Communicating the New Sales Comp Plan: Key Steps Part 3

Communications Points

This is the third in a three-part series. Click here to read: Part I: Start Strong, or Part 2: Craft the Change Story.

See the Organization’s View

Company culture plays a huge role in making change. Some cultures operate on stability and are naturally change averse, while others are change tolerant and even change seeking. It’s important to know the organization’s and individuals’ comfort level with change in order to message and manage well.

Assume that most people will see any change as potentially negative. This is particularly true when it comes to compensation. From a sales organization view, unless the current compensation plan is a complete disaster, they often assume the only reason to change the plan is to manage pay or improve the company’s financial position. If you have a sales program that allows people to make money, and you want to make a change to compensation plan, you have to be crisp and clear about what those changes mean. Otherwise, the immediate thought process of a salesperson is, ‘They’re trying to figure out how to take money out of my family’s life,’” says Jeff Schmidt, global head of business continuity, security, and governance for BT Global Services.

Beyond risk, resistance also comes from reluctance to alter routines. If the new incentive plan steers the organization toward new products or perhaps selling to new customers beyond their current accounts, that can be plain uncomfortable.

In our work, we see that about 20 percent of an organization are acceptors and embrace the new plan without argument. Another 50 percent are observers who will wait and see. If the plan is designed, communicated, and managed well, this group will usually join the first group of acceptors. But as much as 30 percent of the organization may resist the new plan. The resistors range from passive resistors to active resistors.

You may recognize some of the passive resistance behaviors, which include apparent confusion, hesitancy to act, and lack of urgency. On the aggressive side, behaviors might include outright opposition and involvement in trying to change the course of the implementation by demonstrating why the program will not work. The good news is that most resistors tend to be on the passive side, although they are not always easy to identify and engage. The key to working with passive resistors is to connect, sense, and communicate at the field level to understand their resistance points before the implementation. If ignored, their resistance can become contagious. As for active resistors, they’ll test leadership’s resolve for change, as we’ll describe shortly.

 

 Contact me at mark.donnolo@salesglobe.com with any questions.

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From History to Opportunity: Five Quota Setting Methodologies

Quota Methodologies

Quota-setting methodologies vary based on the market and types of accounts. Approaches can range from one-size-fits-all, to a historic view to a forward-looking opportunity view.

  1. Flat quotas are simple and effective in the right situations. Organizations often start out this way or may use this approach in new markets it enters. Everybody gets the same quota because it is assumed that all opportunities and resources are equal. While this may seem like a primitive approach, it can be effective in environments with unconstrained opportunities where there is abundant sales potential and the capability of reps is similar. The flat quota approach is common in new business development situations where reps don’t have an existing base of business to manage and may have few boundaries to their sales opportunities. It’s survival of the fittest.
  2. Historic quotas are the most common in companies, yet they create some of the biggest issues by assuming that history is predictive of the future and of potential in a market. This approach creates quotas that recreate history. A majority of companies use a historic quota-setting process either primarily or in combination with other methods. While history is a good starting point, it should be enhanced by turning the attention to future opportunities.
  3. Market opportunity-driven quotas are developed by starting with historic information and building on it based on the characteristics of the market. Market opportunity might consider predictors of potential that indicate how much opportunity might reside in an account. For example, the number of employees at an account location may be correlated to revenue potential. Those indicators can become part of a larger predictive model that either estimates the potential of a territory or compares that territory with other territories to help allocate the goal correctly across those territories. This approach can be effective for a large number of accounts.
  4. Account opportunity-driven quotas consider characteristics of the accounts as well as the market. By looking at the sources of revenue retention, penetration, and new customer acquisition, and the existing and planned sales pipeline, a sales organization can build the account opportunity components, bottom-up. Those growth estimates can be compared with top-down intelligence on the overall market, and growth predictions. The company can also consider sales capacity and the capabilities of reps to capture that account opportunity.
  5. Account planning can be used for growth planning, coaching reps to the plan, and of course, setting quotas for the account. This process is effective in situations where there are a small number of large accounts. The account plan provides information on growth targets in the account as well as tactics the team will use to grow the customer relationship.

By considering and combining these methods the organization can develop a quota-setting approach that matches each type of account segment and can increase the opportunity to hit the company’s overall sales objective.

 

Next week I’ll begin a series about communicating the sales compensation plan and changes to the organization. Contact me at mark.donnolo@salesglobe.com with any questions.

Ten Success Factors for Better Quotas: Part 2

Quota Risks

This is the second in a two-part series of Ten Success Factors for Better Quotas. Click here for Part I.

 Not setting effective quotas can critically injure even the best sales compensation plans, according to SalesGlobe research, including de-motivation, missing growth targets, and loss of high performers within the sales organization. Below are five additional steps to consider when designing quotas for your sales organization. (You can find the first 5 here.)

  1. Move Beyond History

Most organizations set quotas by looking backwards. Historic sales performance may be the primary driver of the quota, which is usually determined by taking a snapshot of the most recent year’s performance and applying a fairly standard growth rate on top of that performance. This historic approach is the source of most performance penalties that simply add a bigger expectation on top of a rep that had a great sales year. Historic quota-setting may also create a “porpoise pattern,” where sales and quota attainment leap up and then dive in alternating years. For example, a rep with great revenue performance (a leap) in year one resulting in an inflated quota in year two will often have low attainment of that inflated quota (a dive) in year two. Of course, this may then lead to a lower quota in year three followed by another leap in great performance over that low quota. And so the pattern continues. Challenge your team to acknowledge history but to lean toward forward-looking indicators of market opportunity.

  1. Balance Market Opportunity with Sales Capacity

Market opportunity should be a primary driver of the quota. More specifically, territory opportunity relative to other similar territories can give you a good indication of what portion of the total goal should be allocated to each territory.

Indicators of territory opportunity may be characteristics of accounts that correlate with revenue potential. For instance, a company in the bar-code scanning business determined that the square footage of a retail grocery store and the number of beds in a hospital were both metrics that were predictive of the potential annual sales for its scanning solutions. By applying a formula to all customers and prospects in a market or territory, the company got a relative sense of the sales potential across all markets or territories. But that indicator of market opportunity was only half of the answer. The other half was the practical physical ability, or capacity, of the sales force to close a certain amount of business. This sales capacity considers the number of hours each rep works in a year, the percentage of that time that is spent actually selling versus handling other operations and administrative activities, and the productivity of those selling hours given the time it takes to manage or close an account and close rates.

Fifteen years ago, Jeff Connor, chief growth officer for ARAMARK, had a sales force that was cut from 25 reps to 15, but the quota went up. “The executive for whom I was working at the time had some bold leadership traits. He walked into the meeting and said, ‘I’m doing away with quotas. I don’t know what the right number is. I know you guys are the best of the best and it’s a big market. Now, my number, is $100 million, and there are 15 of you. So you can all go figure it out if you want. But there are no quotas, and I’m not measuring to a quota. I want to see what we’re capable of as a team,” Connor describes.

“And guess what happened that year?  That team sold about $127 million. It was the best number ever – highest per person – and we never set a quota for anybody. The organization had a target and there were a certain number of people, but there were no incentives at the target. The compensation plan paid off of what they drove home for the business. To some extent he set the people free. It was a powerful enabler to say to your people, ‘You’re the best of the best, and I just don’t know how good you can be.’ He’s a motivator and a very good team builder, and kind of an impassioned leader. I don’t think everybody can get away with that,” says Connor.

By understanding and balancing the two sides of market opportunity and sales capacity, you can get a multi-dimensional view on how to allocate the quota.

  1. Fit the Methodology to the Account Type

One quota-setting approach does not fit all situations. While a more analytically-driven, standardized quota may work well for small accounts with a transactional sales process, a more bottom-up market opportunity approach might be better suited for a mid-sized account segment. Near the top of the account pyramid, national account quotas may be more accurately based on the information and strategies developed in an account plan. That account plan might provide input for quotas and also serve as a planning and coaching tool for sales managers to use with their account managers. Apply an appropriate approach for each type of segment or market.

  1. Make Your Approach Scalable

A telecommunications organization we worked with had reengineered and piloted its new quota process that incorporated top-down and bottom-up inputs, predictive market data, and precise steps for the entire team to work through the process. It all worked well during the pilot phase only for the company to find out after full introduction that the process was just too complicated, delicate, and unwieldy. The process that worked perfectly in a contained environment just couldn’t scale in the organization without coming apart at the seams. Further, it was creating workload demands to manually manage steps and exceptions that weren’t captured in a non-scaled environment. Err toward the side of simplicity. Accounting for every possibility may not be much more accurate but can certainly be much more manpower-intensive than using a simpler, streamlined approach.

  1. Don’t Over, Over-Allocate

A sales leader in a Fortune 100 transportation company recently asked me a very straightforward question: “Why is it that our CFO reported to Wall Street that we were on plan for revenue for the quarter, yet leadership is beating on us because we’re behind plan in the field?” As we examined the question, the answer became clear. It was a case of over, over-allocation of the quota.

Over-allocation refers to the approach of taking the sales goal for the business overall and, as it is allocated to the next level of management, adding a little extra to that goal. The sum of all unique, non-overlapping front line sales quotas compared to the company’s goal is a simple measure of quota over-allocation. For example, a company with a $1 billion corporate goal with a sum of all front line quotas of $1.05 billion has over-allocated its goal by five percent. Most organizations over-allocate quotas by about three percent to five percent from top goal to front line. That little extra allocation acts like an insurance policy. If the manager has a sales position that remains unfilled for a period of time with no one to effectively cover that territory, the over-allocation makes up for some of that loss. If a rep falls dramatically short on his quota, the over-allocation also makes up for some of that performance shortfall.

Over-allocation, within limits, can keep the organization on-track with its quota. However, when the quota is over-allocated too much at too many levels, it can lead to distortion on the front-line. In the case of the transportation company, the company had over-allocated its goal to a point where the C-level and the front line had two different realities. The sun was shining at the C-level while the front line saw only cloudy skies. Keep your quota allocation trim so that executives and reps all participate in the company’s success.

 

Next week I’ll write about 5 different quota-setting methodologies. Contact me at mark.donnolo@salesglobe.com with any questions.

Your Sales Compensation Report Card

sales comp report card

Designing a great sales compensation program that integrates with the Revenue Roadmap can be complex and time consuming, but the return can be significant. Follow the link below to a free tool – your sales compensation report card.

http://salesglobe.com/report-card

So now is the moment of truth: How does your sales compensation plan hold up?

 

Let me know how your plan holds up! Next week I’ll begin a two-part series: Ten Success Factors for Better Quotas. Contact me at mark.donnolo@salesglobe.com with any questions.

Your Revenue Roadmap: Driving Your Sales Strategy with Compensation

Revenue RoadmapOn a chilly morning in Sacramento, I sat perched on a vinyl bench seat, warily eyeing my rolling workplace for the day: an 18-wheeler, windows fogged from the cold, vibrating slightly as its engine idled. My tour guide, Cliff, was a driver sales rep for a major brewing company. Cliff climbed into the cab, slid over to the driver’s seat, and we pulled away from the distributor’s warehouse towards a 10-hour day of sales calls to convenience stores, supermarkets, bars, and restaurants.

As we drove, we talked about how Cliff sold beer. He had been with the company for a number of years and was very successful, but he explained that his role had changed. “Two years ago, I was selling cases of beer to store owners. Now, I’m trying to make the beer they already have move faster. I check the signs, inspect the coolers, and try to get our beer in the best position.” In addition to being a driver sales rep, Cliff had become a bit of a marketer, too, since the company had changed his objectives a short time ago.

In the parking lot of a convenience store in a gritty urban neighborhood, Cliff dragged down a hand truck and I followed him to the back of the store and into a huge cooler which held cases upon cases of light beer, regular beer, and premium beer in 12-ounce, 16-ounce, and quart containers. Cliff looked through the stacks, pulled the expired boxes, and loaded them into the truck. He then lugged beer from the truck and packed it into the cooler. As he did this he talked to the convenience store owner about what was selling and what was not. Then he detailed the cooler display at the front of the store, making sure the facings of cans and bottles were aligned and that the packaging and tags for the week’s specials were clearly displayed.

The brewery Cliff worked for had changed its sales strategy recently. The old approach was to sell as many cases of beer as possible, as often as possible, to as many retailers and restaurants as possible. Cliff and the other driver sales reps were paid cents per case commission to load more cases into the cooler, rotate the stock, and pull out old beer.

Eventually, the brewing company realized that pushing more bottles and cans into the backroom of a retailer wasn’t necessarily selling more beer to the customer. With competition at the point of sale increasing over the years, sales out was less driven by stocking the cooler and more driven by effective marketing. Strategically, what was important to the brewing company was selling beer to the end consumer. The company learned that the consumption of beer was driven by TV, radio, and social media advertising. Point of sale advertising, they discovered, was another driving force.

For years the company had missed the opportunity to mobilize the driver reps and had motivated them toward the wrong goal. It had mistakenly promoted a transactional model of selling into the backroom. Finally they realized what actually sold beer – product placement, use of signs and displays, and matching price points with competitors. But the question remained: how did that translate to the sales organization? How could this strategy convert to incentives meaningful to the driver sales reps?

The quest for that answer found me undercover in a convenience store cooler, wearing a starched uniform with “Mark” neatly scripted above my left shirt pocket. We worked with the company to determine how to motivate the sales organization with performance indicators that could ultimately steer consumer preference. The company moved their sales compensation plan off of a purely volume-based plan and connected it to the metrics and activities that drove beer consumption. They developed performance measures that were focused on merchandising such as the number of facings, the position of the product closest to the cooler handle, the placement of signage in the retailer, the positioning of large displays, and competitive matching. If their competitor’s malt liquor was in 32-ounce bottles, they made sure their 32-ounce bottles of malt liquor were positioned right next to them, hopefully with a larger number of facings.

By understanding what influenced the purchase of beer and connecting it to something that was important to the driver sales rep, the company was able to change the behaviors of the reps and get them to sell more beer. Now, Cliff talked to the store owner not only about how many cases of beer he wanted and yesterday’s baseball scores, but also how the beer was selling and ideas he had about improving the marketing of certain products. He talked about the positioning of the product and displays, and he had statistics on how much that could increase the volume. The store owner listened because he knew Cliff’s advice was in his best interest.

Because Cliff’s compensation changed, his conversations changed. Because his conversations changed, the results changed. This retailer had struggled with the sale of premium beer brands in this particular market, but had seen a dramatic improvement in those sales over the past 24 months because of Cliff’s marketing.

The company and Cliff had learned an important lesson about translating the new sales strategy to the front line. The customer learned an important lesson about how to improve the results for his business, and together the company and the customer saw significant improvement in results, demonstrating the power of sales compensation and its connection to the sales strategy.

Aligning to the Strategy

One of the first things our firm does when we look at sales compensation is understand the sales strategy. We ask: How should the priorities of the business be represented in the sales compensation plan?

One of the ironies of sales compensation is that while it’s a tactical program, it can churn up issues that are actually bigger sales effectiveness misalignments. For example, Cliff’s sales compensation plan paid him for generating pure sales volume, an activity that was out of alignment with the company’s strategy of positioning product competitively and playing an advisor role to help the retailer grow its business.  A transactional plan like this would ultimately cause a breakdown in the company’s ability to achieve its goals. Sales executives have to be able to distinguish between issues that are sales compensation related and those that are indicators of bigger strategic challenges. They have to know when they have a sales process issue that needs to be fixed.

Mike Kelly, former CEO and president of The Weather Channel Companies, began his career years ago at Fortune magazine. There, Kelly worked directly with the business customer – sometimes the CEO of the company – who would have a personal preference for a business magazine, whether it was Fortune or Forbes or Business Week. Because the decision maker was at a senior level in the organization, it was important to understand the corporate strategy. When Kelly took over the sales organization of a new magazine, Entertainment Weekly, he took that customer orientation with him.

Traditionally, a magazine would research target companies and try to prove to clients and agencies that their audience was the right audience, as opposed to trying to connect their customers and advertisers to the subject matter. But Kelly implemented a customized, consultative approach, connecting advertisers to entertainment marketing. Unfortunately, Kelly explains, “We over-customized it, and the organization had a hard time making money.”

Entertainment Weekly was scheduled to be profitable after two years, but by year five it was still losing money and Kelly was feeling some pressure. “We would always point to our growth. Our circulation growth was great, our revenue growth was great, and everybody assumed, ‘Okay, at some point or another we’re going to get to profitability.’”

Kelly enrolled himself in an executive education class at Columbia University where he met Professor Selden, who talked about an idea called customer segmentation. He told his class the best companies understand not only who their customer is but also what their customer’s needs are. They group their customers based on needs as opposed to what they want to sell them. By segmenting his customers Kelly could understand the profitability of each customer and each customer segment. Then he could align his resources against those customer segments that were most profitable.

“It was revolutionary for me,” says Kelly. “No one – and certainly no one in the magazine industry – thought that way. All revenue was good revenue. And we typically thought our biggest customers, our highest volume customers, were the most profitable customers.”

So Kelly took this idea back to Entertainment Weekly, and his team analyzed the profitability of all of the advertisers and all of their segments. They figured out that cable advertising was starting to explode. Networks wouldn’t let cable channels advertise on television because they thought they would steal viewers. Cable had to buy print advertising; it was the biggest, broadest reach they could get. Entertainment Weekly had a smattering of cable channel advertisers, but it hadn’t been a big focus. Kelly and his team had concentrated on what everybody else was concentrating on – automotive companies and health and beauty companies. They were big advertisers that had a lot of appeal but were price sensitive. Kelly, however, realized that the cable television advertisers were actually their most profitable advertisers because they paid full price; they were time sensitive – they had to be in certain issues in the magazine because the show was on a certain night – all the factors that compelled them to pay a premium.

Kelly completely changed how his organization thought about who their customer was, who their most profitable customers were, and how they should go after their customers. He realigned the sales force, putting more people on the most profitable categories with strong growth expectations and sales incentives and fewer resources against the customers for whom it was really just a price buy.

“We were supposed to lose money that year,” Kelly says. “We made money. And then we went on to have 30 percent CAGR [compound annual growth rate] for the next five years.

“I learned that sales is sales. But there are principles of finance that if you apply them to sales, including incentive plans, you can accelerate what you do. I’ve brought that to every other job I’ve had. We really try to understand who the customer is and what our value proposition is to that customer. Then we segment those customers so we understand who the most profitable ones are and who they aren’t. We put our resources behind that profit.

“If your compensation plan doesn’t align with the strategy and the segments you want to target, then you’re going to be working at cross purposes. It’s hard work to get an organization, any organization, to start to think differently. And in most companies, sales is product-focused or platform-focused. They’re going to go sell their product wherever they can. When a company becomes more customer focused, all of a sudden it starts to define the product mix based on what the customer needs are.”  The sales compensation program can either support that customer focus, run counter to that focus, or create confusion. In Kelly’s case, the priorities of the sales strategy were well-represented in the sales compensation plan, and it drove the desired behavior.

The Four Layers of the Revenue Roadmap: Connecting Your Sales Strategy and Compensation

When thinking about sales strategy and sales compensation, it’s critical to have a framework. “The comp plan is the caboose, not the engine,” says Doug Holland, director of human resources and compensation for Manpower Group North America, a global workforce solutions company. “Compensation should never be driving the strategy. The strategy drives the compensation. It’s incredible, especially in times of stress, how that message can kind of get lost.  Comp issues are often symptoms of bigger problems, and it’s the easiest, most tangible thing to look at. The challenge is, do we have the right job designs? Do we have the right people? Those are harder conversations. That’s often the struggle with comp plans.”

We developed the Revenue Roadmap from our decades of work with hundreds of high performing sales organizations. The Revenue Roadmap identifies four major layers, or competency areas, and 16 related disciplines that must connect for the organization to grow profitably.

To learn more about What Your CEO Needs to Know About Sales Compensation, visit the book’s website, or purchase a copy on Amazon or Barnes and Noble. To learn more about SalesGlobe, please visit us at www.SalesGlobe.com.

Sales Comp & Big Money

Let’s look at one of the most exciting components of the sales compensation plan. (No your eyes have not failed you. I said “exciting” and “sales compensation” in the same sentence.) It’s the part that can sustain or destroy the sales culture, and it lets top performers know whether (or not) they can earn big money. Upside potential is the incentive pay, above target incentive, that a sales person can earn if she exceeds quota and reaches the higher levels of performance in the sales organization.

 

Let’s say, for example, a rep had a total target compensation set for $100,000, and had a 50/50 pay mix (so he would earn $50,000 in base salary, and assuming he met his quota, he would earn an additional $50,000 in incentive pay). But then, this rep just kept going. He kept selling. He went above his quota. His company knew he was capable of this extra effort and had a plan in place to reward him. It’s called upside. (As a side note: a top performer is usually a person at the 90th percentile of performance or above in the company, and the upside potential earnings is usually set as a multiple of pay at risk.)

 
For example, a plan may have the potential to pay 200 percent of target incentive to a 90th percentile performer. So, in our example, the rep’s target incentive is $50,000, so the plan would have upside potential of an additional $50,000 (paying 200% of target incentive to the 90th percentile performer). So now, our rep earns his $50,000 base salary for showing up at work and playing nicely; he earns another $50,000 for selling to his quota; and now he earns an additional $50,000 for being a top performer. Some plans pay 300% of target incentive it’s up to the company to decide, but the amount of upside potential is usually determined by the competitiveness of the market to attract and retain top performers and the margins of the business to sustain a certain level of pay for top performance.

 
To me, this is what makes upside potential so interesting: Without the upside potential, the incentive compensation plan favors the company, because it only pays up to quota. The risk is all assumed by the rep; if she doesn’t make her quota, she won’t earn her total target compensation. But if she knocks her quota out of the park, she’s not rewarded much more. Upside potential balances out the risk and reward equation for the rep, making it worthwhile for the rep to put that pay at risk rather than just take a flat salary.

 

Believe it or not, some companies have very little to offer reps above quota. There’s minimal incentive to reach beyond their goals. In the case of our earlier example, the employee seeks a job with a company willing to pay her upside.

 
Let me know if you’ve seen examples of upside well used — or a company that doesn’t believe in it.

 

 

To learn more, please visit SalesGlobe.

Sales Roles and Productivity I: Follow Me

 

Let’s acknowledge that different sales roles have different definitions of productivity. For example; the transactional sales rep selling local advertising with a quota of two sales per week will have a very different schedule than a long-term consultative sales rep selling an expensive piece of technology.

Different types of sellers, different characteristics to their productivity. Demanding a rep with a sales cycle of two years to close deals more quickly probably won’t result in more sales. More likely, it will annoy the potential customers and send your rep looking for another job.

So how can you define productivity in your organization and differentiate it between sales roles?

We worked with a company that recently made a change to build more of an account management focused organization because so many of their people concentrated on just hunting.

But they were in a new market, and both management and the reps were a little disoriented. So, in order to help the reps, the managers temporarily took over the selling. They broke the market, did the major hunting, and passed it along to the reps for account management.

“We said, ‘We’ll go find the customers, we’ll develop the pattern, how they buy, what the customer looks like, persona, cycle,’ everything,” said the vice president of marketing for the company. “And we’ll train the salesman. We will get the first order, we’ll teach you how to do the second order, and then you’re on your own for the third order.”

“We built a war room down on the first floor and started going through this whole process of building this together. The reps wanted to know what we were doing in there, and we said, ‘You focus on the day job. Don’t try to create this new market. Because then, you’ll lose focus, you won’t make quota, and we will go broke as a company.’

“So, we said, ‘We’ll teach you how to do this and add it to your portfolio.’

“There were questions like, ‘Will I lose quota? Will you take business from me?’ So, we had to work through all of those territorial things that we as sales people like to hold on to.”

It was an interesting concept. This company, a major technology company, didn’t put the salesperson out and say, “Go develop the business in this particular area.” They prepared it for them. They went through the process with them, and then repeated it, and let them catch on that way.

“We knew that the first time we were going to get our nose bloodied. We had to understand how the deal happened,” he said. “There were things we didn’t understand when we got started. Our sales guys got chewed up. We figured out what the pattern was, and learned that we had to develop it, and then hand it off to that organization.”

How well would a practice like that work in your organization?

To learn more, visit SalesGlobe or email mark.donnolo@salesglobe.com. 

How to Set Bad Quotas and Destroy Your Comp Plan

If quotas are so critical to the performance of a business, why are they set with so little thought or methodology (with apologies to those who put in the thought and methodology)? Typically, a team spends months designing a compensation plan, and then hurriedly sets goal numbers based on financial information handed down by CFOs. Poorly designed quotas can significantly weaken sales comp plans. If quotas don’t represent true market potential, the sales comp plan itself will break down. And if the plan doesn’t perform as designed, ultimately the business could be at risk.  

So here are the top five ways to set bad quotas and accidentally sabotage your business:

1. Set quotas using historic information. According to a recent SalesGlobe survey, the top quota setting challenge companies are facing today is that quotas are driven by historic information; they don’t represent real opportunities in the market. Instead, quotas are set looking in the rear view mirror; we’re not looking at market potential – at both those positive opportunities and the places where prospects have dried up.

2. Don’t bother to have your quotas ready by month one. In about 30% of companies, quotas are not ready in the first month of a new comp plan. In fact, quotas actually may not be ready in the first quarter of the year. It happens because a lot of times the numbers aren’t ready until the end of the year, and the quota setting process can’t get started until those numbers are ready.

3. Adjust quotas mid-year. Because quotas aren’t ready by month one (and a few other reasons – legitimate and not) about half of companies will adjust quotas during the year – legitimate reasons and not. (Of course, when adjusting quotas, it’s really essential to have policies for why you would make those adjustments.)

4. Punish your best reps by giving them a higher quota every year. Companies that don’t have an effective quota setting process inadvertently create a performance penalty. The highest performing reps are rewarded with a higher quota each year, often in the same increasingly saturated territory.

5. Make the quota setting process top secret. About 29% of companies we surveyed said the process wasn’t transparent. People don’t have any idea how their quotas were set. And about 29% said they don’t believe in the process. Inequitable quotas weaken the effectiveness of the sales comp plan and raise questions about the accuracy of the information.

There’s a pattern in these bad practices, which I think is really fascinating. The top issue is about information: quotas don’t reflect market opportunity. So quotas are not good because they’re not representative of what the sales reps can do. But the other challenges are around people and around process. I think that’s a key point: is that as much as you get into the idea of the quota being a number, it’s very much about the process and abut the people.

To learn more visit SalesGlobe or email mark.donnolo@salesglobe.com. 

 

Top Comp Challenges — What’s Yours?

Every year, SalesGlobe conducts a survey to find the top sales compensation challenges. And as varied as businesses are, as unique as some industries are, so often sales compensation problems unite them all. Below are a few of the top challenges that plague sales organizations large and small.

1. Setting effective quotas. Almost every year the top sales compensation challenge is actually setting effective quotas. And arguably, quotas aren’t even part of the compensation plan. Quotas are typically set after the compensation plan is designed. But quotas are the linchpin between the compensation plan and performance. You could have a very effective compensation plan, but ineffective quotas can derail the compensation plan. Quota setting, obviously, is critical.

2. Differentiating top performers. Too often in companies, it’s easy to make a good living with a mediocre performance and very difficult to make a great living, even if you knock your quota out of the park. How we do we take the top people and differentiate them significantly from the mid range or the lower performers? We call the solution the Reverse Robin Hood Principle: take the performance pay from the lower performers and provide that to the higher performers with the objective of being able to recruit and retain the best talent.

3. Supporting the sales strategy and sales roles. One of the first steps in designing a sales compensation plan is to make sure we understand the direction of the business. How do you connect the corner office to the front line? The vision of that C-level whether it’s the CEO, CSO or COO, has to flow through in the compensation plan. It’s amazing the number of times we see a disconnect between the priorities of the business and what’s actually being paid for.

4. Driving solution selling. How do we make sure that we’re enabling solution selling through the sales compensation plan and that solution selling is also being supported through other elements of the growth management system? Solution selling itself cannot be driven by paying people multipliers for different sets of products. Product mix is actually a surrogate for solutions. Effective solution selling starts with the strategy and understanding directionally where we’re going. Enable people to sell solutions and have the right offer. Then compensation can come into play and make sure we can motivate people in the right direction.

5. Keeping the organization engaged.  This was a bigger issue in the past couple of years than it is at the moment.  But over the last couple of years it’s been a big question: how do we keep the organization involved when they’re not hitting their quotas and they’re not in the money on their sales compensation? If we have people floating down around 80%-85% of quota, how do we keep them from riding out the storm and waiting for the year to pass? Are there other types of reward and recognition, or are there adjustments we can make to the plan?

6.  Plan complexity. Plan complexity tends to be an underlying issue and an underlying challenge in most organizations. We see this in particularly complex organizations or organizations that are oriented around multiple products or services. When we try to represent too many things in the sales comp plan we create complexity. Then two things happen. First, the message of what the sales comp plan is telling the organization to do starts to break down. And second, we increase the complexity and the difficulty of administering the plan.

Of these six challenges, what is the biggest problem for your organization? Or is there another challenge not on this list?

 

To learn more, visit SalesGlobe or email mark.donnolo@salesglobe.com. 

Quota Setting: Historic Based vs. Market Based

Effective quota setting is a combination of art and science. While too many companies set quotas based on historical information, quotas based on the real market potential is a much better approach. Consider the following:

1. Flat Quotas. Flat quotas are usually used when companies have unconstrained market environments. You might have wide open markets where reps could go anywhere in the country; or the markets have unconstrained potential and the reps have relatively equal capability. In this situation it could make sense to set flat quotas; for example everybody gets a $5 million number.

2. Historic Quotas. For better or for worse, most organizations use historic quotas: they take what people achieved last year and add a projected increase.  The risk is that history does not necessarily represent the future potential of the business.

3. Market Based Quotas. Moving toward a quota-setting process that is driven by market opportunity or account opportunity requires taking your historic numbers and modifying them based on relative market opportunity (e.g., relative growth rate of the market, relative growth rate by product, relative potential, competitive environment). Moving to an opportunity driven approach can incorporate market level data, account level data (customers and prospects), or a combination.

How to Get There

Most companies move toward opportunity-driven quotas in steps over time, starting with a market level hybrid solution and eventually progressing to account driven goals that are formed in a bottom-up, top-down process. Improving the quota process can be a challenge for organizations because it requires the cooperation of several different roles. Many sales organizations also have to battle the legacy factor: if quotas have been set by the finance organization using historical data for decades, it may have become a sacred process – even if it’s a bad process – and will be difficult to change.

But there are risks to maintaining those bad processes. According to a survey by SalesGlobe, 84% of sales organizations say poorly-set quotas put the motivation of their sales force at risk; 59% say that not fixing the process contributes to missed targets for the business, and one in three companies said high sales turnover was a potential consequence of poor quotas.

The End Result

The ultimate goal for most companies is account opportunity driven quotas. Account-driven quotas go down to the account level – our customers and our prospects – and find indicators or predictors of sales potential, apply those out to our entire base of customers and prospects, and use that information for quota setting. Initially, as the organization begins on the path towards account opportunity quotas, they collect this information and use it for territory design and deployment. Once they are comfortable with the data, hot spots of opportunities and markets become apparent, and they can set quotas that are much more opportunity-based.

It is critical to make sure the quota setting process works correctly because it is so closely tied to both the motivation of the sales organization and to the attainment of the company’s objectives. Over the long term, a broken quota-setting process can erode the sales performance and put the business at a disadvantage. It’s imperative that companies examine their quota setting process and develop their case for change around the kind of risks it presents for them and the potential positive impact that can be gained from making an improvement. Setting and allocating quotas effectively will ensure the sales compensation plan is motivational, help us more effectively align sales costs and revenue, and increase the predictability of the company meeting its business objectives.

If you have questions or require assistance please contact Mark Donnolo at mark.donnolo@salesglobe.com, visit us at SalesGlobe, or call (770) 337-9897.

A Better Way to Set Quotas

Too many companies set quotas based on last year’s sales. It’s the wrong way, and we hear it all the time:

“How else would we set quotas if we didn’t just take historic results and project ahead 10%? Can we improve how we do it?”

The answer is yes, and it’s crucial to do so. Quota setting must be a cross-functional process, and sales reps need to see a clear connection between their pay and their performance.

Cross-functional cooperation. Ironically, quota setting is very often controlled by those with the least visibility to the market: for example, the finance team, the folks who love the science of it but don’t know the market and customer. The goal comes down from on high, from the top of the organization, driven by investor expectations or senior management requirements. It then cascades through the organization – an often inequitable division of the pain. This process does not look at market opportunity as much as a sales or marketing-led process would because senior leadership does not have as much visibility into the market. Quota setting should be a cross-functional process that pulls together several different functions including sales, sales operations, finance, and even product management.

Pay and performance connection. Effective quotas demonstrate a connection between pay and performance. Our research and consulting experience tell us that about 60% of companies have at least 40% of reps at or above quota in a normal year. And high performing sales organizations have between 50% and 70% of reps at quota in a typical year. Two years ago, 2009, was an exceptionally tough year for quota attainment. Only 30% of companies had at least 40% of reps at or above quota in 2009.

Reps above quota hit the “excellence level” – usually the 90th percentile level of performance – which should link to the upside accelerators in the plan. The threshold group represents the low performers who are usually at the 10th percentile and below.

Some plans will run a straight line payout from 1% of quota to 100% of quota. Others, which often represent a more performance-oriented culture, will use either a hard threshold or a ramped payout that pays less up to the threshold. This decision often relies on the culture of the organization and the characteristics of the sale and revenue flow for each type of sales role.

The important questions are:

  • How do we set a reasonable stretch goal for the organization based on the market?
  • How do we equitably allocate that goal as quotas to the organization?
  • What portion of our organization do we expect to hit quota?
  • How do we build the sales compensation program to drive performance to those goals?

These questions point us toward a better way to set quotas.

To learn more, visit us at SalesGlobe.com or email mark.donnolo@salesglobe.com. 

The Many Wrong Ways to Set Quotas

Believe it or not, over 30% of companies do not have quotas ready by the first month of their fiscal year, and some companies often delay several additional months. Sales reps are left to figure out what they are supposed to be doing on their own. Companies assume reps are working toward the same goal they had last year, plus x percent; but reps often claim they don’t know what they are supposed to be doing. Even after quotas have been set and allocated, 50% of companies continue to make adjustments during the year.

We hear several recurring questions around quota setting:

1. Should we set quotas on historical performance or market opportunity? Most quotas do not reflect actual market or account opportunity; many quotas actually weaken the sales compensation plan, and many put business performance at risk.

2. Are we actually penalizing our best reps with our quota process? We sometimes put our best reps at a disadvantage with a “performance penalty.”  Reps who do well in the organization get rewarded next year with a bigger quota based on the current year’s performance.

In future years we may penalize them even further. By continuing to give the highest performing reps the biggest quotas, we increase their goals as their market share increases and their penetration of that market increases; but, over time, their potential untapped market opportunity decreases.

3. Is the issue performance or is it the quota? Often companies will look at quota performance – the number of reps hitting quota – and determine the organization is not doing well in terms of quota setting. This is only part of the story and may be a symptom of a larger sales effectiveness problem. The issue could actually be sales performance.

4. How can we incorporate forward-looking metrics? If looking in the rear view mirror at historic results is putting us at a disadvantage, how can we do a better job of looking ahead? Considering factors such as total market opportunity, account level sales potential, relative growth rates, and rep capability may reveal an answer.

There are many explanations for why companies continue to have issues with quota setting. One reason is company legacy: “We’ve always done it this way over the years, and we’ve never really looked at other ways of doing it.” Another reason is that the organization runs out of time and resources.  Consider how much time is put into designing and evaluating the sales compensation plan during the year. If we are on a calendar year fiscal, we might start in August, work up through November and finish designing the compensation plan in
December. And then someone will say, “Next week we’re going to set quotas.” People will go off into an obscure, smoke-filled conference room and somehow produce magic numbers. By the time quota-setting comes around, we have exhausted our time and resources, and we don’t have enough of either to properly determine quotas.

Quota setting can also be a challenge if we don’t have good data, or we don’t have a good methodology. This begs the question: How else would we set quotas if we didn’t just take historic results and project ahead 10%? Can we improve how we do it?

 

To learn more, visit  SalesGlobe or email mark.donnolo@salesglobe.com. 

The Art & Science of Quota Setting

Sales compensation is one of the biggest motivators of performance, but it is not without obstacles. One of the top challenges we see is actually not a compensation issue, but a quota issue: how to set effective quotas. Successfully setting quotas is part science: part process and numbers-driven. It’s also part art: part human and thought-driven. So what’s the right balance between these two, and how can companies continually and effectively set quotas?

Check out our report The Art & Science of Quota Setting, which features a panel discussion of best practices for quota setting with a team of experienced sales operations executives.

If you have questions or require assistance in addressing these topics or other sales effectiveness challenges in your organization, please contact us at  SalesGlobe or mark.donnolo@salesglobe.com.

The People and Politics of Sales Compensation

This is the first in a two-part series. Read Part II here.

The people and the politics of sales compensation is about the softer side of sales compensation – who’s behind the scenes collaborating (or not); the steps in the process; how well the process works; how people work together; commonalities between the various functions involved; and solutions for challenges.

The human element touches sales compensation throughout the entire process. It happens during the year – asking sales managers to participate in the plan and convey how the plan is working; asking sales operations and HR to communicate and evaluate the plan. The human element assembles the compensation design team and establishes the principles for how the team will make decisions – who will crunch the numbers; who will evaluate the finished product and finalize the compensation plan. The human element determines the variety of perspectives included to make sure there is a well-rounded representation from the company. How they interact keeps it interesting.

Here are a few of the usual suspects:

1. The C-Suite. The C-level is almost always involved to some degree. Very often we see the C-level person – perhaps the CEO – pop his head in the room to ask, “Is this going to cost me the same or less than it did last year?” Other times we’ll have CEOs actually at the table and involved in the process. CEOs have very different levels of involvement in the compensation process, ultimately because CEOS, based on their personal preferences, have different degrees of comfort with sales compensation.

2.  Sales. Sales, obviously, is at the table, and they’re always asking for something (more money) often in the form of a bigger accelerator. They may grumble that HR doesn’t understand sales or what sales needs.

3. Sales Operations. Sales operations sometimes drives the process and other times responds to the process by trying to keep meetings organized and trying to devise a system that makes sense. Depending on where sales operations resides in the organization, these people can have different points of view. Sales ops most typically will be within the sales organization, but sometimes will be within finance or even HR. Where they sit, very often, determines their point of view.

4. Finance. Finance is typically at the table, either at the C-level or someone on the project team. They have an Interesting negotiating position. This perspective often brings some old cliché’s about sales: sales is overpaid; they have no value. Finance wants to negotiate: “If we have an accelerator on the plan, what are we going to take away on the downside so we can pay for the accelerator?”

5. Human Resources. Very often HR drives the process; and if they’re not driving the process they are certainly a partner. Their role is to looking at what’s happening in the market and make sure everybody is aligned with the market; try to bring some discipline to the process; and offer some expertise if that doesn’t reside on the team already.

6. Marketing. Marketing is not always involved in sales compensation, but sometimes they have an agenda, like sales. In a multiproduct or multiservice organization sometimes marketing tries to get a lever in the plan for each of the different products they represent, which can add complexity to the plan.

While all these interactions take place designing the compensation plan, the field sits and waits, knowing they will most likely get a bigger quota – often for a lower percentage increase in compensation. The sales compensation design process brings together many competing points of view and potentially competing priorities. It quickly, as we say, puts the “fun” in “dysfunction” in organizations.

Who are the people involved in your sales compensation design?

To learn more, visit  SalesGlobe or email mark.donnolo@salesglobe.com. 

 

Sales Comp ROI Best Practices

When determining the ROI you can expect from your sales compensation plan consider several drivers around ROI, and some ways to dis-aggregate the important questions.

1. Determine your strategy and the business objectives you are trying to achieve.

Understanding, for example, that you want to grow a certain product group or develop a certain market may change the way you look at ROI. You may be willing to invest a bit more to develop this market than you would on average or in your traditional markets. Isolate and evaluate ROI uniquely for that market.

2. Define how the sales compensation plan can help drive that strategy, and where its limits are.

The sales compensation plan doesn’t control everything. If you were going to sell a strategic product you know that the sales compensation plan can motivate people to sell it, but there are other factors such as availability of that product, targeting the right markets, the right sales messages, having the skill in the sales organization to do that, and having the right sales processes. A lot of other factors will play into whether you can actually accomplish that objective, in addition to the sales compensation plan. When you attribute success to the sales compensation plan because it helped you achieve certain objectives, often you have to understand that sales comp was just one piece of it.

3. Determine who you will pay.
You might look at ROI a little bit differently this way as well. Consider certain sales groups that were able to help you achieve that growth objective, versus the whole population. You can then look at the ROI on them.

4. Decide how much to spend.
We recently worked with a media company that traditionally sold TV advertising, and they wanted to increase their cross selling of online advertising. That’s a sales strategy; that’s an objective. What could the plan do? They wanted the plan to help them get a 10% average attach rate to their core product. Their television advertising will have a 10% attach rate of online advertising. They stated what they wanted to happen; next they examined who would do it and who would bring in the return on their investment.

They looked at the TV sales organization. They would be selling that online inventory cross-platform. So now they knew who they were going after. What were they going to pay? They expected an incremental spend of about 15% of the first year’s contracted program revenue. So this company basically took that idea and converted it into a statement.

We find it very useful to move any focus away from the number, much like in quota setting. Take the focus – and the argument – away from the number and break down the components driving that number; then, the conversation is simply a lot more productive.

Check out our report What’s Your Sales Comp ROI, which features a panel discussion of experienced sales executives on evaluating the return on sales compensation.

If you have questions or require assistance in addressing these topics or other sales effectiveness challenges in your organization, please contact us at SalesGlobe, (770) 337-9897, or mark.donnolo@salesglobe.com.

Target Your Sales Comp Plan for the New Economy

As we approach the new year, most companies are wondering not only how to grow their businesses in the current economy but also how to compensate and retain their sales talent who will help them get there. While we’ve watched corporate revenues and profits drop over the past twelve months, companies have been struggling to make their sales organizations more effective amid a difficult selling environment. One of the big challenges has been keeping the sales organization engaged and selling while they’re earning little for their efforts. In terms of pay, the typical sales compensation plan has approximately 40% to 50% of pay at-risk, meaning reps earn only 50% to 60% of their normal compensation if they don’t reach their minimum performance targets. In a normal year about 60% of the sales population performs at-quota or above, earning target or above target compensation for their results. Over the past twelve months, organizations on average have 42% of their reps at quota or above, leaving the majority of the sales organization under water on pay.

This drop in performance and resulting pay has led to a mad scramble for levers to improve sales productivity, approaches to find other ways to motivate and retain the sales force, and methods to reduce quotas without bankrupting the business. We’ve found that the visionary executives are prevailing, as they see this period as an opportunity to re-calibrate their sales strategies and sales compensation programs. We see some common themes among these visionary leaders as they use their sales compensation programs to keep their organizations motivated.

Keep the Sales Organization Engaged. With reps below the earnings range in their compensation plans, a challenge for some organizations is keeping reps’ heads in the game and focused on the sales process. Some reps and sales managers we talk with have surrendered to the situation and are “waiting the storm out” until the economy improves. This probably isn’t the best approach for driving business in the near-term. Those who are winning the game are finding alternative methods to motivate the organization. For example, often seen as a frivolous perks, reward and recognition programs have become a tool to drive short-term performance despite overall lagging quota performance. As one executive in a major business services company put it, “We can move sales performance ahead incrementally, when reps may otherwise have given up on reaching their overall quotas. Our reps will kill for a t-shirt and recognition in front of their peers.”

Monetary and non-monetary rewards can be used for more specific performance targets, even if the overall growth objective is unattainable by the organization. Using this method, organizations may set goals such as winning the next ten closed deals for a team or booking an incremental million dollars of revenue by the end of the quarter. Non-monetary rewards are a powerful alternative in expense-constrained environments. They offer an intrinsic reward and “bragging rights” that won’t get rolled in to paying the electric bill like a small cash reward might. Most organizations find that non-monetary rewards are motivational and visible to the organization and draw upon reps’ desire to compete and win. These types of rewards can range from quality of life bonuses for the family, like home cleaning or meal services, to recognition visible to the rest of the sales organization such as car leases or car key lotteries that involve a number of potential winners.

Align to the Sales Strategy. At the core of a high-performance sales compensation program are a well-defined sales strategy, sales process, and sales roles. The coverage model refers to the combination sales resources such as field sales, telesales, and partners necessary to pursue the sales strategy. During the recent economic changes, most organizations have shifted their sales strategies to stay on top of customer needs and evolving sales opportunities. These changes may include improvements to the customer message or value proposition around return on investment or alterations in sales roles such as shifts to hunter or new customer acquisition roles.

Each sales role should be defined in terms of its critical success factors, role descriptions, and competencies. Confirm whether you base pay, salary and incentive mix, upside potential, and performance measures aligned with each job’s most important roles or whether these components reflect a job that has changed over time. Determine the correct relationships between these components based on each job’s role in the sales process, sales cycle, account type, product focus, sales strategy, and management responsibility. A fresh look at your sales strategy may reveal some glaring misalignments that can make a big difference in motivation.

Move the Mighty Middle. Take a look at the distribution of quota performance in your organization- the percentage attainment of quota at the rep level. Odds are you’ll see a large group of reps hovering just below quota. While many organizations invest their effort in developing the high performers, there are huge gains to be made by improving the performance of the mighty middle of the organization, meaning those performers between 80% and 99% of quota. Moving the performance of this group a few incremental percentage points can have a larger impact on the results of the business than even a dramatic percentage gain from the high performers. Shorter term performance targets and a look at the motivators in the plan can be used to coax this group along the incremental five percentage points of quota attainment that will deliver a much-needed impact on your business. For example, a high tech organization found that it was actually de-motivating its reps for selling one-time deals if they were below 90% of quota. The incremental pay was minimal compared to the effort and the rep would be assigned the annualized value of that quota for next year, making it more desirable to pass on the sale until next year. This was a lost opportunity for the business and the rep. A change in mechanics and associated policies made these opportunities much more attractive for the mighty middle and aligned their motivations more closely with the company.

Over Reward the Top Performers. A successful sales compensation plan should disproportionally reward the top performers. Make sure you’re rewarding the top performers at the expense of the low performers. While this may sound extreme, successful sales compensation plans drive a sales culture by rewarding those who deliver results. In terms of upside potential (the portion of target incentive pay available to your top performers) evaluate whether top reps are earning appropriately more than average performers. Top reps should have an opportunity to earn one to three times the incentive of an average performer. Using precious compensation dollars for performance below a minimum performance threshold depletes financial resources that could be put to better use in the organization and encourages low performers to hang around long after their time. If your most loyal reps are your lowest performers, you’re probably paying too much on the low end of the performance curve. Question whether your low performers paid too much, resulting in a misallocation of funds to non-producers and putting your top talent at risk of competitive poaching.

Know Your Desired ROI and Follow a Proven Process to Get It. Sales executive often question their return on investment in sales compensation. We often hear questions like, “How do I know what I’m getting back from our compensation plan?” or “What should we expect from the comp plan?” The answer to this ROI question lies in articulating the connection between your sales strategy and your sales compensation plan and the influence the plan can have over executing that strategy. Rather than describing ROI simply in terms of compensation expense versus sales results, look at it also in terms of attainment of stated product objectives, market objectives, and sales culture objectives. Key to creating these connections to ROI is following a proven process to evaluate and design the plan. Your sales compensation design process should flow from the strategic decisions around sales roles and the sales strategy to the required design which includes target pay levels, salary and target incentive mix, upside earning potential, performance measures, mechanics, and quotas. Evaluate your plan qualitatively and quantitatively in each of these areas to understand your gaps. Then design and refine the plan using the same components to model your financial returns in a strategic manner.

Examine your plan relative to today’s environment. Keep it motivational to reps and align it with the sales strategy. With shifting customer needs, sales messages, and sales strategies, applying a structured approach to evaluating the performance of your plan and implementing some creative ideas can re-engage reps and better target the plan to the current economy.

 

To learn more, visit SalesGlobe or email Mark Donnolo at mark.donnolo@salesglobe.com.

The Trouble with Quotas

You’ve developed your business plan and put the new sales compensation plan in place. You’re almost ready to go except for one thing… setting quotas for the sales organization. Quotas are an often-overlooked critical link between the sales force and your business objectives. Too often organizations spend a lot of time building the plan and the compensation program and then quickly set the quotas to be ready for the next year or the next quarter.

A Bad Quota Can Kill a Great Sales Compensation Plan
Many companies wait until the last moment or simply rely on historic performance or apply a “one size fits all” approach to setting quotas rather than understanding the true growth potential of accounts and the market. The result? Over 30% of companies don’t have their sales quotas ready in the first month of their fiscal year, almost half of companies end up adjusting quotas during the year, and many reps carry an unrealistic load. Why does this happen?

· Quotas Are Often a Last Moment Priority. The organization has invested time, energy, and resources in creating its sales strategy and the new sales compensation plan and has little energy, time, or tolerance left for developing market-based quotas.

· Ownership of the Quota Process May be in the Wrong Hands. Quotas may not be clearly owned in the organization with split accountability from the sales organization, sales operations, or finance. Often the organization that owns the quotas, like finance, is farthest from the market has and the least knowledge about market opportunity and sales organization capability.

· The Organization Lacks the Right Information or a Consistent Methodology. Setting and allocating accurate quotas can be downright confusing and difficult without a logical methodology or information on addressable market opportunity. It’s a lot easier (but in the end more costly) to just evenly spread the goal across the sales force.

Quotas are frequently developed by traditional methods that consider only what the company wants, rather than the true market opportunity and sales force capability. Too often they are assigned after the start of the year (and after reps have worked for a few months on the new sales compensation plan) and then are tinkered with during the year. The results of not developing market-based quotas can include erratically allocated and inequitable goals, missed corporate growth objectives, overpayment and high compensation costs, and a de-motivated sales force that eventually dismisses the strategy and the comp plan.

Instead of overlooking it, companies need to seriously scrutinize their quota system and its ties to compensation and effectiveness. When the field is not selling as forecasted, the reason could lie with quota issues like allocation, goal equity, achievability, performance penalties, adjustments, and perhaps most important, market responsiveness. The problem is sometimes that quotas are being set top-down instead of bottom-up. They reflect what the company wants, rather than what the market will bear.

The challenge is to recognize the cause and effect relationship between quotas and results and develop quotas around market opportunity. Then make sure those quotas complement the compensation plan and are programmed to create sales effectiveness.

What Are We Looking For?
Well-designed quotas should strike the right balance between meeting the company’s objectives and creating a realistic, yet challenging goal for the rep. Pushed too far in the company’s favor, quotas become wishful thinking on the part of the company and unattainable or unrewarding on the part of the sales organization. Pushed too far in the rep’s favor, quotas become walk-over goals and deliver excessive pay and high costs to the company.

If quotas are effectively set and allocated about 60% to 70% of reps should reach quota or above. The overall performance distribution should be fairly symmetrical with about 10% of reps at the excellence or high-performance level and about 90% achieving at least threshold or minimal performance.

A review of your organization’s historic quota attainment will show whether you fall into this range or if your performance is skewed toward low or high performance, or perhaps bi-modal with pockets of extreme under-performance and over-performance.

Sometimes companies simply outstrip their sales organization’s ability to grow with ever increasing expectations without requisite increases in sales productivity. Over the past several years, sales organizations have pushed annual quota increases, on a per-rep basis, 50% to 70% faster than compensation. So reps are required to do more for less, organizations are not attaining the necessary productivity gains from reps, and both groups fall short. From an initial view of organization quota performance, you can delve into further quota forensics to uncover the true drivers of your quota attainment issues. These could be:
· Issues with the quota setting and quota allocation process.
· Issues with the sales compensation program.
· Issues with core sales productivity and consistently improving the capabilities of reps.

Putting Quotas in Context
How do you ensure a tight and well-integrated alignment between all key components of sales performance? Since market factors and business strategy drive sales execution, incentive compensation and quotas, must work within a broader sales management context:

Growth Strategy. Clearly defining the strategy in terms of components that are actionable by the sales channels and the sales organization. These include market targeting, value proposition, tactical strategy, and growth plan by each component of the strategy.

Customer Alignment. Aligning the most effective sales channels to each customer segment, strategy, and sales process component to optimize sales effectiveness and cost effectiveness.
Sales Support. Enabling the sales strategy and coverage plan through incentive programs, quota setting, development, and sales tools.

Evaluation and Interpretation. Gaining a clear understanding of internal performance, market environment, and competitor performance, and taking appropriate actions to stay on-course with the strategy.

To be effective, quota setting and allocation must reflect the organization’s decisions in each of these areas including sales strategy, sales coverage, deployment, and compensation. Too often, the company growth goal is driven by sources that may be unrelated to market opportunity. Objectives may arise from the expectations of analysts and investors, or from business requirements or management objectives. Growth projections are then cascaded down to business units and the field, but the quotas are not grounded in market opportunity. Consequently, quotas are adjusted and re-adjusted during the year.

Traditional Approaches
Traditional approaches to quota setting tend to address design from the company’s perspective.
In a fixed allocation method, flat targets are established for all members of the sales team. This simple process is effective for undifferentiated or open selling environments. It can also work well for start-up companies and for sales teams with similar levels of skills and experience. Unfortunately it does not consider territory potential, nor is it responsive to market opportunity. Consequently fixed allocation can potentially create a bonus for reps in territories with the highest untapped potential or for those with the largest existing accounts.

Historic allocation is another simple, company-focused approach, which can, over time, de-motivate high performing reps. This approach allocates quotas on a pro-rata basis reflecting prior year’s performance. Each quota is ratcheted up by a fixed percentage regardless of market opportunity. Companies just starting up or facing a wide-open market can use this approach effectively. Sales reps in heavily penetrated territories may be penalized when quotas climb out of proportion to market potential.

Account planning is a traditional approach that is highly market-focused although on just a handful of accounts. Account planning incorporates an account by account analysis of individual customers or prospects by focusing on characteristics of opportunity, such as current market position, decision makers, competitors, product opportunities, business issues, action plans, team roles and expected results. Account planning is an effective approach for a small group of large or complex accounts. Companies often reserve this level of scrutiny and planning for top global, national, or major accounts. However, extending this approach to a large number of accounts in each territory becomes unwieldy.

Market-Driven Quotas
Market-driven quotas incorporate elements of account planning but on a broader scale. Often including twenty five or more accounts in a territory, market-based quotas are driven by an estimate of true market opportunity. They meet the principles of quota setting and use bottom-up, account level information to reconcile at the regional, national, or global level. A market-based quota balances relative market share with other differentiating characteristics, such as rep experience, competitive intensity, and market growth rate.

Growth capability identifies an organization’s potential for organic sales growth based on internal strengths in a certain market environment. All the components of the company’s sales model combine to determine and enhance growth capability. The goal is to find the intersection of market opportunity and growth capability.

Market opportunity takes into account elements of sizing, segmentation, and targeting. It starts with an analysis of total market opportunity, considers what is actually accessible given product offerings, existing locations and asset infrastructure and then determines the sales potential in designated markets for target segments. At the same time, elements of sales capability—including resource alignment to target segments, sales workload and duration, hit rates, staffing levels, and sales competencies—are balanced against the market opportunity. The result is a growth objective that is attainable given market factors and sales capability.

5 Principles for Effective Quota Setting
1. Fully allocate the company goal to all sales resources and understand your true cost of sales given multiple crediting, sales overlays, channels, and over-allocations. Typically, the goal should be over-allocated by 3% to 4% to account for variations in individual and business unit performance

2. Ground the quotas in market realities. Know your addressable opportunity for customer retention, penetration, and acquisition. If you cannot incorporate specific account data on sales potential, use reliable forward-looking indicators to modify historic information.

3. Make sure quotas are perceived as fair, equitable, and achievable. If they’re too high, they turn off the sales force. If they’re too low they can turn off profits. Optimally, quotas should provide a challenge but also be within reach given a solid sales plan and sales force capabilities.

4. Consider all factors that affect individual quotas, both external factors, such as market opportunity and rate of market growth as well as internal factors such as rep experience and capabilities.

5. Reflect Rep Input in Quotas. Design systems that are easily communicated and readily understandable by the sales force. A rep will work hard to achieve a difficult quota that she understands but will give up on the same quota if it is not understood.

Capturing Opportunity and Taking the Next Step
In the past, estimating market potential was a guess at best. Companies lacked concrete data about customers, prospects and competitors. Today, however, volumes of information are available from a variety of sources. The richness of market and customer data coupled with improved analytical capabilities and data tools make determining market potential practical. The key is to identify the critical drivers and determine the relationships between them that predict true potential.

For example, a company might determine a customer’s or prospect’s potential through a regression analysis that considers the number of white collar workers, personal computers, and square feet of office space. This would result in a predictive model that could be applied to the universe of customer and prospect accounts territory by territory. Next, the organization might consider factors such as the mix of current and new offerings, the balance between acquiring new accounts, penetrating current customers, and retaining them, and finally the actual capability of the sales organization. Balancing potential with organization capability yields a goal that reflects both market opportunity and the organization’s readiness to capture it.

Amid the details, it is crucial to ensure that the process meets the tests of:
· Receiving adequate time and resources to conduct the process properly.
· Being understood by management and reps- a block box solution won’t work.
· Including management and reps in the process from a bottom-up and top-down perspective.
· Incorporating relevant and accurate information.
· Being evaluated and adjusted to improve performance and accuracy.

Companies that understand the importance of their quota setting and allocation process and strengthen this link to sales performance usually find a new source of sales productivity improvement. Audit your quota process, consider its effect on productivity, and take the first step toward getting extra traction from your sales organization.

 

Questions? Please contact us at www.SalesGlobe.com or mark.donnolo@salesglobe.com.

Copyright © 2014; SalesGlobe

10 Simple Rules for Improving Your Sales Compensation Plan

Mark Donnolo
http://www.salesglobe.com/

It’s the time of year when many companies are deep into executing to their business plans, evaluating performance, and thinking ahead to how they’ll make adjustments, or strategic changes, to the plan for next year. As you conduct your business planning and think about the organization’s growth objectives and sales strategy, attention invariably turns to questions like:

“Is the sales compensation plan really working?”

“Can we drive better performance by making improvements to the plan?”

Now that you’ve established your financial objectives, determined your market and product priorities, and developed your sales coverage model, the sales compensation program becomes a critical link between your goals and sales results. If it’s designed and implemented well, the sales compensation plan can motivate sellers and drive performance to company goals. If overlooked or poorly designed, the comp plan can move the organization in the wrong directions and result in missed objectives at a high cost.

To develop your plan correctly, understand the core issues and look to a set of time-tested sales compensation rules that will guide your way.

“How can we make a change that better supports our goals without disrupting the organization?”

The Top Sales Effectiveness and Sales Compensation Issues
Many sales compensation issues are actually business alignment issues in disguise. As the company grows and evolves, its markets and strategies change, requiring changes in sales strategy, coverage, and compensation. Understanding these issues and their potential meanings can give you some clues on how you might improve the plan and what other adjustments might need to be made to the strategy or sales coverage model.

The following sales effectiveness and sales compensation issues are most common to sales organizations. We’ve included some areas to investigate that can provide ideas on how you might address these issues.

Issues and Areas to Investigate

Developing an Actionable Strategy
Do the sales organization and sales channel partners understand how they should execute to the strategy on a day-to-day basis? Does the sales compensation plan communicate a clear message about our business priorities?

Increasing Sales Productivity
What levers can we pull to increase the capabilities of the sales organization? Are sales jobs too broad, trying to encompass too many different roles? Do sales people spend too much time on non-selling activities? Does the sales compensation plan push sellers in too many different directions?

Solution Selling
Are we selling products to our customers or developing solutions that address their specific business issues? Have we defined what solution selling means in our business and equipped the sales organization with the right tools? Does the sales compensation plan motivate fast cycle selling rather than considered solution development?

Minimizing Channel Conflict
Do our channels and sales resources align in the sales process or do they conflict, lessening our effectiveness? Does the sales compensation plan include measures that motivate these dysfunctional behaviors?

Cross-Selling
Are we evaluating the full breadth of opportunities in customer accounts? Does the sales compensation plan motivate sellers to expand our portfolio of products or services in each account?

Building a Sales Culture
Is the organization growth-oriented or have we created an environment of mediocrity and entitlement? Does the sales compensation plan drive performance or deliver pay for the status quo?

Paying Top Performers the Most
Do we significantly differentiate pay for top performing reps compared to the average rep? Are we overpaying our low performers?

Reducing Complexity of the Compensation Plan
Is the sales compensation plan easy to understand? Do reps know how they earn pay or is the plan muddled with too many measures and complex mechanics?

Setting Effective Quotas
Is the organization reaching its goals overall with 60% to 70% of reps at quota or above? Are quotas set considering market opportunity or are they based on historic performance?

Managing Crediting and Sales Compensation Costs
Do we have clear crediting rules for sales? Are we multiple crediting too many reps and channel partners for each sale and driving up costs?

Ten Simple Rules
Evaluating and designing the sales compensation plan can be a daunting task due to its complexity and the implications on the success or failure of the sales organization. Everyone has an opinion about the sales compensation plan and everyone is an expert. However, moving ahead without a clear understanding of how to evaluate and approach the issues is a recipe for disaster. The costs of taking the process step-by-step, according to a set of time-proven processes and knowledge of cross- industry best-practices, is far less than the cost of missing the company’s sales objectives or losing top sales people.

Use the following rules to guide your way and start by checking your Sales Compensation Report Card, available at http://www.salesglobe.com/.

1. Align Your Plan with the Strategy and Job Roles. At the foundation of a successful sales compensation program are a clearly articulated sales strategy and coverage model. The coverage model refers to the combination sales resources such as field sales, telesales, and partners necessary to pursue the sales strategy. Each sales role should be defined in terms of its critical success factors, role descriptions, and competencies. Are your base pay, draw, and performance measures aligned with each job’s actual role or do pay components reflect a job that has changed over time? The job’s critical success factors should provide direction on target pay, pay mix, and performance measures. Determine the correct relationships between these components based on the top three to five key job priorities for each direct sales, channel management, sales support, service, and management job. These may include role in the sales process, sales cycle, account type, product focus, sales strategy, and management responsibility.

2. Don’t Be a Robin Hood. The pay mix, the portion of base salary to incentive at target performance, should match each job role. Make sure your pay mix isn’t too aggressive for long and complex sales cycles or too shallow for faster acquisition cycles. There are a number of factors that drive pay mix that should be considered including the job’s focus on account management vs. account acquisition, buying process complexity, and length of the sales process. In terms of upside potential (the portion of target incentive pay available to your top performers) evaluate whether top reps are earning appropriately more than average performers. Depending upon industry, market, and job type, reps in the top 10% should have an upside earnings ratio of one to three times the incentive of an average performer. Are low performers paid too much, resulting in a misallocation of funds to non-producers? Check your plan with the “Reverse Robin Hood Principle” and make sure you’re not taking from the top performers to pay the low performers.

3. Focus on the Right Measures. Performance measures represent the top sales priorities of each job. These typically include financial measures, strategic measures, and may include leading indicators of success. Consider whether performance measures directly mirror the sales strategy and each job’s critical roles. Do relationships between measures (weights, links, hurdles, multipliers) represent the organization’s priorities? Does the plan communicate objectives to the employee in the clearest way or is the message complicated by unnecessary elements? Best-in-class plans rarely use more than three primary measures. Few have measures that represent less than 10% of target incentive. Don’t create a plan that allows reps to pick and choose or creates confusion about what’s important to the organization.

4. Develop a Clear Connection Between Pay with Performance. The sales compensation plan, at its core, is a tool to communicate business objectives and reward for the attainment of those objectives. Does your plan pay for revenue, profit, growth, base retention, or other priorities? Does your plan reward for dysfunctional behaviors or gaming? Total pay, total incentive pay, and incentive pay for each plan measure should be tightly linked to the company’s critical measures of success and should clearly communicate how pay is associated with each performance result. If a simple regression analysis shows a pay to performance correlation of less than 0.5 for your most important business measures, then the plan may be off-track.

5. Reward for Teamwork and De-Motivate Conflict. In an environment of complex sales roles and multiple sales channels, it has become increasingly important to ensure the plan promotes congruence among sellers and channels rather than channel conflict. Does the plan motivate direct and indirect channel teaming necessary to execute the sales process or does the plan create conflict between roles? Do team measures incorporate a group on which the employee has significant influence, or are team measures too high level for the employee to control? Test your measures and mechanics to make sure that the plan does not create a recipe for channel conflict on the four major conflict areas of product, sales process, geography, and segment.

6. Check Your Mechanics. Plan mechanics are the inner workings that specify how pay and performance are related across dimensions such as performance and time. Mechanics should be elegantly and simply designed to finalize the plan and ensure that it operates as designed. Determine whether the plan creates a clear line of sight for sales people so they understand how they’re paid and where they should focus. Is the plan hampered by outmoded commission structures or do the mechanics accurately represent performance potential and pay levels for each job and territory? Do you pay as much for maintaining the revenue base as for hunting down new business and are you over paying for recurring customer revenue? Develop plan structures that encourage high performance rather than dampen achievement.

7. Know Your Economics. Plan economics are deceptively simple in concept but a challenge to master in reality. Understanding your compensation cost of sales is the first step. However, your total cost of sales reveals only part of what you’re getting for your money. Look at the components and drivers of your sales and compensation costs. These include cost by strategy (customer retention, customer penetration, new customer selling), cost by product type, cost by customer segment, cost by geography, and cost by job type. The allocation of these costs should mirror your sales strategy and your total cost of sales should fit competitively with your market.

8. Set Equitable Market-Based Quotas. Setting equitable quotas is one of the major challenges sales organizations are dealing with today. Many organizations still fall into the trap of setting quotas based on historic performance, which usually does not represent true opportunity and lowers the overall performance and productivity of the organization. Quotas should be set and allocated to the sales organization in a market-based fashion and account for variations in territory size, sales potential, and growth rate. Quality market data on customer and prospect accounts is now readily accessible and can provide organizations, that know how to use it, with a performance advantage. Do your quotas create “performance penalties” for top performers or support mediocrity? Are your objectives set and allocated in an equitable manner and does the sales organization buy in to their quotas with a process that uses their input? If quotas require future adjustments, are there clear guidelines in place? Is your quota over-allocation from front line to management adequate or excessive?

9. Get Organization Buy-In Before and After You Design the Plan. Getting the right technical answer on the compensation plan is only part of the battle. To ensure success, the organization must be involved or represented during the evaluation, design, and implementation process. Pull in key executives and the opinion leaders in the organization early in the process to develop shared responsibility for plan development and results. A good plan, effectively implemented will produce far better results than a great plan poorly implemented. Many high-performing organizations use a 30, 60, 90 day audit process to check understanding, behaviors, and results from the plan through their sales compensation dashboards. Do you have a process in place to communicate plan changes, link them with the company’s strategy, accurately track performance, evaluate plan effectiveness, and make any necessary course corrections? By conducting regular, periodic evaluations and tune-ups along the way, you can avoid reacting to costly business damage and operate a plan that will successfully drive business results.

Sales Comp Diamond

10. Follow a Proven Evaluation and Design Process. At the first mention of the sales compensation plan, many executives tend to pull out their calculators and start re-working the payout rates and mechanics. Beware of the temptation to jump to the details first because that’s really the end of the process. Start by understanding the organization’s sales strategy and the job’s key roles. Then follow a proven process to evaluate and design the plan. Follow the Sales Compensation Design Process through two passes. First, evaluate the plans qualitatively and quantitatively on each of the components. Then design your plans following the process, which continues with how you implement and manage the plan on an ongoing basis through the year. Getting into an evaluation and design cycle like this will allow you to proactively manage the program each year.

Taking Action- Get Your Sales Comp Report Card
As you get started, identify your organization’s issues in the areas of sales compensation and sales effectiveness and remember that they are usually connected. Then follow the rules during your evaluation and design process. To begin, it’s important to understand the strengths and weaknesses of your sales compensation program. One of the most effective ways to get an initial, objective reading is to use a sales compensation report card that grades each major component of the plan. The report card will provide your organization with direction on where to focus and in what priority. With those objectives at-hand, you’ll be ready to conduct a rigorous evaluation and plan design process and develop a program that will support your business objectives.

Copyright © 2014; SalesGlobe

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