SalesCompInsights

By Scott Barton and Matthew Zink

As we have written numerous times on these pages, quota attainment distribution is a critical diagnostic for a goal-based incentive plan.  The shape of the distribution and its position relative to target attainment impact both the plan’s motivational capabilities and its ROI.

Consider an example:

• Company A sets a goal for its sales organization to produce $100 million in revenue.  It models a normally-distributed, salesperson-attainment scenario to test the impact of pay mix (ratio of base to incentive target pay) and pay rate accelerators on total comp expense.
  • Under the “model” scenario the company pays 113% of its incentive budget at 100% attainment, due to its use of accelerated payment rates for salesperson attainment above 100%, and the model scenario placing approximately half of the sales population into accelerators;
  • Its compensation cost of sale, or CCOS, is 4.26% — i.e., Company A is spending 4.26% of each dollar of revenue on sales comp under this scenario.

•  In a wide distribution scenario, the company experiences an increase to the deviation of salesperson quota attainment – i.e., the left and right edges of the distribution curve grow outward.
  • While the company generates no more revenue in this scenario, it spends more of its incentive budget, due to more salespeople earning at accelerated payment rates;
  • The scenario also produces a less efficient CCOS, given the increased number of salespeople performing at low attainment levels, yet continuing to earn base salary.

• In a third scenario the company experiences an upward shift in average performance, such that all salespeople produce 5% more than what the company modeled under the normal scenario.
  •  Due to its accelerators, the company spends more as a percent of incentive budget than under the normal scenario;
  • The higher cost is at a lower effective rate (CCOS) than under the wide scenario, because revenue increased at a higher rate than comp expense.

• Finally, a forth scenario, and an unfortunate one, is where the average attainment is 100% of revenue target but the shape is bi-modal.  I.e., instead of one, normally-distributed curve there are two – one centered at the lower end of the performance continuum and the other at the upper end.  Think of a two-humped camel, or the tale of two cities:
  • The lower-performing camp produces relatively-high fixed cost as a percent of revenue due to base salary;
  • The higher-performing group produces relatively high variable cost as a percent of revenue due to accelerated payment rates;
  • There is no middle group to offset each, extreme group.

From a purely budgetary perspective, Company A prefers the normal distribution scenario, which provides the lowest spend rate as a percent of incentive budget and revenue.  However, the company’s sales management has a different view.  The wide scenario provides more extreme examples of performance, and pay:

• High performers pull down big pay checks and serve as a source of inspiration to average performers;
• Poor-performing reps opt out of the program (or company), saving sales leadership pain and hassle associated with administrative, “performance-management.”

Obviously, for the sales management, the right-shift scenario is preferred – beat the goal and increase the number of salespeople over quota.  But beyond some point of goal attainment the sales organization’s success carries both short- and long-term consequences.

Short-term Company A – and this is a real example – is dealing with the fact that its overall corporate growth and profitability in its last fiscal year fell below analysts’ expectations, even though a large portion of its sales organization exceeded 110% of their quota. 

How is this possible?  Goals defining company success and sales team success are not aligned.  Misalignment usually stems from: 

• Under-allocation of goal, which is the practice of assigning to the sales team a level of quota that falls short of the corporate goal;
• Excessive use of measures and goals that enable the sales team to earn what they view is sufficient pay, even when their performance on the primary goal of revenue or margin falls short.

Longer term, companies that celebrate sales team success but fail to meet Wall Street’s expectations must take radical steps to get salesperson pay and performance in line with corporate results.  Ultimately the sales team must perform more, or earn less.

The prospect of earning less doesn’t sit well – with salespeople in particular.  Therefore, sales leaders need to ensure the sales compensation program uses measures and goals that align with corporate requirements, and that the resulting performance of the sales team and the company is aligned as well.  Other components of the comp plan, including target pay mix levels and payment rate accelerators, help fine tune the pay-and-performance relationship at difference levels of average attainment. 

The cost of poor quota setting and alignment can be substantial.  In our Company A example, the firm spent about 10% more than the modeled result at 100% average attainment, enough to employ at least four salespeople.  Another scenario could have been an average attainment below 100%.  This outcome better aligns pay and performance as fewer, highly-leveraged salespeople exceed goal.  The cost here, while difficult to measure, can be high as well, as salespeople perceive they can’t meet their income expectations because the company sets its goals too high.

Two recent news stories provided a lesson on the significance of core selling attributes, a theme often marginalized by the prevalence of social networking and the like.

The WSJ wrote on June 17 how Groupon and similar web-based marketing firms have boosted sales in small businesses.  Article

That same week the Journal reported the departure of the Apple Store’s chief Ron Johnson and the phenomenal success he helped create.  Article

These stories represent opposite ends of the sales-role-influence continuum, a core attribute of sales compensation design.

Take Groupon.  While technology enables the service, the service does not sell itself to many of business owners Groupon targets.  So Groupon relies on good old fashion telesales to embed its value proposition in the minds of potential customers, many of whom are too busy running the shop to spend time on the internet.

The Apple Store and its success is quite a different matter.  We’ve seen cases in retail where technology affords store personnel real-time data on customer profiles and preferences, and up-to-the-minute sales incentives based on inventory flow and strategic positioning.   But spend a few minutes in an Apple Store and you sort of conclude that the stuff sells itself.  Sure, Store personnel tend to be knowledgeable, courteous and attentive (all things we complained recently were missing in the RIM store). But aggressive sellers they are not.

Not surprising then that the incentive pay strategy is completely different between these two models.  We can’t speak specifically to Groupon but know a few of its competitors offer little base salary with lots of commission upside.  Sales reps secure a contract and get paid on a percent of the deal’s revenue.   Apple Stores do not pay its personnel commission.  A representative told me the focus is on the customer’s overall store experience, and not whether customers hear from a store rep about the latest product or app.

This, my friends, is old-school sales comp design.  Take into consideration factors such as brand equity, market share, competition, teamwork and the company culture for deciding how much if any variable comp goes into the total pay mix for the role in question.  Groupon may come to dominate the market for localized, deal-of-the-day advertising so that more prospective customers call Groupon than the other way around.  For now though, it’s a phone, call list, well-honed message and big, dangling incentive carrot that gets the sales job done.

Effective Sales Compensation Starts with the Sales Role

Over the years in our work on sales compensation we’ve engaged with companies of all sizes.  One of the more instructive aspects is the way in which a small firm, as it grows, formalizes its sales roles and uses this structure as a competitive advantage.  Many firms we encounter are loose on this approach, giving salespeople the autonomy to focus where they see fit, or directing salespeople in ways that conflict with how they’re paid.

A similar issue comes when the company has no formal approach for profiling sales job roles after an acquisition.   Either the acquired job stays in its legacy plan and is “off the radar” from a governance perspective, or the job gets slotted into a plan without any formal analysis to ensure alignment.

In either case the sales compensation approach does not align with the job role.  Salespeople complain they’re being asked to focus on account development, new products or profitability while the sales compensation plan doesn’t adequately reward for these initiatives.  In addition to salespersons’ perspectives are those of sales management.  If the rank order of salesperson contribution, as perceived by sales management, doesn’t align with the ranking of salesperson earnings, then there’s a disconnect between job role and comp plan.

At core is a lack of role profiling and ensuring the compensation approach aligns with the role profile.

Components of the Role Profile

Many firms rely on a narrative job description and generic leveling matrix.  Read the descriptions for a number of different job titles and they start to all sound the same.  Problem is these descriptions lack key components of the sales role.

More thorough is a role profile that targets priorities of the job, including:

• What’s the degree of market maturity into which the salesperson selling – e.g.: mature; high-growth? 
• On what is the salesperson’s knowledge oriented – e.g.: accounts; products; technical solutions; partner relationship?  To what degree is the solution a stand-alone versus configured?
• What are the buying patterns and overall segment characteristics of the targeted customers – e.g.: sporadic; aligned with budget cycles?
• What percent of the sales time is on new versus current accounts?  What percent of current account focus is on maintaining current business?
• To what extent must the role team with other sales and support roles?
• Where is the role to focus during the sales process – e.g.: prospect; persuade; fulfill?
• What’s the length of the sales cycle?  What’s the timing of revenue recognition following the sale?

Should-be, As-is and Multi-Source Inputs

Those responsible for profiling the roles should construct a template using the factors above.  The next step is to complete a “should-be” version based on the coverage model and strategic intent for each job.  We are often asked to assess the gap between this ideal profile and how incumbents currently execute — “as-is.”   For the as-is profiling, consider multiple inputs, including incumbent surveys, management surveys and interviews, team interviews and focus groups, and observation.  The observation track can be particularly insightful. 

Long ago I spent six weeks with over 30 field sales representatives from Alliant Foodservice (later acquired by U.S. Foodservice), visiting customer accounts in territories around the U.S.   Using the templates my colleagues and I performed as-is profiling for over 100 field sales personnel, and inputs from surveys and management focus groups, we observed seven distinct profiles for a single job title.  Relative to the “should-be” profile, we assessed coverage gaps and other deficiencies – information critical to training, cross-role coordination and change management.  Typical of what we’ve observed in similar assignments, the reps were critical of their as-is execution and saw significant opportunity for refinement. However, they were not likely to start executing on a new role profile until first being heard and perceiving their input helped shape the future-state approach.

Aligning Sales Compensation

Aim to design a sales compensation plan for each unique job role.   Start with the target total cash amount.  Profiling often identifies an increase in the job’s strategic content, from where management had thought it was previously.  This shift requires an increase in base salary.  Use market pay surveys appropriate for your industry as an input for appropriate target total cash levels.

Pay mix, the proportion of target cash that is both base salary and target incentive, should align with the job’s relative influence over persuasion on deals.  Many factors for determining the appropriate mix tie directly to components of the job profile.  For example, jobs focused on more complex segments of customers tend to command higher base salaries in the pay mix.

Performance measures and pay mechanics must align with each profile as well.  Suppose the account manager role earns variable pay according to revenue quota achievement, yet the role profile indicates the job’s primary responsibility is to penetrate the account base with new products.  Therefore we’d expect the plan to include an account penetration measure, with pay mechanics geared toward the sales cycle and deal’s revenue flow.

Managers often attempt to design and apply sales compensation programs on unfocused or misdirected job roles, believing the plan will focus and guide behavior accordingly.  This puts the cart before the horse.  Formal role profiling is a critical step in the evolution of a sales organization and the foundation for sales compensation effectiveness.

What Makes This Group of Sellers Unique?

It used to be that inside sales was commonly seen as a lower-tier channel relative to field sales.  Inside reps could touch more accounts than their field counterparts in a given period, at a lower cost, making them well suited for covering lower-value customer segments.

With changes to customer buying habits, inside sales is playing a larger, more prominent role.  Indeed, a client recently confirmed this notion, sharing that he bought a $600k enterprise software application after researching options and receiving some over-the-shoulder support from the software company’s inside sales rep.  “If I can buy a $60k Audi without ever speaking to a salesperson, (it) seemed logical I could buy a software app without all the in-your-face, dog-and-pony shows.”

As prominence of the function increases, so too does the complexity and questions on how best to attract, retain and motivate inside sales team members.  We look at three aspects.

Culture and the Social Network

Generational nuances come up more frequently with inside sales forces because these roles are typically the first rung on the sales career ladder.    Inside sales is a tough environment, and the fate less certain than a field sales role.  There’s no loyalty.  Field sales is a career; reps increase their comp by staying in the role and being better at it; inside reps look for a job promotion instead.

For the manger, culture can work for you or against you.  Ring the bell, free pizza in the lunch room, public expressions or recognition and success – all less viable in a field sales environment; but skepticism and disappointment travel like wildfire in a call center.  Such conversations used to occur over cube walls, in the hallways or at the water cooler.  Today’s younger inside sales reps are more likely to stay in their cubes, texting and emailing as a way to stay connected to peers both inside and outside the firm.  These factors make it harder for the call-center manager to leverage the positive aspects of an inside team.

Steve DeMarco is VP of Sales for Xactly Corporation, and a long-time manager of inside sales resources.  Recently Steve spoke at the American Association of Inside Sales Professionals (AAISP) Conference, where much of the discussion was around how best to motivate “Gen Y” employees that fill the majority of inside sales seats.

Steve says, “Given all the sports and related activities that kids now participate in from an early age, today’s younger workers can be dedicated but expect structure and formal training for advancement, much more so than earlier generations.”

And Baby Boomers are entering or returning to inside sales at rates not seen in years, given the recession’s hit to retirement incomes.  “Everyone gets along,” Steve says of the two generations working side by side, “but management has to appreciate that what motivates one group won’t necessarily work for the other.”

Role Design: Inbound or Outbound

There are significant differences between inbound and outbound roles.  Of the two, inbound is more difficult to benchmark for determining competitive pay rates because the pay mix – the split between base salary and target incentive – is not consistent across firms using inside roles.  More challenging is the confusion many inside incumbents have around the inside role – is it sales?  Service?  Firms that haven’t nailed the culture, performance expectations and skill requirements will struggle.

We think of outbound sales roles as being similar to field sales but typically more transactional and data driven.  Issues pertain to account ownership and handoffs when both field and inside sales work on the same accounts and opportunities, or lower-value accounts migrate from inside sales to field coverage.  In these cases the sales credit mechanism must align with each job role’s point of influence.

Pay for Performance

Measuring performance for the inside sales role is problematic.  In call routing schemes managers can struggle to identify which rep influenced a buying decision.  Call routing and marketing campaigns influence overall sales opportunity for inbound roles, and have an impact on the customer experience – “my cable is down and you’re trying to sell me phone service?!”

Call centers have a tendency to overload reps with metrics.  Frequent spiff programs can conflict with, or dilute from, the core incentive plan.  Management has to filter out what are important-but-not-critical measures from those that link to profitable revenue growth.  Inbound roles do well with incentive credit schemes that retire quota at a rate that’s proportionate to the product’s or service’s strategic value, with a minimum customer-service score serving as the qualifier for incentive eligibility.  And quota must, for the inside role, adjust with fluctuations in call volume.

As we’ve said on these pages many times before, sales is, or should be, service.  Salespeople able to demonstrate this approach do well, particularly in the inside sales environment, where words, tone and timing account for everything.

Adding to our List of Favorite Sales-Themed Movies

Ah, Friday night.  Maybe you shut down early, pick up some Chinese food (though here in SF we have to distinguish between Hunan and Mandarin) and stream a good sales flick.  We keep a running list of our favorite movies that speak to the madness of the sales profession.  If you’re a salesperson, manage salespeople, or in some other way find the profession entertaining, we suspect you keep a similar list or at least enjoy a sales-themed movie on occasion.  We’re happy to recommend one for your list.

Let’s first get something straight: this is not a movie review.  My Friday night viewing standards are low, given the alternative to a Friday-night-dinner-movie-kids-asleep scenario is being stuck at O’Hare, or worse.

Now then, “Love and Other Drugs” represents a good dinner-and-a-movie piece because it’s a love story, though considerably spicier than your average Julia Roberts flick, and showcases primal sales behavior.   Jake Gyllenhaal’s character is a heartless Pfizer sales rep with some unsavory tricks up his sleeve, that is, until Anne Hathaway’s Maggie makes a strong bid for his attention.  We can only imagine the legal wrangling between Pfizer and the movie’s producers.  Perhaps the subject’s period was enough long ago – when you could still buy a new 911 for under $50k – so that any unflattering depiction of Viagra or its sale force is moot.

There are three general types of sales-themed flicks: light-and-foolhardy; dark-and-serious; and serious-yet-ultimately-uplifting.  Depending on your meal and mood, we’ve tried to cover all three categories with our top-pick list, in no particular order:

1. Glenngary Glen Ross: “Put that coffee down – coffee is for closers”
2. Boiler Room: Ben’s profanity-laden pep talk is second only to Alec’s above
3. Fargo: William H. Macy didn’t go to Club that year
4. Wall Street: Charlie Sheen plays a grownup
5. The Big Kahuna: don’t let the cover art fool you – dark and serious
6. Thank You for Not Smoking:  “We don’t sell Tic Tacs, we sell cigarettes. And they’re cool, available, and *addictive*. The job is almost done for us.”
7. Tin Men: some great dialog….and a government probe!
8. Clerks: retail at its best
9. Tommy Boy: “That guy may not call us”
10. Working Girl: Talk about self motivated – she wasn’t even eligible for the comp plan!

Upon reflection it’s the dark-and-serious genre that dominates the list.  Avoid many of these movies if you’re considering a career in sales, or are skeptical of salespeople.

But any one of these movies illustrates the stuff that makes salespeople tick: passion, tenacity, guts, desperation. If you work around salespeople and find them a little hard to understand, you might consider watching these as part of your  sales sensitivity training.

Or just decent entertainment.  As for the dinner portion of the equation, we’ll leave that to Part II of this series.