From time to time an article appears in the press that argues it is inappropriate to pay sales people through commission because these kinds of plans create more problems that they are worth. Such an article recently appeared in Forbes (see “Death of a Sales Commission” by Susan Adams, April 19, 2016, pp 58, 60; www.forbes.com). We have no direct knowledge of the company situation described; however, we found it interesting that the decision to move from salary plus commission to 100% salary was made without any apparent consideration of an interim step, for example, salary + a team sales bonus. The latter, in our experience, is a common practice in the HVAC industry.
Near term, the article reports that sales results improved; presumably the improved results paid for the increase in fixed costs, i.e., higher salaries which are the result of adding salary plus the average of three prior commissions earned. No mention is made of the likely consequences of a future downturn in business, i.e., sales go down, compensation costs do not and, therefore, to reduce selling expense headcount is proportionately reduced.
With that background in mind, we thought our readers would find it useful to have “refresher” information about factors to consider prior to “killing” the use of commission.
The cultural and behavioral aspects of the sales environment in which sales reps operate have implications for the use of a commission plan as described below:
What to consider about sales reps’ perspectives…and what the commission plan communicates about selling behavior:
View of business opportunities…opportunistic; follow the money; deal oriented; short cycle selling focus
Feel about their sales role…they are the product; skills and efforts are the biggest determinant of the sale
Go about their job…highly competitive; love recognition for winning
Respond to company priorities…customers come first
Are monitored and coached…little direct supervision by the field manager
Are measured and evaluated…making the sale comes first
Are retained…not a lot of non-financial “glue”
With that perspective in mind, the following four factors should be considered when making a decision about the continued applicability of a sales commission plan in a particular business environment. As indicated in the table below, if the majority of the responses to the questions associated with these factors are “yes”, the use of a commission plan is then directionally correct.
Sales role – Is the degree of influence over creating the sale seller driven (vs. company or team driven)? Yes = commission; No = other incentive
Industry practice – Are comparable jobs in the industry (i.e., direct competitors; competitors for talent) paid sales incentive through a commission plan? Yes = commission; No = other incentive
Stage in business (or product) life cycle – Is the business (or product) relatively young, in start-up mode with limited resources? Yes = commission; No = other incentive
Sales/customer relationship management – Is selling transaction oriented? (Customer not interested in building a relationship) Yes = commission; No = other incentive
In his January 27, 2016 blog post “Sales Excellence and the Comfort Zone Freeze”, Dr. Richard Ruff, an international expert in the design and development of sales training programs, explains how sales rep comfort zone freeze poses a significant challenge for companies dealing with marketplace disruption. He suggests that one permutation of this “freeze” could be attributed to financial incentives; in others words, is it financially worthwhile for sales reps to reach outside of their comfort zone? Because many companies initiate change in sales compensation in parallel with sales transformation initiatives, we offer some additional thoughts about how the comfort zone freeze materializes and how to avoid encouraging it through the compensation plan.
Consider this example. A leading technology company fell behind in the development of a new generation of products that it promised to its customers. Concerned that customers may switch out its product for one of the competitors’ newer products, the company implemented a change to its sales commission plan. The change was intended to reward sales employees for holding on to customers and staying with the company until the next generation of products was released.
The commission plan was revised to provide an additive rate to current commission rates for achieving and exceeding quota. For example, if the current commission rate was 5%, for a sales rep who over achieved in the prior year, there was an add-on rate of 2% for a total new commission rate of 7%. The add-on rate carried forward to the next business year. And, because commission rates were applied to first dollar of sales, the additive rate was operative regardless of performance. The rationale was that the additive rate provided sales reps a strong incentive to hold on to both current customers and, to stay with the company because, as in this example, the additive rate was available regardless of future year quota performance or product sold.
Eventually, the new product-line was launched and the consequences of “additive” commission rates yielded unfavorable results. First, some sales people decided that the new product line was too difficult to sell and continued to focus their selling effort on the current product (i.e., they stayed in their comfort zone) since the additive rate applied to all sales. Next, because the “additive” commission rate was paid regardless of performance relative to quota, some sales people decided to “slack off”. The number of top performers, as a percentage of the sales force, declined. Finally, the cost of sales compensation – particularly, commission cost, outpaced sales growth. This one change – apparently believed to be a good idea at the time – not only caused some of the wrong sales people to stay but also may have contributed to diminished performance on the part of other previously high producers.
Could this situation have been avoided? Yes, we believe it was avoidable. Specifically, to keep sales rep from camping out in the comfort zone, we believe that companies should regularly review plans relative to the following three design considerations:
Are salary levels too high? In plans that are intended to deliver 50% or more of compensation at target as variable pay, actual base pay must be managed. Individuals who earn 85% or more of their annual compensation in salary as a result of base pay increases and are allowed to stay in their sales job for two or more years have probably become too comfortable with their salary. The consequence of not actively managing out sales people who become comfortable with their salary is that the company risks under-optimizing business growth opportunities in the assigned territory.
Is the plan focused on the right behaviors? While the plan formula is the most visible element (e.g., is the commission rate attractive?), they key element for management to determine is the basis for payout. Determining the right performance measures is critical.
Are performance expectations too low? Too many of the wrong sales people may be retained in situations where incentive compensation pay is based on quota attainment. How could that be possible? In sales organizations where the quota allocation process is highly decentralized, we find that it is not uncommon for some proportion of the sales force to actually be paid target compensation (salary + target incentive) for a fraction of the results achieved by other higher performing sales people who also earn roughly equivalent compensation. This occurs when there are no quota performance standards by job and, thus, a wide range of performance variability is associated with target compensation.
Are there too many additional opportunities to earn pay outside of the incentive plan? In tough economic times, there is a tendency for companies to over-use contests and SPIFFs. Doing so creates the potential for some sales people to supplement their earnings with contest winnings thus making up for missed commission or bonus associated with the primary performance goals. Our experience suggests that sales contest winners are not uniformly high sales producers overall. Care should be taken to confirm that contests and SPIFFs are not disguising overall performance and, thus, motivating some individuals stay in the sales force because of mixed messages about their performance contribution.
Research shows that two out of three B2B companies enter a new fiscal year with a new or significantly revised sales compensation plan. Given both the number of companies making that change and the amount of time multi-functional teams spend on plan design and implementation, we believe it is important to confirm that the new plan’s launch was successfully completed. Here are five tips to act on within the first 30 days of new plan launch:
Quotas or sales goals are in the hands of your sellers. Sales people tell us that nothing is more frustrating than receiving a new plan without the corresponding sales quotas (or goals) which are the basis for payout. If sales quotas were not issued at the same time as the new plan, are they in the hands of sales people no later than two weeks after the start of the new year?
Performance reports are available now. No measures should be included in a plan that can’t be tracked and reported to participants at the beginning a new plan year. Well in advance of the first payout under a new plan, managers should have in hand a complete set of performance reports that are available under the new plan.
The sales force understands the plan. The degree of plan change typically determines the need to validate its understanding by the sales force. This is particularly important if there is an expectation for a material change in selling behavior. For guidance on how to structure such a survey, including illustrative questions, see our book: Sales Compensation Essentials: A Field Guide for the HR Professional, 2nd Edition, WorldatWork, 2014, pp 154-156
Managers understand how to manage with the new plan. Our research shows that too often companies underestimate the importance of training sales managers in how to manage with a new sales compensation plan. The best way to insure that all sales managers are on the same page relative to managing with a new plan is to conduct a training session to accomplish four objectives: 1) Explain the best features of the new plan (i.e., what’s changing and why); 2) Equip managers with the tools and techniques to succeed in managing with the new plan; 3) Help managers formulate a plan of action; and, 4) Practice using that plan of action
Expected business outcomes are understood and agreed to by senior management. Typically, senior management will want to know two things about a new sales compensation plan: 1) Will the new plan result in directing behavior and performance to the desired business outcomes; and, 2) What are the cost consequence of the new plan; will it cost more, less or about the same as the former plan if the same level of performance as prior year is achieved? With that criteria in mind, it’s a good idea to reconfirm with senior management that the expected outcomes under the new plan (that may have been the basis for the plan’s approval to begin with) have been effectively communicated to the sales force and that there is clear evidence of “buy-in” to plan change.
Preparing Sales Leaders for Three Common Year End Challenges
As 2015 rapidly draws to a close, we thought our readers would benefit from advice on three common challenges that sales leader ask us to address. We also want to share with you information on three new compensation books you may find valuable.
1. Securing Top Management Approval on a New Compensation Plans
Our article for WorldatWork (WaW), “Engaging C-Suite Executives in the Approval of a Sales Compensation Plan”, provides 5 tried-and-true techniques for selling a new or revised plan to top management. Considered by some as a classic guide to gaining plan approval, if you have not as yet secured approval of 2016 plans, you may find this article useful: (http://www.worldatwork.org/adimComment?id=66648)
3. Getting Off to a Fast Sales Start in the New Year
We are often asked “what incentive techniques contribute to fast start sales performance in the new year?” The two most common design techniques associated with fast start sales incentives are: 1) a defined bonus for early achievement of a specified performance result; and, 2) accelerated/multiplicative incentive rate for achievement of fast start performance. If this is a challenge that your Chief Sales Officer asks you to address, we believe you will find another of our WaW articles a useful reference (http://www.worldatwork.org/adimComment?id=49117).
New Compensation Books Worth Your Attention
Before signing off for the year, we invite your attention to three new books on Compensation, as follows:
The Compensation Handbook, Sixth Edition, by Lance A. Berger and Dorothy R. Berger , is an excellent reference guide to all things compensation! CF’s Chapter 17, “Aligning Sales Compensation Plan Design with Talent Retention Strategy”, provides advice about how to use sales compensation as a retention tool.
Sal DiFonzo, a former colleague and currently Managing Director, FMI Corporation has written Designing Effective Incentive Compensation Plans: Create a Plan that Drives Strategy, Engages Employees and Achieves Success. This book was written to assist construction contractors on how to convert from entirely discretionary to structured incentive plans and how to improve their plans. We believe that this book, rich with examples and survey data, provides clear instruction for how to transition from discretionary to structured, performance based compensation plans. Regardless of industry, this is a must read guide for any company that seeks to improve its ROI on compensation, particularly incentive plans that are not contributing to desired business performance. Due for publication in January, write directly to Sal about how to purchase it (email@example.com).
Federico Lopez Saavedra, Managing Partner, Thomas More Management Consulting (thomasmoremc.com) has written a new book on Sales Compensation. We have read a pre-publication draft of this book. It is rich with example of sales incentive compensation practices in Latin America. Contact Federico directly if your scope of responsibility includes sales compensation practices in Latin American countries and you would like to purchase his book.
CSO Insight’s recently published “2015 Sales Compensation & Performance Management Report” provides both interesting and useful information for those involved with the sales compensation plan design process. Over 250 companies participated in the survey and data on 70 sales compensation and performance management metrics were collected on their plans and practices. Approximately 28% of the survey responders have annual revenue in the range of $51M – $250 M; and, 12% of the participants reported annual revenue greater than $1B.
Some of the key survey findings include the following:
76% of salespeople will meet/beat quota with compensation plans that consistently drive precise selling behaviors, compared to 56% where the plan generally drives behaviors
Biggest challenge in rolling out compensation plans is the inability to forecast plans’ future economic impact
The number one management behavior impacted by compensation plans is meeting assigned territory revenue targets—making the number
61% of salespeople will meet/beat quota where the salesperson exceeds expectations in knowing how to maximize earnings, compared to 41% who need improvement
If you are involved in the process of developing 2016 sales compensation plans, we strongly recommend this report to you and your design team. To learn more about the report’s contents and its availability for purchase, please contact: Kim Cameron, Sr. Director of Research, CSO Insights, Kim.firstname.lastname@example.org. Please reference the Colletti-Fiss blog post when contacting Ms. Cameron.
CSO Insight’s 6th annual (2014) Sales Compensation and Performance Management study provides such data. In a survey of over 800 companies, 47% of which have revenues greater than $50 million*, participants report the following:
Plan Design Element Used as Talent Retention Tool
Multiple levels of sales role – 41.3%
Salary as the incentive multiplier – 34.6%
Merit pay treatment – 32.7%
Quota tiers – 31.1.%
No performance threshold (i.e., payment from dollar one) – 29.5%
We don’t target retention (through the compensation plan) – 18.2%
Consistency performance bonus (long-term) – 11.3%
Don’t know – 5.4%
*Revenue size of companies represented by respondents were as follows: 31% < $10M; 22% $10M-$50M; 17% $51M-$250M; 13% $251M – $1B; and, 17% >$1B
** Percentages add to great than 100 because respondent were asked indicate all of the techniques used by within the compensation plan
Generally speaking, the practices reported in this survey are consistent with what we have observed in companies’ sales compensation plan designs through our consulting engagements. Two data points, however, did catch our attention: first, about a third of the respondents indicated the use of “consistency performance bonuses” (both short and long term) and we believe this practice reflects the importance of retaining sales reps who are consistently among the top performers; and, second, we were surprised that almost 20% of the respondents indicated that talent retention is not targeted through the compensation plan. This finding is difficult to explain in a time when many industries and companies are challenged with turnover, particularly when that turnover involves high performers.
We believe that salespeople can and do make a difference when a customer chooses to buy from a company instead of from its competitors. This is particularly true in B2B (business to business) markets characterized by high product parity. In such markets, the major players offer an equally high level of product quality and customer service. When this is the situation, one advantage a company can leverage is the quality of the relationship between customers and salespeople. This presumes, of course, that the company attracts and retains the right caliber of sales talent to do so. The compensation plan, particularly the incentive component, can play an important role in attracting and retaining the sales talent required for that competitive advantage.
Also, some companies use sales rep retention as a metric to evaluate compensation plan effectiveness. In its 2013 Sales Compensation & Performance Management Report, CSO Insights reported that 43.6% of its survey respondents used such a metric. Our own research and consulting experience indicate that there are at least eight plan design areas that companies consider when striving to align compensation with its sales force retention strategy, as follows:
Salary as an incentive multiplier
Merit plan treatment
No performance threshold (i.e., $1 payout)
OA (over-achievement) rates
Consistency performance bonuses
Special recognition designation
We have posted an abbreviated slide deck related to these design topics (SlideShare Link). Used in conversations with our clients and hundreds of seminar participants at various conferences and workshops, the slides offer ideas or questions that a Design Team should consider when focusing on how to improve the strength of the relationship between the compensation plan and the company’s sales talent retention strategy.
On June 5th, McGraw-Hill will publish the 6th Edition of The Compensation Handbook: A State of the Art Guide to Compensation Strategy and Design.
Previously, CF contributed to the 4th and 5th editions of the Handbook. We are pleased to be among the 63 contributing authors who have made important revisions to this transformative edition that will enable compensation and human resources practitioners to:
Provide a road map for creating a fully defined compensation strategy for any organization
Design and implement an approach for attracting and retaining talent that will remain relevant into the future
Present programs that allow for the seamless alignment of historic best practices with the latest tools, methods and diagnostics in compensation
CF’s chapter contribution to the edition of the Handbook is titled “Sales Compensation: Aligning Plan Design with a Talent Retention Strategy”. A fundamental premise of this chapter is that high-caliber-sales talent contribute to a unique competitive advantage in relationships with customers because those relationships enable a company’s sales people to outcome peers in other companies. Thus, incorporating a company’s sales talent strategies into the compensation plan design process can ultimately contribute to high performance for a business.
You can learn more about the Handbook, its authors and content once the book is available by visiting any one of the following three sites:
A recent Wall Street Journal article (“Why It’s Hard to Fill Sales Jobs”, by Lauren Weber, February 5, 2015) suggested five reasons why sales jobs are hard to fill with young workers, as follows:
They view Sales as risky and defined by competition
They are reluctant to enter a career where success depends on hitting a number
They don’t view Sales as a profession – it suffers from that age old stereotype in “Death of a Salesman”
They want stable pay; campus job fairs that tout opportunities for “tremendous variable compensation packages” for Sales jobs are not always attractive to potential applicants
They want a clear career path, one that provides a roadmap to work their way up in the business.
As the article suggests, companies have their work cut out for them when it comes to recruiting and hiring talented young workers who shy away from Sales. Many companies are rethinking their compensation strategies to appeal to young people who show interest in Sales and the article discusses some prevalent trends in that regard. While we agree that such rethinking is a good thing, we believe that college students interested in Sales must acquire a better understanding about how sales jobs are paid. By senior year, it may be too late; thus, we have encouraged educational institutions that offer sales programs to begin to acquaint students in their sophomore year with how sales compensation works particularly in B2B sales environments.
Originally prepared by Mary Fiss for the students at The Ralph & Luci Schey Sales Centre at Ohio University, “Sales Compensation Essentials for the New Sales Person” provides a basic foundation for what college students need to know about sales pay. If you are in a position to influence how job candidates or young workers think about sales pay, we suggest you refer them to this brief slide presentation as one source of information when considering a career in Sales.
A recent WorldatWork Sales Compensation Focus article (5 Steps for Communicating Your New Sales Comp Plan), provided specific suggestions about how to effectively communicate a new plan. A logical next step to that advice is to consider gaining sales force feedback about the new plan, preferably shortly after the first payment has been made under the new plan. In our opinion, it is wise to validate through sales force feedback that the new plan is well understood and, therefore, supports the behavior and performance that management desired from a plan change.
Here is a brief description of two techniques that we find are productive approaches to gaining that feedback.
FOCUS GROUP DISCUSSION SESSION
We find that a facilitated focus group session is one of the most effective techniques to use to gather sales force feedback on a sales compensation plan (either “new” or continued from prior year). Here are two suggestions about how to implement an effective session:
Format and ground rules. Setting the stage for a productive session is essential to gathering useful information. The facilitator’s role should be defined (e.g., guide the discussion; bring participants back on point, ensure that everyone participates). Participants should understand how/why they were selected for the focus group; and, encouraged to freely share their point of view even if it differs from what others have said.
Discussion questions. Based on years of experiences with focus groups in many industries, we find that the following topics/questions are effective in drawing out meaningful feedback from sales reps about the compensation plan:
As an alternative or complement to Focus Group sessions, we find that a web-based sales force survey provides useful information about sales reps’ attitudes about a new plan. The best time to conduct such a survey is after the first payout of the new plan. Our experience shows that the most useful questions to ask about the plan are as described for the Focus Group session, but “close ended” are as follows:
No matter how well prepared sales managers are for launching a new sales compensation plan, some glitches always arise. The larger the sales organization or the change, the more likely it is that you will run into some unanticipated issues. Focus groups discussion and a sales force survey can be helpful in identify such issues. Two types of issues that can come up through sales force feedback initiatives are:
Things that aren’t clear. Common examples include: 1) New performance measures were implemented, but sales crediting related to these measures has not been defined and documented in new terms and conditions description. 2) Some salespeople misunderstood the incentive formula mechanics, a common problem when calculation involves multiple steps. 3) Quotas appear too high (relative to prior year(s)), which means salespeople either misunderstood or are challenging the process by which quotas were assigned. 4) Salespeople have many questions about the plan but they are unclear about where to go to get straight answers.
Systems that aren’t working. Common examples include: 1) Sales results are late, incomplete or inaccurate, and therefore salespeople and their managers spend a great deal of time trying to sort out results and the implication for incentive payment under the new plan. 2) Incentive payouts are delayed either because sufficient time was not allowed to reprogram systems to make incentive payments or because there are problems in tracking and crediting sales results.
To gain maximum motivational mileage from a new sales compensation plan it is critical to monitor the impact of the plan on sales force behavior and performance. Thus, gaining early feedback on how well the plan is understood and what issues it may be creating for salespeople and their managers should be a first quarter priority for both sales compensation plan designers and the sales executive team.