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Engaging and Retaining Sales Talent through the Sales Compensation Plan

We are in the process of updating our chapter on “Sales Compensation” for the Sixth Edition of McGraw-Hill’s The Compensation Handbook. The focus of this revised chapter is talent strategies and their alignment with a sales compensation plan. Drawing from our research and consulting experiences, the chapter will identify contemporary sales talent retention strategies and best practice design techniques that companies use to realize desired outcomes from those strategies.
As we pull together materials for our revised chapter, three things caught our attention that we believe are useful for companies to consider when examining the retention value of their sales compensation plan.

Don’t underestimate the financial importance of retaining sales talent. In many B2B markets, customers buy because of their relationship with a salesperson. HR Chally’s ( research on World Class sales organizations reports that sales person effectiveness accounts for 39% of a customer’s choice of a vendor – more than price, quality or the ability to provide a total solution. Our own research shows that when a sales rep leaves, 20% to 80% of the business is at risk. The costs associated with replacing one sales rep – particularly top performers – is 35% to 200% of annual total cash compensation. Finally, customer satisfaction and, ultimately, lifetime value of customer accounts are significantly diminished. Bottom line: losing sales talent is a very costly proposition and companies should know the cost of lost talent so that wise decisions can be made about how to invest sales compensation dollars to reduce the total cost of turnover.

Start with beliefs about the role Sales Reps play in creating “stickiness” between the company and its customers. CF research and one-on-on conversations with Chief Sales Officers shows that beliefs about the business in three areas is a good place to start the thought process about retention goals that compensation could address. Here are three examples of beliefs above the business and potential retention goals/actions:

1) Cost of customer acquisition and lifetime value is relatively high:

  • Highly experienced/tenured reps are required
  • High percentage of these reps must be retained

2) High correlation between rep turnover and customer churn:

  • Manage to = or < than industry average turnover rate because customers are likely to defect (or, at least actively consider other suppliers) when presented with the challenge of working with a new rep from current vendor

3) High degree of product parity, i.e., relatively easy for competitors to replace our products because of degree of similarity and functionality:

  • Investments in programs (e.g., compensation,  training; recognition) at rates greater than industry to reinforce belief that reps are the competitive advantage

Formulate and follow an explicit sales rep retention strategy when making decisions about sales compensation. Here’s an example of how one company articulates its strategy:

  • Compensation levels – overall, set at the 50th percentile of the labor market; scarce labor talent pool jobs set at the 60th percentile
  • Annual performance – sales incentive compensation is paid for achieving a balance between revenue growth and customer retention revenue; salary will be used as a multiplier for incentive pay calculation
  • Target incentive pay – 50% or less paid below 100% performance; overachievement paid at 200% of target
  • Long-term performance (i.e., three to four year timeframe) – long term incentive pay is awarded for compounded results (e.g., .5x of actual three years incentive earnings paid for achieving defined long term results)