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Sales Compensation and the “Comfort Zone Freeze”
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.