SalesCompInsights

Leveraging the Power of Sales Compensation

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

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

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

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

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

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

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

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

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

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

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

Flexible With the Course While Staying True to Plan

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

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

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

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

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

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

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

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

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

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

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

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

How to Pay for SaaS Sales in a Legacy Software/Hardware Environment

In many respects, there’s nothing particularly complex about paying salespeople for software as a service (SaaS) — determine when and by what means to credit the sale, then run this credit through the incentive scheme, whether that be a commission (sales credit x payment rate) or quota-based payment (% of quota attainment = % of target incentive).

The real fun begins when you’re trying to motivate a sales force accustomed to earning good money for selling perpetual software licenses, hardware and services.

Take a software/hardware company with its core business in perpetual software licenses.  In 2010 the company added a SaaS solution to its offering and chartered its field sales force to sell it, while continuing to offer the core business.  It’s now September and the directors of Comp and Finance are trying to figure out how to change the comp plan so that reps sell more SaaS.  I join the conversation on a hot Thursday afternoon in a windowless, poorly-ventilated conference room at the company’s headquarters.

The discussion focuses on what should be the commission rate on the monthly recurring revenue (MRR) for a SaaS deal.  At 7% it’s currently two points higher than the base rate for a perpetual license contract.  Trouble is reps get paid on average about $10k based on half of the contract value* on a core (perpetual license) deal, and only about $500 each month on an average SaaS deal. 

*Second half of the core deal credit comes when the product is installed.

I ask, “Why would a rep focus on a deal that pays less after a year than one that pays more today?

The finance director fires back, “Because the customer wants the SaaS solution, and the rep gets an annuity stream so long as that solution remains in service.”

I bit my tongue and took the high road by elevating the discussion up a few notches, for we were in the weeds talking about rates and such, when the conversation needed to clear a few items related to the sales strategy.  That is:

1. What’s the relative priority between core business and SaaS business?

2. What is the expected net present value (NPV) of a target SaaS solution sale?

3. What is the length of a SaaS sales cycle?

4. What role should the rep have in post-sales activity – i.e., motivating the customer’s adoption and use of the SaaS solution?

Fast forward to another design meeting.  This followed a few executive committee meetings in which we got some answers to the questions above.  Armed with these answers we could now sketch out the blueprint to a new comp plan.  The real meaty issue came down to SaaS deal valuation and timing of the sales credit.

We established two design principles that helped work through these issues:

• Establish parity in the credit value between core and SaaS products: A knee-jerk reaction is to equalize the commission rate, but this doesn’t recognize parity in NPV between core and SaaS deals.  It’s complicated to reach parity when the businesses are so different – contract value for core, MRR for SaaS.  For the sales team to give SaaS the focus it required there had to be parity between the two or better yet, greater NPV incentive opportunity for SaaS.
• Establish parity in the credit timing between core and SaaS deals: The primary role of the sales rep was to focus on growing new business. That’s why the company offered 50% of the sales credit on core business at the time of booking.  Per the first principle, we established that TCV would serve as the basis for SaaS sales credit.  Providing 50% of the sales credit on TCV at contract signing struck the right balance between alignment with revenue recognition (MRR) and job role focus (close the deal and move on to the next).

Remember the timing of credit for core business was half at booking, half at installation.  SaaS installation was a few weeks versus that of the average on-premise (core) system, which was eight months.  To keep the SaaS and core credit cycles aligned we selected eight months into the first year of a SaaS contract for the second half credit trigger.  Should the annualized MRR at eight months be way off from the TCV, the plan would adjust the second-half credit amount. We had to consider any significant differences in sales cycle between the two offerings, but in this case there was none within similar customer segments.

Many companies struggle with the approach of decoupling incentive credit from the revenue recognition approach.  Thus, most SaaS companies pay on MRR.  We think that’s fine in a pure-play environment.  Here though, the company’s sales force was accustomed to earning on a deal-by-deal basis.  To expect, as the finance director did, that reps would essentially buy into an annuity – sacrifice credit today for an ongoing cash stream later – wasn’t realistic given the legacy pay approach.  Even as a stand-alone system the annuity approach becomes difficult to manage over time.  Tenured sales people build up large books of business and lose their motivation to continue growing new business; young salespeople can’t earn enough to stick around.  Territory splits and trailing of the credit, where it decreases each year to eventually reach zero, can mitigate the fat-and-happy syndrome but becomes a nightmare to manage in a large sales organization.

There are still some details to iron out in this case pertaining to goals and payment schedules.  But having aligned the incentive credit approach to elements of the sales strategy, most of the heaving lifting is behind us.

Sales compensation design and management is a very specialized field — just ask the recruiters trying to fill sales compensation management jobs.  Consultants make good candidates because of their breadth of experience and strategic thinking.  Though making a switch from years of consulting to the day-to-day challenges of a global enterprise is not for everyone.

Last week we met with Keith Briscoe, who recently joined Dell as a global sales compensation strategist after years as a senior consultant for Hewitt, Mercer and AGI.

SalesCompInsights (SCI): You had been in consulting for about 15 years.  What attracted you to a full-time position at a firm like Dell?

Keith Briscoe (KB): This was a personal decision I made to broaden my experience base and create new opportunities for the next 10-15 years.  I had the chance to do good consulting work with a wide range of companies around the world over the past 15 years, but I sensed that I was still missing something.  I had a feeling that it would take working directly for a company to see how business strategy actually connects to the day-to-day activities of an organization.  At Dell, it was clear there would be a tremendous opportunity to experience this connection.  I was especially drawn to Dell given its successful history and the tough challenges it faces as it transforms into a truly full-service information technology company.

SCI: How’s the management consulting business changed since you started in the mid- 90s

KB: In general, it seem clients demand significantly more today than they did 10 or 15 years ago.  I think this has a lot to do with the sophistication of organizations and their focus on consulting expenses.  Specifically within sales effectiveness and compensation consulting, I believe client companies are now highly educated in this field.  Fifteen years ago, there was still a tremendous need to help companies work through the basics: connecting sales strategy to organization structure to sales compensation design.  We provided value by putting process and discipline around setting pay mix, selecting plan metrics, and devising pay mechanics.  Now, companies can do this for themselves and their questions of consultants are far deeper and more specific to their industry and/or sales model.  This requires management consultants to make sure they put the right individuals with the right experience in front of every client.

SCI: Since joining Dell, what’s been your biggest surprise?

KB: My biggest surprise is how many sales compensation experts we have at Dell….  I say this with a bit of sarcasm but the reality is, many people in many functions have a vested interest in what and how we pay our large sales force.  At its heart, Dell is a sales-oriented company.  So, through its history people in sales management, HR, finance, sales operations, and marketing have paid close attention to the sales compensation program.  Ultimately, this is a good thing.  I just need to keep it in mind as I attempt to make improvements to this part of the business.

SCI: How are the challenges of work different as a manager versus consultant?

KB: Ultimately, many challenges are the same and I think doing good work is the most important thing whether as a consultant or manager.  But, the biggest challenge as a consultant is wearing a lot of hats: building client relationships, selling work, creating intellectual capital, managing projects, and doing detailed design work. It requires discipline to focus on each of these and creating the right balance.  Also, it was sort of like a roller coaster, sometimes ramping up to a heavy workload; sometimes slowing down and “being on the beach”.  At Dell, I’d say my role is more singular (global sales compensation design) so I am not acting as a jack-of-all-trades.  Instead, the two main challenges are 1) prioritizing all of the requests from the business segments, and 2) maintaining the right balance of strategic and tactical focus.

SCI: What’s your advice to someone considering a shift to a career in sales compensation consulting after having worked for years as a sales comp manager in a company like Dell?

KB: Understand that your experience working through plan design and writing policies / communication materials will be valuable.  You can use this experience to ask good questions of your clients and focus on details.  However, as a consultant you must be mindful of completing the job you are hired to do – on time and on budget.  This means keeping close watch on the project plan.  I believe this is where consultants are generally more disciplined.  And, if you pursue a career in consulting, remember that you are always on stage.  Clients will be evaluating what you say and how you say it so preparation is absolutely essential.  Finally, while doing good work for clients is critical, remember that your firm will rely on you to produce results for them: this means selling work and billing time.

SCI: Has your perspective on the value provided by consultants changed?

My perspective hasn’t really changed, but it is clearer to me now that consultants must provide something that is lacking within their client organizations in order to be valuable.  In sophisticated companies, there are plenty of smart people that have come up with a lot good ideas.  A consultant’s value here will come from his/her ability to dig into the “how”, not the “what”.  That is, make sure you can address the details of implementing change and not just identifying problems.  One way to make sure you provide value is to get guidance from someone inside the client organization.  Ask questions about what will really make a difference and how you can improve any of the solutions you develop.

In our last post on this topic we shared ways that companies in the banking and other regulated industries change their incentive plans to address regulatory concerns.

Now we’re turning our attention to the management side of the equation — i.e., processes, standards, decision accountability and tools.

My first experience managing incentive plans in a regulated environment was with a large brokerage firm.   The industry was still reeling from a few high-profile incidences where brokers were found pushing mediocre investment products in part because those products paid them the most commissions.  Our company vowed to NEVER wind up on the front page of Section C in the Journal.

One of my first observations was the fragmented nature of our company’s incentive management practices.  For example, product groups would develop promotions and offer incentives for the salespeople to sell certain products without any consideration of how those sales could distract from other sales initiatives.  Similarly, sales managers could run their own campaigns without any thought to program ROI, regulatory compliance or sound incentive design principles.

The second issue was the degree of transparency related to how the company’s various programs paid.  While I started to build an inventory of the various incentive programs out there, it wasn’t complete and I could not easily say how much the company paid each sales person or for each product.

That last question is one that for many incentive managers falls in the “nice-to-know-but-I-have-bigger-fish-to-fry” category.  For me it did until one Tuesday in late November.  The NASD (now FINRA), governing body for the securities industry, issued a request for the payment amounts going to each salesperson for a particular bond type over the past two years.  Date request due: November 29 — the Tuesday after Thanksgiving.  I’m reading this memo on the Tuesday before Thanksgiving! Man how I would have loved to, after first ensuring the email wasn’t a prank by someone, push a button that would crunch the numbers and issue the report while I was packing up for the Thanksgiving holiday.

This wasn’t to be.  My group worked the entire weekend (downtown San Francisco is terribly depressing on Thanksgiving day — not so much as a turkey sandwich is available). We had no formal way of collecting pay program details and ensuring those programs were in line with our standards (of which we had very few).  Worse, we did not have a centralized database for storing performance and pay information.  Trying to collect this information was like a scavenger hunt.  Reporting these data in some coherent fashion was yet another humbling exercise.

Somehow I survived and the firm is still in business.  But the memory still stings.  The lesson: know what plans you have and how they pay.  This goes for regulated and unregulated firms alike.  If you can’t answer this question within 48 hours and a few easy key strokes, then prepare to miss your favorite holiday.

Better yet, take note of these steps:

Step 1: Document Who’s Accountable for Which Decisions and What Information

Critical processes such incentive plan redesign work best when the company has established clear accountability for each process step and decision.  Use a reliable accountability matrix, such as RACI (Responsible, Accountable, Consulted, Informed), to delineate roles.  Some regulatory bodies require the involvement of your company’s board or risk officer for major incentive policy decisions.

Step 2: Map and Optimize the Critical Processes

We think of processes for incentive management falling into four buckets:

1. Evaluation of Results
2. Design or Redesign of Plans/Programs
3. Implementation of New Plans
4. Administration, Reporting and Dispute Resolution

Within each bucket is a set of processes to ensure these things get done effectively.   At it’s core, incentive management focuses on the administrative processes — after all, if you’re salespeople don’t get paid, they don’t sell.  Yet there’s much more.  My Thanksgiving from Hell required processes for reporting and evaluation, but a lot of the pain came from the fact that the company had no good process for designing new programs.  Each bucket is important and requires clearly mapped processes.

Step 3: Establish Standards for What Makes A “Good” Plan

In the first part of this series we discussed many of the guidelines that banks are using in an effort to align with the Fed’s pay-risk-mitigation principles.  These address plan features and policies like base-incentive pay mix, types of performance measures and goal, etc.   There are principles and standards for the management practices as well.  E.g., number of acceptable pay adjustments per total payees, number of times the steering committee meets to review plan evaluation results.  Each of the four buckets above should have a set of standards that management compares to the company’s actual practice.  Any gaps between standard and actual form the basis for change.

Step 4: Leverage Tools Appropriate for Your Incentive Management Requirements

Many companies we encounter can effectively manage their incentive programs using spreadsheets and emails.  Many cannot.  This was certainly the case for the brokerage firm mentioned previously.  The company knew what it had was inadequate but viewed the solution as being too complex and too expensive to pursue.

Tools for incentive management can be relatively complex.  Many companies use multiple systems to determine sales performance and complex plan rules for paying the salespeople.  Yet there are good systems on the market today for managing such complexity, and you needn’t try to automate all processes at once to make an impact.   Focus on the critical processes first, optimize those processes by removing design features that add complexity but aren’t necessary for meeting your strategic goals,  principles and requirements.

*   *   *   *

Building solid processes, decision accountability, standards and tools enables a well-functioning incentive system and just might help your work-life balance.  After all, requests for information always come right before a holiday.

This week brought a slew of reports indicating strength in the tech sector: Google’s profit up 37%, AMD’s revenue up 34%, Intel sales up 44%.  Not surprisingly, many tech firms are starting to ramp up their hiring of sales professionals and make other investments targeted at sales productivity.

The Wall St. Journal reported yesterday that Intel plans to hire 1,000 to 2,000 employees, Cisco between 2,000 and 3,000, both Twitter and LinkedIn about 150.  The tech job website Dice.com has shown a 22% increase in tech job listings from a year ago.   Most of these jobs are focused on engineering and sales.

From our client work in the tech sector we’ve seen an unusually high rate of activity related to sales productivity and operational efficiency designed to support the sales force.    Typically, consultants specializing in sales compensation design and automation take a spring recess.  Not so this spring.  We’ve seen a spike in job openings for sales compensation and operations professionals as well.

On the decline are sentiments that salespeople “should be lucky to just have a job.”  We heard this repeatedly over the past year as management’s rationale for downplaying a disengaged sales force.  As we wrote on these pages in February, such ignorance can in turn sows seeds of discontent.   A discontented sales force eventually leads to dissatisfied customers and, based on the recent job trends, sales force turnover.

If you are not in discussions about your sales force management strategy — clear goals, competitive reward opportunities, pay-and-performance-reporting and supervisory-coaching capabilities, we think it’s a good time to start.