We hope you enjoy this Q1 summary of our new Field Sales Compensation Survey Series. Clicking on the full screen button will make it easier to see some of the statistics (sorry about that).
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One of the most challenging decisions facing sales leadership is whether to move from a commission to a goal-based plan. By commission, we mean the relatively simple approach of sales x payment rate = payment. In a commission plan, payment rate gets the focus – bigger the better for a salesperson. In a goal-based plan, it’s all about the goal or quota: goal achievement = payment. There are derivations of these approaches: variable-rate commission schemes where the payment rate changes based on a goal-achievement threshold. But fundamentally, the commission plan provides a target share of each sale to the rep, where the goal-based plan provides a target payment when the rep has met the required goal.
Two years ago we worked with the sales force of an incumbent local exchange carrier (ILEC). In 2009 the sales organization adopted a quota-based plan after having used a commission plan. The firm’s head of HR said moving to a goal based sales compensation program was relatively simple, and one of the better things they’ve done.
In 2008 the company was struggling. Yet most salespeople earned variable pay based on recurring revenue from previously-done deals. Many in management thought reps viewed their variable pay as an entitlement, and were not sufficiently motivated to grow new business.
The program changes for 2009 included a minimum performance threshold for incentive eligibility, and use of both cumulative and discrete goals for monthly payments, depending on the job role. The new program simplified the calculation methodology by using a standard approach across various performance measures, whereas the previous plan used a variety of calculation rules. In exchange for the threshold, the plan offered higher payouts for over-goal performance.
During 2009 the company operated under bankruptcy protection in one of history’s worst recessions. Yet the sales organization performed admirably, coming in for the year just below the goal. In 2010, management kept the same basic plan structure but increased the goals and minimum performance threshold. The company emerged from bankruptcy in October and finished the year at 107% of plan.
The company’s mood for 2011 is bullish. Management has refined the sales comp plans to place more focus on strategic product sales. A benefit to goal-based plans is management can shift strategic emphasis by changing the quotas and payment rates, without structural changes to the program. This consistency is a welcome change for reps that grew accustomed to constant changes to the plan, and given all organizational changes.
Goal setting and allocation is never easy. “We did a lot of work behind the scenes,” says the head of HR. “But this paid off in making the program appear simple and sensible to the field.” Management restructured the way in which marketing and sales worked together in goal setting by setting up a core team and calendar, with shared accountability for revenue goals across functional groups. This helped the entire process become more transparent – a criterion for effective goal management in the sales organization.
“Managers often fear they’ll lose their best salespeople by making incentive pay contingent on goal achievement. You have to take risks, and work through the fear. If you have solid relationships – salespeople with customers and management with salespeople – fear of losing sales talent is probably overblown.”
The company lost some salespeople during the transition, but most are back. They’re excited about the culture and being a part of what the company now stands for: a high-performing organization. Setting goals at the sales rep level enabled the company to take a big leap forward.
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.
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.
The Wall Street Journal reported recently that more and more brokers are breaking away from the traditional wirehouse firms to boutiques, or to become independent advisors, and taking clients with them. In 2008 alone, net outflow from the big firms was about $20 billion in client assets. In the three-year period ending in 2008, the number of brokers serving retail investors at major firms fell 14% while the number of independent financial advisors (IFAs) grew 29%, the Journal reports.
http://online.wsj.com/article/SB126256739671014281.html
Certainly the last two years were pivotal ones for the industry. Thousands of brokers from the likes of Merrill and Bear flat out lost their jobs and had to go elsewhere to earn a living. Yet the trend of breakaway brokers started before the crash, and persists through the recovery.
Incentive pay practices get creative when there’s lot of movement of the kind of people a firm wants to retain or hire. Call this a golden moment for the incentive professionals in the retail brokerage industry.
We’ve thought for some time the incentive practices at brokerage firms were a bit primitive. Despite a myriad of complex product offerings, radically-different margin levels across those products, and the heavy hand of regulation, the incentive plan designs at many retail brokerages look like what you’d expect for a car salesman –luxury and SUVs fetch 8%, compacts 3%, mid-sized 5%. No wonder Phil Angelides likened selling investment grade mortgages to used cars when grilling Goldman’s Lloyd Blankfein during a recent government-sponsored, big-bank bashing session.
And yet this seemingly broker-biased structure generally gets poor reviews from the folks the plan is supposed to motivate. In our work we hear too many brokers say they find the plan too complex, the goals too high and the pay opportunity not in line with what they can (or should) influence or in conflict with the customer’s interests.
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Big firms contend that turnover is largely that of underperforming brokers. While the broker’s decision may be voluntary, the incentive plan forces their hand because of a steep reduction in pay when the broker’s production falls below a certain level. Thus for those who can produce, bigger is better.
Regional brokerage firms, beneficiaries of the breakaway trend, provide a different view. Bradley Hofmeister, executive vice president and associate national sales manager at Waddell & Reed, a Kansas-based regional advisory firm, says even strong producers at wirehouse firms grow disenchanted. And while becoming an IFA works for some, it’s not for everyone. Waddell & Reed, which offers independent brokers an open platform for trading equities and funds, saw 80% of its new advisors come from the wirehouse firms.
“People want to be part of something,” said Hofmeister. “Many wirehouse producers felt they were left out to pasture (from the industry’s implosion). Here they discover a place where they feel they belong, where they’re wanted and valued.”
What has surprised Hofmeister about many of the advisors coming from Wall Street is their strong desire for continued professional development, collaboration and teamwork.
Sound like your average Wall Street broker? Maybe the cut-throat-competitive culture that defined the retail-brokerage powerhouses of Merrill, Morgan and Smith Barney has run its course. While we believe pay opportunity will remain on the short list of attributes for staying at or leaving a firm, dare we say that it’s the soft stuff that counts. Even in the rough-and-tumble word of Wall Street.
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