively and hits its financial objectives, then it is “safe” — for now (i.e., the check engine light isn’t illuminated).

What if the plan uses multiple performance components?  Or it includes supplementary components, like those for short-term promotional campaigns (a.k.a. “spiffs”)?  Another complexity arises when performance uses measures other than financial units, making comparisons of pay-to-performance rations across multiple measures meaningless.  In either case, managers can track what they pay for each component, and assess whether the spend is worth the result.  The more components, the more likely one or two components will be ineffective– i.e., not producing compensation.  Administratively, the company spends money supporting a plan component that isn’t producing fruit.  And from the salesperson’s perspective, the opportunity isn’t worth their time. 

Sales Time Allocation

“Whoa,” you say.  “I manage the sales comp plan, not the salespeople.”  Fair enough.  But the reason you love sales comp is because of its implications for the company’s profitable growth. 

Devilish Details

Of course, you can’t rely exclusively on these four measures to ensure the health of your sales compensation program.  Once you have nailed the basics, you should explore upgrades to your dashboard to include other dimensions, such as administrative expense per payee, or number disputes per incentive dollar. 

The time should be now to start measuring your sales compensation plan effectiveness.  Come third quarter, questions will surface around what’s working and what’s not.  Armed with output from your four plan-effectiveness measures, you’ll have definitive answers.

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.

Facebook, WikiLeaks and the Power of Peer Pressure

During Thanksgiving dinner my extended family (NOT pictured left) seemed intent on discussing Facebook.  How it’s necessary, how it’s evil.  Why in heck does Uncle Lou have a page?  Dude — stop texting at the table!  And so on.  The following week I’m inundated with news on the latest WikiLeak — scandal, crises, gossip — over state department wires.   Then yesterday I’m in a debate with a company’s sales and HR leadership over company policy on employees sharing their earnings info with co-workers.

So we’re in a controversial age over privacy and promotion of personal data.  I hadn’t thought this subject yet hit the shores of sales compensation land.  But  having now thrown it around our brain trust here at SCI (pictured above left), I’m confident saying the trends that have seeped into so many areas of our daily lives, driven mostly by technology and the Internet, has applicability to policy and preferences over the privacy of pay data.

Let’s be clear.  We’re talking about sales compensation specifically.  Please don’t go posting all your employees’ base salary levels on the company’s website as a way of demonstrating your hipness.

There are varying degrees of appropriateness and purpose here based on the structure of your comp plan.  To be safe, take base salary out of the equation.  So then do we socialize actual incentive earnings?

Many companies frown upon the idea.  Some go as far as suggesting that if a sales rep utters a word over his or her earnings to anyone other than spouse, then they’re fired.  This was basically the declaration of one executive in the meeting yesterday.  He had reason to be upset.  Despite the company’s efforts to keep its sales compensation data confidential, someone on the inside — a salesperson presumably — was disclosing details on Vault.com.  Management could try to fire the person or people responsible but had no way of identifying the perpetrators.

Consider companies where using personal pay references during team coaching and recognition events is encouraged, and celebrated.  My first experience with this was during a job interview for a sales position where the hiring manager said, “Our top salespeople made $xxx,xxx, $yyy,yyy and $zzz,zzz last year.  Here are their names.  You can call them.”  I felt a rush then, and always have since in meetings and ceremonies where personal pay is put forth for consideration.

If your salespeople are driven by both internal and external competition, and you have statistics to be proud of, then post it.  Get it out there.  Not only the ranked performance levels, but the corresponding pay also.  Attach names.  Get personal.   Your average performer will react differently to the pay figure versus the performance of Rep #1.   And for #23 out of 200?  Shame on him.  Perhaps the DMV is hiring.

This sounds harsh, but it’s characteristic of the increasingly-transparent world in which we live.   I took quite a beating over stuffing and cranberries due to the low number of “friends” reported on my Facebook page.   And that’s probably okay if this metric is important to me.  Point is, variable pay opportunity should be important to your salespeople, as should peer pressure be effective for motivating action.

Granted, details on your company’s incentive pay opportunity may not be ready for public consumption.  Maybe comparing competitors’ pay to your company’s own reveals a weakness, or your salespeople can’t figure out how the top five reps in the ranks made what they did.  Better then that you don’t publish this stuff.  Ignorance is bliss.

We caution such policies of secrecy, if only because everywhere we turn, it seems the genie is out of the bottle.

Here’s the situation: years of sustained growth, multiple acquisitions, complex sales compensation plans, manual and unreliable systems, ongoing disputes from the sales force on payment accuracy.  We met with a sales operations team of a large financial institution back in 2007.  They were done with the band aid approach to fixing the system.  Time to transform the entire operation, get ahead of the curve, become a strategic resource to the organization.

The situation is not unique.  We’ve listed what are common issues that can drive a complete transformation of the incentive management function:

• Incentive management (IM) technology platforms are disparate and lack functionality;
• Processes for plan adjustments and redesign lack analytical decision-making rigor;
• IM staff is reactive, not proactive, in keeping the incentive plans aligned with the needs of the business;
• Leadership is unclear as to the effectiveness of its incentive compensation investment.

In solving these issues, the company needed to ensure its incentive compensation plans were effectively managed, and aligned with the needs of the business, and enabled through a robust technology platform.

The solution approach focused on three discrete areas:

• Incentive operations: people, processes and tools that report performance and payment data, address disputes and adjustments, and provide analysis for ongoing incentive plan alignment;
• Incentive compensation plans: structure and policy for motivating the required behaviors and delivering compensation to specific sales and service job roles;
• Technology: applications for measuring and reporting sales and service performance, and facilitating incentive compensation management, including goals, payments, analysis and ongoing administration.

Subsequently, the project approach included three work streams designed to identify current state practices, desired-state practices, gaps and action plans for closing those gaps.

The company formed a task force to execute the three-phase initiative, along with an executive steering committee to guide progress and decide on structural elements.  The 30-week effort provided these outcomes:

• Formation of a formal IM governance structure, including:
  • Decision rights and accountabilities for the analysis, redesign, approval, implementation and ongoing management of the incentive plans;
  • A cross-functional incentive advisory panel chartered with the delivery of outcomes tied to an annual incentive management calendar;
  • An executive incentive leadership team chartered with addressing recommendations from the incentive advisory panel;
  • The role and staffing requirements for staff positions responsible for execution of incentive management functions;

• A comprehensive redesign of its incentive compensation plans for key jobs to realign goals and payment opportunity with the company’s strategic objectives; the redesign included development of plan design principles and operational standards to guide future plan realignment efforts;
• Funding and implementation of a “best-of-breed” incentive compensation management application.

By using a comprehensive approach, the company transformed its incentive management function to one capable of meeting the needs of the business for years to come.    The business impact includes:

• An increase to the company’s return on its sales compensation investment – more revenue and net operating income relative to the sales and service compensation spent;
• Increased sales and sales support productivity through a reduction in the number of sales and staff time previously engaged in IM activities;
• A reduction in the time required to cost-model and introduce incentive components and campaigns for new products;
• A reduction in the number of performance and payment reporting errors tied to sales credits.

Granted, this is a tough pill to swallow, but it’s a very comprehensive approach.  Just fixing the plans, the technology or organizational structure is piecemeal.   It’s a band aid.  Sound familiar?  Time to transform.

A question we hear frequently in our line of work is, “who owns the sales compensation program?”  In principle, it’s the head of sales, as sales leadership theoretically has accountability for motivating the sales force, and sales compensation is a key motivational tool.

In practice, the answer depends on the organization, and in many companies the ownership over sales comp isn’t clear.

According to OpenSymmetry’s annual sales compensation practices survey last year, 31% of the study’s respondents said the sales function is the organization’s designated owner of the sales compensation program.   Finance was the second most frequent response at 21%, ahead of HR at 17%.  In specific industries the numbers differ.  While the data are fairly consistent since we began the research in 1990, we observe in our work with financial services firms, retail/commercial banking in particular, a shift to finance and HR, away from the lines of business.

In cases where sales does not have formal ownership of the program, we have seen instances of sales leadership not engaged in the requirements phase and final determination of program changes.  This is unfortunate, as the sales leaders may not stand behind the requirements of the new program, yet must motivate his or her team to perform consistent with it.

Having formal accountability does not guarantee meaningful influence.  Leaders over the various stakeholder functions often debate over how best to fix the current plans, or even what’s wrong with them in the first place.  Too often we observe sales leaders making a case for change based on anecdotes and exceptional circumstances – e.g., “Competitor X just offered our top AE a $50k signing bonus.”

What’s missing from these debates is a set of principles, requirements or criteria for shaping plan design decisions, and data to indicate how well the current plan meets those standards.

We recently polled a group of sales, finance and HR leaders on the approaches they use to evaluate how well their sales compensation plans are performing.  Over half said they had no formal process for measuring plan effectiveness and ROI.  Clearly, there’s opportunity for fact-based decision making.

Below we list the most frequently-used reports for analyzing the sales compensation program.  Taken in aggregate, these reports help measure a company’s return on its sales compensation investment:

1. Group Pay Distribution: checks for plan participation rates, compensation efficiency and trending relative to competitive benchmarks for 25^th, 50^th and 90^th percentile earners ;
2. Individual Pay-and-Performance Correlation: identifies potential over- or under-pay scenarios – see scatter plot, left;
3. Quota Attainment Distribution: checks for quota reasonableness and identifies potential over- and under-pay scenarios and engagement issues – see distribution chart, below;
4. Compensation Cost-of-sales Trending and Benchmarking; measures total compensation (individual contributor, supervisor, region/division management) as a percent of revenue relative to competitive trends;
5. Administrative Efficiency Ratios; includes administrative FTE per payee, adjustment volume (occurrence and dollars) rate and system costs (hardware, software and professional-services fees).

(Charts courtesy of Xactly Corporation)

Evaluating the program through robust analytics is but one lever in an overall process for effective program management.  Other attributes include an annual calendar for planning and ongoing program-management activities, and clear accountabilities and decision rights for supporting the program across various stakeholder functions.

The company’s program requirements to a large degree dictate the data necessary for the ROI analysis.  Many firms can’t easily source the data needed, and thus require some investment to enable the analysis.  These are good investments because they provide greater overall program transparency.

The role of the sales leader is to motivate and engage the sales force to sell more.  Sales compensation is a key mechanism.  More important than program ownership the sales leader’s influence over plan change decisions based on objective criteria and analytical findings.

Welcome to our blog. 

SalesCompInsights was created by Scott Barton and Mike Meisenheimer.  In our 30+ combined years of working on sales compensation design and management, we’ve collected a lot of  intellectual capital and developed a few opinions on the subject.  So it’s time to share.  This includes reliable information on sales compensation principles, as well as current trends and research. 

Over time SalesCompInsights will continue to evolve based on feedback we receive, specific requests and changes in the broader sales compensation world.  

From time to time, we’ll ask our clients — professionals in sales, HR, finance and sales ops — to comment on industry trends and news that impacts sales compensation policy and administration.

We’d like to hear from you.  Please let us know if there are specific topics you’d like us to cover or comment on posts you find of interest.  Share with us your own sales compensation insights as they pertain to plan design, implementation and administration – things that worked, things that didn’t or questions you’d like to get answered.  We also appreciate a good story. 

We hope you find this site of value.  If you don’t, let us know that, too!