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“Red Zone” Advise for FY 2015 Sales Compensation Plans

WorldatWork’s Jim Fickess recently reported on the challenges associated with tailoring sales compensation plans to attract, motivate and retain salespeople in 2015 and beyond (“Experts Explain How Sales is Changing . . . And Why You Better Change With It!”). With that thought in mind, there are three topics that we suggest sales compensation plan designers revisit as they move into the “red zone” for finalizing 2015 plans.

  • As the Fickess’ article indicates, sales role are constantly changing. Such change often leads to this question: “What is the right salary/incentive ratio for the new sales roles”? For advice and an applicable tool to use in answering this question in your company, see our article “Setting Pay Mix for New or Changed Sales Roles.”
  • Because many companies are focused on accelerating business growth as they move into 2015, there is interest in providing the salesforce with appropriate incentives to get off to a “fast start”. For business situations that are right for a “fast start” sales incentive and techniques to use when designing them, see one of our classic articles, “Gaining a Motivational Edge through a Fast Start Sales Incentive”.
  • Finally, as companies continue to efforts to align their sales compensation plans with business strategy, we believe that profitability measures will command top management’s attention. To learn how companies take action to include profit measures in their plans, see both our recent Article and Slide Presentation.

We hope that you find these suggestions and the accomplishing references useful.

Happy Holidays!

An Update on Compensating Sales Reps for Profitable Selling

One way that companies can protect and expand profit margins is to connect sales profitability to their sales force incentive compensation plans. Sound familiar? Interested in learning more? Please read on to learn about results of a recent touch point survey and implications for future sales compensation planning.

Recently, we conducted a Webinar for financial executives interested in evaluating the use of profit measures in their company’s sales incentive compensation plan. This session was hosted by Proformative, the largest on-line resource and professional network for senior finance professionals (http://www.proformative.com/) and sponsored by Xactly, the leader in the field of incentive compensation management. A condensed version of the slides used during the presentation are available at: Presentation Slides.

During the course of the Webinar, we asked participants several questions about their company’s practices relative to using profit measures in sales incentive compensation. There were 123 responses to our polling questions. Here’s a summary of the survey results we found most interesting:

  • Sales – Finance agreement on including a profit measure in the plan. We have seen other surveys report Sales – Finance agreement on a profit measure in only 33% of companies.   Our webinar participants indicated 69% agreement between their Sales and Finance executives. Perhaps this was a biased group. Or, alternatively, we believe a “sea change” is underway with respect to an increasing number Sales and Finance executives coming to realize that in low growth markets (particularly in North America) an important way to sustain and increase profitability is by rewarding the employees – sales teams – directly responsible for it.
  • Current state of incenting and rewarding sales people for profitable selling. 20% of our participants reported their company has been rewarding sales people for profitable selling for some time. However, 39% indicated they reward for profitable selling but doing so needs improvement.
  • Incentive technique associated with profitability measure. Among the companies that include a profitability measure in the sales incentive plan, how is it associated with the incentive payout? The three highest responses were: 1) 19% indicated it’s a standalone bonus; 2) 17% indicted the profit measure is a hurdle or gate for payout on other measure; and, 3) 12% indicated it’s a “multiplier”, i.e., incentive pay earned based on another measures is increased based on performance in the profit measure.

An underlying assumption when considering the use of a profitability measure in a sales incentive plan is that negotiations with customers is a key task and reps have discretion over discounts and contract terms. When that is case, it clearly makes sense for a company to investigate the feasibility of adopting a profit measure in the sales incentive plan.

Based on our experience overall and feedback from the participants in our webinar, it appears that the number one thing holding companies back from moving ahead with the use a profit measure in the plan is not lack of agreement between Sales and Finance but rather the lack of systems and reporting capabilities. Approximately one fourth of our Webinar participants indicated that their companies cannot accurately track and report profit performance (e.g., margins) by sales made at the sales rep level. Given the advances that have been made in recent years in pricing and profitability software (see, for example: http://www.vendavo.com/profitable-selling/), our view is that companies may need to bite the bullet and step up to the investment required to equip both sellers and managers with the tools they need to execute profitable selling. Once that is done, following behind with profit oriented sales incentive plans provides the opportunity to recapture monies invested in doing so.

Connecting Profitability to Your Company’s Sales Incentive Plan

We cannot remember a time when companies were not interested in rewarding the sales force for profitable sales results.   We track actions companies take to include profit oriented measures in their sales compensation plans. Here’s a snap shot of findings about company practice that we find encouraging:

  • WorldatWork’s 2012 edition of Sales Compensation Practices for the High Tech Industry reported that more than three out of four surveyed companies use some incentive method to encourage their sales force to sell products at a high price point.
  • CSO Insights reported that 37% of companies in their Sales Compensation Programs and Practices survey expected their sales incentive plan to motivate and reward their sales people for: 1) selling higher margin products; and, 2) avoiding discounting, or both.
  • In a survey of 90 companies conducted last year, KJR Associates reported that 33% of the respondents were holding internal discussions about adding a profit component to their sales compensation plans.

With that background in mind, when Proformative, the largest on-line network of finance professionals, asked us to conduct a webinar sponsored by Xactly on the topic of how to better align sales compensation to profitable revenue growth, we thought such a session is timely and would be of interest to not only finance executives but also to HR/compensation professionals.   Our October 9, 2014 webinar will enable participants to:

  • Understand the types of profit measures that should be considered and adopted in reference to the three common business goals associated with improvement in profitability.
  • See examples of the architecture of effective, profit oriented incentive designs relative to three common business goals for jobs that typically measured this way.
  • Learn about key decision criteria that are associated with profitability to determine if implementing these changes would be right for your company.

There is no charge for this webinar. If you would like to participate, you can enroll at: Webinar Registration

Solution Sales Lives!

In our now classic HBR article, “The Ultimately Accountable Job” (July-August, 2006), we explained that the CSO (Chief Sales Officer) must understand the why, where and how of solution selling so that it is appropriately aligned with customers’ requirements for doing business. Because it can be incredibly inefficient and expensive, solution selling (aka consultative selling) is not uniformly right for all B2B sales models. It never occurred to us that the fundamentals of solution selling would ever become obsolete and, thus, when HBR published a subsequent article (“The End of Solution Sales”, July-August, 2012), we became concerned that we had overstated our case to CSOs about its importance.

We believe that a new book by Mike Schultz and John Doerr (Insight Selling: Surprising Research on What Sales Winners Do Differently, Wiley, 2014) provides important data and insights about how solution selling is evolving and continues to be an important selling style to understand.

Here is a brief run-down of what caught our attention in this book and, thus, the reason why we endorse reading it:

  • First, Insight Selling is largely based on primary research. It includes an analysis and interpretation of more than 700 purchases involving $3.1 billion in value where buyers report their buying experiences with sales reps. This research by itself, in our opinion, is well worth the price of the book. The first Chapter does an excellent job of putting the research into an easy to read/easy to understand perspective.
  • Next, one of the break-through ideas in the book is to look at sales reps in the context of “winners” and “runners-up”. That is, who won the deal; and, who was the second “runner-up”. It’s in this context that we clearly see one of the authors’ key points: solution selling is not dead; rather, it needs to be updated to reflect the new realities of how customers buy today. For example, largely gone at the days where the seller needs to focus on “pain points” and conduct diagnosis for problems to offer solutions. What the sales winners did (that the runner ups did not do) was to educate the buyers with new ideas or perspectives and, to collaborate with the buyers to confirm needs and mutually arrive at optimum solution alternatives.
  • Finally, Schultz and Doerr make a strong case for reorienting solution sellers through a three level RAIN SellingSM program. We are not experts in sales training; we have, however, interacted with sales organizations and their leaders in over 30+ industries during our consulting careers where we have observed a wide variety of sales training practices. The three levels of their model (Level 1 = Connect; Level 2 = Convince; and, Level 3 = Collaborate is an unbelievably simple, yet a powerful framework in which to understand why some sales people win and other come in second. Perhaps equally important, their model and techniques for operationalizing solution selling build on what many companies already know about it, rather than asking the reader or practitioner of solution selling to scrap it and start all over again.

Insight Selling is a relatively quick read and one that you will find yourself saying, “Ah ha, I knew that…” but, now you’ll have some data and expert perspectives to support it. Also, we believe, perhaps like us, you’ll mark a number of pages and charts that you will want to go back to when challenged with the realities of how to increase business results through doing solution selling right!

7 Building Blocks, 3 Skills for Designing Sales Compensation Plans

An effective sales compensation plan is an integrated set of elements.  Each element is an essential building block in plan design.  Understanding what the building blocks are and how they interact in the plan design process is useful to HR/compensation professionals involved with businesses that deploy a sales force.  Our recent WorldatWork article identifies the seven essential building blocks and three skills we believe are required to work effectively with them.

To read this entire article, please click on the link below:

7 Building Blocks, 3 Skills for Designing Sales Compensation Plans

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 (www.hrchally.com) 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)

 

 

“Double-Check” the Effectiveness of Your 2014 Sales Compensation Plan Launch

State Farm’s Discount Double Check ad is recognized as one of the best ever use of a celebrity (Aaron Rodgers, QB of the Green Bay Packers).  The premise of the ad is to double check to see if you qualify for an insurance discount.  It’s the concept of double checking that got us thinking about its relevance to the launch of a sales compensation plan.  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 companies spend on plan redesign, the concept of double-checking plan implementation has a great deal of merit.

Here are five elements of effective sales compensation plan management that should be on your “double-check” list:

  • 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.  In companies where there is a lag between new plan launch and final, individual sales quotas, the typical refrain is, “…our sales people understand that they will be expected to sell more…”   While that is probably true, our advice is this:  make every effort to issues quotas at the same time as new plan launch (and, certainly no later than one business week thereafter); if that is not possible, invest the time and effort to provide each sales person will a projected estimate.
  • Performance reports are available now.  No measures should be included in a plan that can’t be tracked and reported to participants.  This is particularly important when a new measure (e.g., sales profitability) has been added to a plan.  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.  When the incentive opportunity is changed (up or down), measures are added, performance weights are changed, and/or timing of payout is altered, it’s a good idea to conduct a sales force survey to confirm sales people understanding of the plan.  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.  Particularly when performance measures are changed, it is important that sales managers are clear about how to coach and counsel their team to achieve sales success.  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 relatively short (typically 60-75 minutes) training session to accomplish four objectives:  1) Explain the best features of the new of 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 to manage with sales compensation; 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.

Linking Qualitative Performance to Pay through the Sales Incentive Plan

In recent years, changing business conditions in some commercial markets involve complex, long sales cycles and require the integration of products and services to deliver solutions that are valued by customers.  When confronted with such situations, executives and sales leaders look for ways to assess performance at key milestones in the sales process and, reward for such accomplishments even when the financial results may be modest or non-existent.  Typically, these milestones or outcomes are referred to as key sales objectives (KSO) and provide the sales person with an opportunity to earn a portion of target incentive pay based on achieving one or more KSO.  If you are faced with the challenge of helping management determine how to best incorporate a KSO metric into the sales incentive compensation plan, our recent WorldatWork article may be helpful to you:  http://tinyurl.com/lsauomt

Aligning Sales Incentive Compensation with Desired Selling Behaviors

Independent research firm, CSO Insights, recently released its 2013 Sales Compensation & Performance Management study (http://www.csoinsights.com).  A total of 950 firms responded to the survey questionnaire that inquired about a wide range of topics related to sales compensation and practices associated with contributing to plan effectiveness.  In our opinion, sales compensation plan designers and functional leaders in Sales Operations, HR/Compensation, and Sales Finance will find this report a useful reference guide to many of the topics that must be considered when either tweaking or redesigning a sales compensation plan.

One of the study’s topics that attracted our attention is the behaviors that respondents indicate their compensation plans impact.  This is of particular interest to us because our experience shows that there is often misalignment between what management says is important and the results the compensation plan rewards.   The survey results from CSO’s last two surveys (2013, n=950; 2012, n=700) indicate respondents reported that selling behaviors impacted by compensation plans was as follows:

  • Selling to new accounts:  61.2% vs. 70.3%
  • Retaining existing business:  57.2% vs. 63.2%
  • Farm more from existing accounts:   44.6% vs. 56.5%
  • Selling new products:   42.8% vs. 46.9%
  • Cross-sell/up-sell:  42.4% vs. 53.1%

While some of the year over year variance may be explained by the increase in the survey sample size, the order of the top three behaviors remains unchanged.  Selling new products and cross-selling flipped places in terms of significance; however, they are in a virtual tie relative to participant response.   We suggest that companies keep in mind these findings when assessing the relative appropriateness of performance measures in their sales compensation plans.  For example, in keeping with our belief that three or four performance measures are optimal for most sales incentive compensation plans, CSO’s finding suggests to us that B2B companies should consider the following three incentive measures:

  • Total revenue (Revenue from existing business/existing accounts + new revenue)
  • New revenue (New accounts revenue and/or new product sales)
  • Placeholder for 3rd measure – for example, cross sell revenue in multi-division enterprise; or as more typically the case in recent year, a profit-oriented measure (either margin $ or %; selling higher margin products ranked sixth on the CSO survey list)

Rewarding Sales Reps through a Commission Plan: When is it the Right Plan to Use?

Recently, we participated in a sales compensation planning discussion with the newly appointed North American business President for a global specialty chemicals company.  Having come from another industry where sales commission plans are the prevalent variable compensation scheme used to pay the sales force, he asked:  “Why aren’t we using commission plans to pay our sales forces?  Wouldn’t we be more likely to achieve our business plans if our sales people had a stake in the sales they made?”  Those questions suggested to us that this executive believed a sales commission plan is more likely to contribute to business success than other approaches (e.g., a sales bonus plan based on a rate per point payout line).

The subsequent discussion of those questions by this business’ North American leadership team proved to be a valuable learning experience.  Essentially, it resulted in a shared understanding about how to decide when a sales commission plan is right for a particular business situation.  For an abbreviated presentation about how we suggest companies’ management teams think about this topic, see our slide presentation at:  http://tinyurl.com/knso99j.