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.

Know Which Investments Will Pay Off

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

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

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

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

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

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

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

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

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.

Incentive compensation management in a global organization brings its own complexity and opportunity for frustration.  On one hand is the local country manager; adamant that all things incentive related should reflect the needs of their market.  On the other we have the Vice President of Global Accounts, VP of Marketing or new head of HR who are looking to increase the consistency of customer experience and go-to-market model.   Caught in the middle is the person or group responsible for sales incentives.  As the results from a recent survey we helped with suggest, companies use a variety of approaches to manage their incentive programs. 

Looking back over the last five years, the percentages haven’t changed much.  Answering the same question in 2006, 44% of respondents used a centralized process with business unit representation and 18% had a centralized process led by corporate staff.    What’s the takeaway?  Well, for one, it appears fewer and fewer companies use a decentralized process to design their sales incentive programs.   This is consistent with what we observe; most global companies today are looking for at least some degree of consistency in their incentive plan designs.  What varies are which elements of the program should be designed centrally – whether it is corporate led or a cross-geography design team – and which elements should be left to local managers.   Consistency of customer buying practices, business priorities, culture and legal requirements can all have an impact on who makes what decision. 

Where we observe more change is the administration of the plans.  Improvements in technology, combined with a desire to reduce costs are clearly driving more companies centralize their administration efforts.  Where it gets tricky is how to handle inquires and disputes (we know – with a new technology investment shouldn’t the number of inquires/disputes go to zero).  Some companies have implemented global or regional ICM “call centers.”  In our experience the more diverse the selling environment the more difficult this becomes.  Assuming the available budget dollars, a more common approach is to centralize the technology infrastructure with local administration support.   An added benefit is the ability to evaluate the plans on a global level while retaining local insight. 

When it comes to global ICM, perhaps the most important suggestion we could make is to clarify your governance model – whatever that may be.  Whether corporate HR drives the global design process or each region participates as a member of the design team, clarity of the process, who makes what decision and how the plans will be administered will help improve the effectiveness of the program.  One last thought, lest we forget – publish and stick to the ICM calendar.   This simple, but all too often overlooked deliverable is one of the key differentiators between leading and lagging ICM organizations.

Along with prior year calculations and current year plan launches, Q1 is also the time of year when many companies sweep the dust off of their dormant  incentive compensation management/sales performance management projects.   Rare is the sales compensation manager who wouldn’t love to replace the aging homegrown incentive system or do away with the calculation spreadsheet.    Historically the request for money might be met with a raised eyebrow from the CEO; “why would we buy a new system when the checks go out on time?”  Or from the CIO; “that’s a good project, number four on our list.  This year we have funding for three.”   Even with our bias for the subject matter, given all the money spent on incentives and all the pain incurred, the growth rate of the ICM/SPM market has surprised us over the years.     

But change is in the air.  A growing recognition of the difference between incentive compensation management and sales performance management.    Plenty of companies generate real returns from their ICM investments.  And you could argue that the ICM focused market (i.e., companies that really just want to upgrade their compensation system) continues to grow.   The noticeable change from our perspective is more companies considering true SPM projects.  More companies investing in SPM. 

What caused the change?  Improved economy? Maybe.   Increased awareness?  Again, maybe, but less likely from our perspective.   Increasingly dynamic selling environments?  Shift in sales management focus?  SPM product evolution? We think yes to all three.  A recent eBook from CSO Insights supports our hypothesis.  In it, Barry Trailer contrasts the difference between incentive compensation management – limited number of primarily tail light focused metrics – and sales performance management – increased number of forward-looking metrics.  CSO Insights analyzed the prevalence of behaviors motivated by the sales incentive program.  Across 8 of the 11 categories measured,  SPM focused companies reported a higher prevalence of motivated sales rep behaviors compared to companies that are strictly ICM focused.   Companies that invest in SPM report positive results.      

In our experience, companies tend to invest in both ICM and SPM for one of three primary reasons:

1. Pain resolution:    Low accuracy, delayed payments, compensation team turnover or other symptoms of  a broken process/system that is no longer tenable.    
2. Aspiration:   We can be more productive.  Through better reporting, program modeling, dashboards, workflow and the like we can increase the motivation of the field, target and implement more effective strategies and improve the overall performance of the organization.
3. Regulatory or risk avoidance:   Federal regulations, compliance or related issue requires that we change our processes and/or tools. 

Business cases for a new ICM process or technology solution tend to focus more on categories one and three:  fix what we have today and if the other areas can be improved, well that would be great.  Business cases for SPM tend to focus more on category two:  we can take the management of our sales team to another level and drive increased sales productivity.     For those companies considering a new ICM/SPM solution, it helps to inventory the change drivers into the three categories and then tailor the proposal accordingly.   For category one in particular, hard dollar costs may be easier to quantify and generate a “credible” (from the CFO’s perspective) ROI.   Category three often ends up “we just need to do it,” while aspiration focused efforts may require a broader base of support. 

And therein lies the rub; aspirational projects may be harder to quantify, but can arguably generate the biggest return.   Intergalactic revenue increases might look good, but they won’t be credible.  Successful SPM business cases  the hard dollar impacts that can be quantified along with a compelling argument for how the organization will change; practical examples and tangible goals.  One final thought; woe is the project champion who forgets the political dimensions of any ICM/SPM project.   Often times the unspoken considerations sway the decision one way or the other.   And in all cases, successful ICM/SPM transformations require more than just technology;  the associated  job roles, processes, and governance model impact  your ability to drive sales performance as much as the underlying software.

David Stein, founder/CEO of ES Research Group, Inc. and publisher the popular blog “Commentary on Sales Leadership” for leaders of customer-centric enterprises, recently sat down with our own Mike Meisenheimer to discuss trends in sales compensation.

In this column, “Show Me The Money,” David and Mike observe companies having seemingly everything in place for sales success — hot product, well-oiled sales methodology, tools, support, references, technology, training, coaching, leadership.  But if the sales compensation approach is poorly designed or managed, salespeople won’t stick around, or the company faces the difficult scenario of having to correct an overpay situation (and then the salespeople won’t stick around).

Mike describes during the interview what are three common symptoms of poorly-managed plans:

“1) Under-merchandising the plan launch. Rather than a robust strategy that involves sales management and engages the field, an email comes from corporate; 2) Limited progress reporting; plan participants don’t receive regular updates on their performance; and 3) Lack of detailed incentive reporting.”

There are good insights to keep in mind as you work over the ensuing weeks to redesign your company’s sales comp plans for 2011.

Paying for Growth in a Regulated Environment (Third in a Series)

In this series so far we’ve used the banking industry as one currently at odds with growing the business in an increasingly regulated environment.  It’s within this context that NewSigma and Varicent recently surveyed 35 regional banks on their current and projected sales compensation practices, and sponsored a webcast to review survey highlights and hear perspectives from a panel of incentive managers from within the regional banking industry.

For a rebroadcast of the web event, to go:

https://www1.gotomeeting.com/register/753683233

Based on the survey’s findings, here’s what regional banks are doing to balance growth initiatives with regulatory compliance:

1. Increased sales compensation governance:  35% of the responses said their bank has the board’s involvement in sales compensation review and decision making; 26% said their bank has resources dedicated to enhanced plan management practices (e.g., plan evaluation, redesign and communication).

2. Focus on more sophisticated reporting and analytics: 59% of the responses said that better reporting and analytical tools represented their bank’s best opportunity for improved management of the sales compensation program; 32% of the responses indicated their bank plans to adopt new systems for reporting and analytics of incentive compensation measures.

3. Shift to longer-term and organizational level measures: banks surveyed most frequently selected profitability, longer-term and organizational-level measures as new or more-emphasized components in their sales compensation program across the multiple lines of business.

4. Stronger alignment between goals and performance of the individual salesperson and that of the organization:  33% of the responses in Wealth Management, Private Banking and Investment Services, and 28% in Commercial Banking indicated goal alignment as one of the best opportunities for increased program effectiveness.

From client work and surveys we see a relatively high deviation in practices – i.e., show me five regional banks and I’ll show you five different approaches for sales compensation.  Regional banks operate in different geographic markets and thus can differ in terms of challenges and priorities.  This makes sense.  But what’s less obvious is the rationale for differences in philosophies and strategies for addressing federal regulations and local market growth opportunities.  For example, one panelist spoke of the high level of uncertainty in her market, and conservative approach (“hand holding”) for compensating and motivating the sales team.  Yet another spoke of her commercial division’s “dramatic” shift to a production focus, with sales compensation being a “driving force” so that the sales team can get back to what it was hired to do (i.e., sell).

We like to see that some banks are dusting off their playbooks for effective sales performance management.  Unfortunately for the majority of banks in the survey, many of their current sales compensation practices are at direct odds with sound principles for motivating sales behaviors.  Too much emphasis on organizational measures removes the salesperson’s individual accountability for production.  Half-baked measures for profitability leave the salesperson feeling powerless about outcomes that influence his or her pay.  Too little pay in the variable bucket makes the salesperson indifferent to high and low levels of performance.  Too heavy a reliance on manual processes for calculating payments, reporting performance and analyzing trends takes time away from selling.

Knowing what makes the salespeople tick, and what ticks them off, is a critical ingredient in the formula for getting a good return on the sales compensation investment.  Shockingly, a reported 72% of those banks surveyed said they do not seek salesperson opinion when evaluating the effectiveness of their sales compensation program.

Can you imagine rolling out out a consumer product and not knowing how your target market will respond?  Banks have done a good job recently meeting the expectations of the federal pay regulators.  Now it’s time to get with the people responsible for growing the business.