Communicating the New Sales Comp Plan: Key Steps Part I

Communications Points

Whether changing the sales compensation plan or making a change further upstream in the Revenue Roadmap, a change management plan with a heavy focus on communication will increase the likelihood of acceptance, and mitigate confusion in the sales organization. Doug Holland, director of HR and compensation for Manpower Group North America, says, “If we’re making a big change that’s going to affect a lot of people, the first question our CEO will ask is, ‘Why? What is the rationale for the change?’ His sensitivity is, ‘What is it going to do for the performance in the field?’  He’ll say to me things like, ‘You know Doug, if you present a compensation change for HR, marketing, finance, or IT, and it’s a bit disruptive, it’s not going to bother me. I understand that. But if you introduce a change that’s disruptive, in a bad way, in the field, that is going to bother me.’ That plan could be the greatest plan in the world. It almost doesn’t matter if people don’t understand it, if people don’t know how they’re going to grow their pay,” says Holland. It’s tempting to make one announcement or send out an email describing the new plan and consider it done. But don’t assume that because the people who designed the new plan understand it, that anyone else will. Real understanding – and the questions that pop up along the way from the end users – takes days, weeks, or sometimes months. Begin your change plan by looking at the entire process from evaluation, to plan inception, to design, to implementation. Put yourself in the shoes of the sales organization, concerned with their livelihood and any possible disruption, and develop your change plan to drive the strategy with the sales team in mind. When making your next change, consider the following six steps:

  1. Start strong. Conduct your due diligence to make sure the program is bullet-proof and ready to go.
  2. Craft the change story. Be honest about the reasons for the change, and develop a clear message around the C-level goals.
  3. See the organization’s view. Expect some resistance, and identify who those resisters might be so you can get them on board.
  4. Get the change forecast. Know your organization’s readiness for the change and your team’s resolve to see it through.
  5. Leverage the learning modes. Use multiple methods to communicate with the organization to increase the impact of your message.
  6. Follow the process. Begin communication early and follow your approach until well after introduction.

Start Strong Make sure you cover a few important checkpoints so the plan is ready for introduction. First, enlist the opinion leaders for input at the start of the process. Bring together not only executive stakeholders, but also highly-regarded representatives from the field who have a tactical operating view on the business. These opinion leaders can provide valuable input and help communicate the right messages to their peers. Second, pressure test the plan during the design phase. When the team has arrived at a good set of design drafts, expose the plan to a select group of managers or even top-performing reps for a cold look. This group could also include the opinion leaders. Pressure testing is most easily done in a small group setting or one-on-one. The objectives are to get beyond the team to see how the end users will see the plan. Ask them to react to it, describe how they think the organization might interpret it, and ask them to try and outsmart it to find the loopholes or behaviors the company may not want to motivate. This process also gains additional buy-in from the group because they’ve taken a role in the plan design. The goal is not to negotiate with them or change the design on the fly but to gather intelligence as the plan is finalized. Third, financially test the plan under a range of performance scenarios. Modeling at a high level by looking at target incentive, revenue, and cost of sales tells only part of the story. Payouts and cost of sales can vary dramatically depending upon the organization’s overall attainment of quota and how many reps attain quota. That’s because a sales compensation program often includes payout curves that reward at accelerated rates for high levels of achievement, and incorporates multiple measures that may pay independently from the primary revenue measure, So, very simply, the organization could reach its goal in aggregate but pay more or less than the targeted cost of sales based on how the team reached its goal. If the team reaches its goal on average, but does it with a combination of very high and very low performers with few average performers, then the plan may trigger upside accelerators, increasing the cost of sale for those high performers, while low performers may not cover the cost of their base salaries – a perfect storm. Know every financial angle of your plan to minimize the potential for surprises.   Next week I’ll write about how to craft the change story. Contact me at mark.donnolo@salesglobe.com with any questions.

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.

Differentiating Top Performers Part 1: The Reverse Robin Hood

Upside Potential

Let’s look at one of the most exciting components of the sales compensation plan. It’s the part that can support or detract from the desired sales culture, and it lets top performers know whether they can really be significant earners. 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. A top performer is usually a person at the 90th percentile of performance or above.

Typically the upside potential earnings at that 90th percentile point of performance is set as a factor or multiple of pay at risk. Upside potential refers to an earnings point above which the rep can continue to earn. Upside potential doesn’t indicate that there’s a cap on incentive pay.

Upside is defined as a ratio of target incentive. For instance, a plan may have the potential to pay 200 percent of target incentive to a 90th percentile performer. In this case, if target incentive is $50,000 with a 50/50 pay mix, the plan would have upside potential of an additional $50,000, paying 200% of target incentive to the 90th percentile performer. In the same fashion, a plan could also pay 300 percent of target incentive to a top performer. 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.

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 that case, usually the employee seeks a job with a company willing to pay her upside.

Organizations that know how to use the Reverse Robin Hood Principle typically set the pace with the leaders in their industries as one example illustrates with a top performer who recently made $4.5 million in one year. “We had another person who made $2 million, another who made $2.5 million and then we had about 10 to 15 people that made over $1 million,” says Lucky Young, director of compensation design and operations at Salesforce.com. “That’s probably eight to 10 times their target. So, there’s no question; we have a very aggressive comp plan that pays well. The incentive plan is a motivator. That’s the bottom line.”

How much cash should a top sales person potentially earn in a given year? More than her manager? More than the head of sales? More than the CEO? The answer to this question is indicative of an organization’s pay philosophy and its ability to attract and retain the best talent in the industry. When we asked C-level executives, nearly all agreed that a top sales person could earn more cash in a year than the head of sales. While that high earning rep may be a different person each year, and this earnings level may not be attained every year, that event would not be unheard of in the organization. In fact, C-level executives noted that these events would be motivational to the organization. As for earning more than the CEO, many C-level executives philosophically agreed that this wouldn’t be an issue given the right level of sales production, but it’s not usually realistic. Nevertheless, “sky’s the limit” potential is inspiring to reps who see no limits to their capabilities.

The Reverse Robin Hood Principle states that an organization doesn’t overpay the low performers but instead significantly rewards the high performers. Instead of paying low performers below threshold, the organization uses those funds to reward the top. That’s a big challenge for a lot of organizations. This principle makes a statement about philosophy that ultimately affects the sales culture. If the company operates as a meritocracy that emphasizes accountability and applauds performance, then the Reverse Robin Hood principle fulfills the promise of opportunity. If it operates with a collectivist view on balancing rewards, the Reverse Robin Hood Principle can wreak havoc on the culture. That may not be a good thing if the organization likes that collectivist culture. However if its strategy, according to the upstream decisions in the Revenue Roadmap, is to move the roles and talent in a more sales-oriented direction, the Reverse Robin Hood Principle may be just what it needs.

 

 

Next week I’ll write about upside and downside. Contact me at mark.donnolo@salesglobe.com with any questions.

The Six Dimensions of Sales Roles

6 Dimensions of Sales Roles

Defining sales roles has a direct connection to the sales compensation plan. When identifying those roles, consider six dimensions. A sales role (channel or job) is comprised of multiple factors that make it effective, yet can stretch its capabilities to a point that either maximizes or limits its effectiveness.  The factors below must be considered when structuring and managing sales roles. You can use these to define sales roles pretty specifically down to what you will need for the organization and for the compensation plan.

  1. Sales Strategy Responsibility

This dimension defines the type of customers the organization is targeting. Is the company retaining current customers? Is it penetrating current customers through either product penetration (selling more of the same products) or buyer penetration (getting additional buyers)? Is it pursuing customer acquisition? This combination of possibilities provides overall direction for the job.

  1. Product Responsibility

This dimension describes the products, services, and offers the job will bring to market. Does the rep sell one product, multiple products, or the whole portfolio? The more products each rep is asked to represent, the more his bandwidth is stretched. A product specialist, for example, should be focused and narrow. A rep selling the whole portfolio may need some overlay specialists for support, especially if it’s a complex offering.

  1. Market Segment and Channel Responsibility

For reps working directly with customers, this dimension identifies the groups and characteristics of those customers. Market segments can be defined as simply major accounts, key accounts, middle market accounts, and core accounts; or they might be defined by customers, values, or needs. Market segments may also be described vertically, such as healthcare or transportation, or a combination of these variables.

Channel responsibility refers to coverage and management of third party channels. An organization might use distributors, resellers, referral partners, or other types of third party businesses to help get to customers. In that case, it will usually use a role that works with its channel partners. In fact, it may need two roles: a channel acquisition role (someone to go out and acquire those relationships) and a channel management role (somebody to manage, cultivate and develop those relationships).

  1. Sales Process Responsibility

This dimension refers to the breadth of the sales process the job will span. The sales process may be expansive covering lead generation, qualification, solution design, proposal development, deal closing, and even implementation.

If you ask a sales person to do all of those things – going from lead generation all the way through the close and the implementation – it stretches his bandwidth. That requires a broad set of skills, as compared to having some jobs that are lead generators or maybe – odd concept – marketing generating an abundance of leads. One role may pick up qualified leads, close them, and turn them over to an implementation specialist. Many organizations over-simplify what’s really required in the sales process.

  1. Marketing, Technical, and Operations Responsibilities

Some jobs will have dual responsibilities, performing disparate functions. Some jobs are contaminated with other operations roles and have been cobbled together over time. Moving non-selling roles to other functions out of sales can help clean up the sales job and increase its effectiveness.

  1. Management Responsibility

This dimension identifies roles the job may have in managing other people in addition to selling. The classic jobs affected by management responsibilities are the selling sales manager and the selling branch manager. These combination roles often appear in organizations with emerging management levels. Having a seller straddle both sales and management is sometimes a first step toward pure management jobs that allows the organization to still attach a unique quota to the job and align its cost with a revenue stream. The reality is sharing a dual selling and management role can create conflicting priorities. A pure management role, effectively defined and staffed, can provide a much greater revenue impact through leadership and development of multiple sellers.

The big concept concerning sales roles dimensions is that the more a job is asked to do, the more stretched it gets, the less effective the job becomes. This customer coverage discipline of job definition is important to understand to make the organization more effective and to have a solid foundation for the compensation program. Once you decide which breeds of dogs your organization needs and clarify their priorities, it’s time to begin compensation plan design.

 

Next week I’ll write about how to differentiate your top performers. Contact me at mark.donnolo@salesglobe.com with any questions.

The Three Strategies for Revenue Growth

RPN

When companies grow from year to year, they don’t grow in a straight line. They hold onto some revenue from current customers, they lose some revenue and customers, and they grow in other areas. Analyzing the ebb and flow of revenue and profit can help a company understand how it grows, plan for future growth, align sales roles, and motivate the right results in those roles.

The dimensions of buyers (both current customers and prospects) and offers (current and new products or services) describe a range of possible revenue flow opportunities. Among the possibilities are really just three basic strategies.

  1. An organization can retain the revenue from its current customers, which is called retention selling. While it may not actually lose any customer companies from one year to the next, an organization will usually lose some of its current revenue from current offers. It’s deceptive. The customer remains, but some of the business is lost. In fact, the average business-to-business sales organization retains only about 84 percent of its prior year revenue. So, to grow it has to find new revenue.
  2. A company can grow revenue from its current customers, which is called penetration selling. Penetration selling breaks into two different types of selling. Buyer penetration is gaining additional buyers for the same product or service. For example, a shipping company that focuses on ground transportation would try to get more buyers within the same large customer account to use their services instead of another carrier or shipping method. Product penetration is growing with additional products the customer may not be purchasing. So that same shipping company might capture more current customer growth by selling its air shipping service to a customer that’s already using the ground service.
  3. A company can create revenue through new customer selling, which also breaks into two types. New competitive wins provide growth through new customers who are already purchasing similar products from competitors. The shipping company may win a new contract of international shipping from a competitor who held that business last year. New market selling is developing a new opportunity with a new customer that hasn’t purchased that product before. For example, the shipping company may offer logistics services to a new customer to help them improve the operations of their warehouse facilities. Of course this strategy could ultimately result in the company winning the customer’s shipping business, too.

This is a good tool to plan coverage and sales roles and determine what breeds of seller the organization needs.

 

Next week I’ll write about the six dimensions of sales roles. Contact me at mark.donnolo@salesglobe.com with any questions or visit www.SalesGlobe.com. 

 

The Sales Compensation Diamond Part 2: Linking Pay and Performance

Sales Comp Diamond

This is the second in a three-part series of The Sales Compensation Diamond – evaluating and designing a best-in-class sales compensation program. Click here for Part I: Framing the Plan.

Linking pay and performance actually begins with performance thresholds, which we covered last week. The next step is to develop the measures.

  1. Develop Measures and Priorities

Performance measures define the focus areas that are most important for each role. Each measure should represent the most significant pieces of the sales strategy that the role can control. A challenge for many organizations is determining which few of many possible measures should be included in the sales compensation plan, which should be part of the performance management program, and which should simply be core expectations of that job. Do the measures represent the top two or three financial and strategic priorities for each job? Has the message of the plan been diluted with too many measures, creating a buffet plan from which reps can pick and choose? Do reps have significant control over each measure in their plans?

  1. Set Levels and Timing

            For each measure, the organization must define the level at which that measure will be tracked for the plan. For example the organization may define a revenue measure for a sales rep at an individual level or a region level. Each measure will also be measured and paid on a certain timeframe, for example monthly or quarterly. The decisions around measurement levels and timing can have a direct impact on rep behavior. Measure too high and the rep may have little control. Measure too frequently and the cycle may be out of synch with a long sales process. Do our measurement levels match with reps’ ability to impact those measures? Does the frequency of our measurement and payment match the rhythm of the sales cycle or it unnaturally speeding or slowing the cycle?

  1. Design Mechanics

Mechanics create the connection between performance and pay. It’s the area most sales executives will jump to first rather than working through the previous steps. If your team is starting here, then they’ve missed half the process. While mechanics can seem complex with various rates, hurdles, gates, accelerators, and point systems, they can be divided into three types. A rate-based mechanic (also known as a commission) usually pays a certain percentage of revenue or gross profit, or a certain dollar amount per unit of sale. A quota-based mechanic typically pays a target incentive for reaching a specific quota or goal and may scale its payout above and below that performance level. A link creates a relationship and interdependency between two measures or mechanics. For example, attainment of a goal for a product mix measure may result in a multiplier that links and magnifies the payout of a total revenue commission. Are the plan mechanics easy to understand and calculate? Do they create an alignment to goal attainment or can a rep simply earn to a level where she’s comfortable? Are old commission rate structures causing the organization to work backwards by structuring territories (an upstream discipline) to manage pay levels (a downstream discipline)?

  1. Align the Team

            A full sales compensation program will include a range of sales, sales support, and management roles. To work together as a team, plan designs must interface as a complete system. This alignment point checks for how sellers will work together as teammates and peers in the sales process that may include business developers, account managers, field representatives, product and market specialists, sales support, and channel partners. This alignment point also checks for vertical integration from the front line up through each layer of management. Does the program promote teamwork or does it have points of potential conflict? Are managers and the front line operating with congruent measures or are there priorities not intersecting?

  1. Set Objectives and Quotas

Quotas are the linchpin between the sales compensation plan and performance. Objectives and quotas should be market based, representing the relative opportunity in each account assignment or territory, and be created with a process that’s well-understood by reps, optimally incorporating their input. Over time, quota processes for an organization will usually move from more internally or historically-based approaches to more market-based approaches as the market and organization become more developed. In early stage companies or in newer markets, an organization may allocate the same goal to each rep, with the assumption that each has similar market opportunity and sales capability. While this may hold true over a period of years for a new business developer with an un-bounded territory, usually the normal growth of accounts will accumulate to create an installed base of recurring or expected revenue for each rep that will vary by territory or account assignment. Reps with more established accounts may carry a larger installed revenue base than those with newer accounts.

For many companies, looking at historic performance and projecting a trend forward seems to work for a period of time. However, they quickly learn that they’re either saddling their highest performers with ever-increasing goals or they’re overpaying reps who manage large bases of slow growth recurring revenue while under rewarding the brave new business developers bringing in new customers. Does each rep own a portion of the total business plan that represents a stretch level of achievement? Are quotas forward-looking or steeped in history? Do reps understand and buy-in to the objective setting process?

 

Next week I’ll write about the final step in the sales compensation design process: operating for results. Contact me at mark.donnolo@salesglobe.com with any questions.

 

Grade Your Sales Compensation Plan

Picture1Designing a great sales compensation program that connects the strategy of your business to the front line sales people can be complex and time consuming, but the return can be significant.

“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.”

Too many companies get that wrong, however. We’ve created a quick report card to help you see how well your sales compensation plan drives the correct behaviors. Fill out the report card and receive a grade for each of the five categories: C-Level Goals & Sales Roles; Framing the Plan; Linking Pay and Performance; Aligning Team and Financials; and Operating for Results.

Select the grade that most closely represents your organization’s performance in each area. Once you are done, have each of your team members do the same, and compare results and potential actions.

http://whatyourceoneedstoknow.com/reportcard/

Let us know your thoughts.

C-Level in Sales Comp: Getting Involved and Supporting the Program

In order for sales compensation to work, the C-level goals of the company have to be incorporated. But at what point should the C-level get involved to communicate those goals?

Certainly at the beginning of the process, to discuss strategic direction and short and long term goals. And in fact, 23 percent of C-levels participate periodically in design team meetings, according to a recent SalesGlobe survey. However, most C-levels and their teams give caution about getting too involved in the details. It pulls the C-level out of his area of strength and sometimes turns him into the bull in the China shop. About 36 percent of C-levels get involved in the details occasionally, but very few (about five percent) get involved in the details frequently. For the inquisitive, high-IQ CEO or president, it takes a certain level of self-control, and team reinforcement to prevent this from happening.

The head of sales compensation at a large software company limits the number of design options he shows the CEO, in order to prevent him from spending too much time on the details. “It works very well,” he said, because, “too much information and too many options can be confusing. But our CEO got involved this year at the end of the process. We were pretty much done with the plans, and then all of a sudden he wanted to take a look at them. He comes at it with a very different style. …We had to change the plans, and it took us another month and a half to get them approved, which made it interesting. He was definitely involved to a degree this year to where next year, we’ll integrate his expectations before starting the design.”

In our study, the more than 50 companies we examined that had a blend of C-level involvement had an average three-year compound annual growth rate of approximately 7.5 percent compared to the Fortune 500, which had growth of about half a percent and the Fortune 100 which had growth of  about 2 percent over the same period ending 2012.

While the right type of C-level involvement in incentive plans is certainly not the primary cause of higher growth, it is likely indicative of greater C-level involvement in the workings of the sales organization overall and the practical drivers of growth.

Join us for a complimentary webinar today, September 17, 2013, at 2:00 PM eastern, on making the C-level to street level connection through your sales compensation plan. Or, contact us at Mark.Donnolo@salesglobe.com for a recording of the webinar.

 

Mark Donnolo is the managing partner of SalesGlobe and author of What Your CEO Needs to Know About Sales Compensation. To learn more, visit SalesGlobe

C-Level Involvement in the Sales Compensation Process

Picture2As sales executives determine priorities for their sales compensation, they need to set their C-level goals. These will define the major priorities for the organization that will be converted to the sales compensation plan. Those priorities provide clarity for the behaviors the plan’s going to drive in the organization.

While the Revenue Roadmap defines all our possible destinations, the following dimensions help us to make the right strategic alignments and stay on track.

There are five C-level goal areas that can describe our strategy. Articulating these from the C-level to the organization helps to simplify the critical few from the trivial many.

Most organizations can concentrate on building programs that support these five major areas.

  1. Customer. The Customer dimension describes priorities in terms of buyer types and segments. Who are the right types of companies and buyers for our business?
  2. Product. The Product dimension identifies which offers will get the most focus. What products and services should be emphasized? Which are strategic and which are critical for cash flow? What are the priorities for cross selling?
  3. Coverage. The Coverage dimension articulates the major methods of matching sales resources to each customer segment. What are the routes to market? What is the role of third-party channels? What will the sales organization look like?
  4. Financial. The Financial dimension specifies monetary goals. What growth results are necessary for revenue, profit, and market share? How is the return on investment measured, with improvements in the organization and sales programs?
  5. Talent. The Talent dimension defines who the sales organization needs in its coverage roles to reach its goals. What types of skills will execute the strategy? What’s the talent inventory? Where does the organization need to build strength? Where do we need to source new talent?

Looking at the complexities of the growth plan, setting the priorities around the Customer, Product, Coverage, Financial, and Talent goals can provide clear direction for a range of sales effectiveness programs, including sales compensation.

Mark Donnolo is the managing partner of SalesGlobe and author of What Your CEO Needs to Know About Sales Compensation. To learn more, visit SalesGlobe

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.

What Your CEO Needs to Know About Sales Comp

Our new book is out! Read an excerpt below and let us know what you think!

Book Cover 3The office lights flicker on at 7:00 Monday morning. The early risers arrive and the staff trickles in. The CEO, vice president of sales, CMO, and vice president of human resources sip their first cups of coffee, bleary-eyed from Sunday evening’s conference calls. The office chatter starts. In an hour the phones will begin to ring. A few miles away, manufacturing has been busy at the line for a couple of hours by now.

Despite the bustling activity, it will all come to a halt if the next sale isn’t made. “Sales” is the top line on nearly every income statement. Without it, the funding runs out, the stock doesn’t trade, the lights no longer burn, and the office chatter falls silent.

At the root of sales is a team of tenacious souls squeezed in middle seats without upgrades, walking the hallways of major corporations, making outbound calls to semi-qualified prospects, pacing customer reception areas waiting for a chance to have that critical conversation about the customer’s needs, and generally wearing out the soles of their Cole Haans. Each year on average, they experience eight to ten times more rejection than acceptance from their prospective customers. Yet they persevere – most with continued optimism – in pursuit of the close, the add-on sale, the contract renewal. Most of them are driven by a quest for three things: personal accomplishment, recognition, and compensation … sales compensation … commission … bonus … the deal that makes their year and the company’s year.

The sales compensation plan is one of the most significant drivers of performance in the sales organization and represents one of the single largest expenses a company will incur, commonly tens or hundreds of millions of dollars. It’s a thin but vital long distance line that keeps the daily connection between corporate growth and the rep on the street. It guides and motivates the actions of the sales organization more than any other single factor. It trumps leadership messages, sales strategies, sales management, and sales training. If there is a hard wire between the customer’s office and the corner office, sales compensation is it.

But if the plan’s message isn’t clear or to their liking, sales reps will interpret the plan in their own financial interest. As a corporate leader, you’ll get what you measure and what you pay for – and it may not always be what you expect.

While its impact can be direct, it’s a fine blend of art and science that has long been a point of conflict within companies. Everyone has an opinion about sales compensation and everyone is an expert, yet few agree on the best approach to drive performance toward the company’s objectives. Sales, sales operations, human resources, and finance regularly engage in battles over questions like:

  • Does the plan represent our business objectives?
  • Are our highest paid sales people actually our top performers?
  • Is the plan too expensive?
  • Can we better motivate our organization to pursue the sales strategy?
  • How can we promote more of a performance-oriented sales culture?
  • Can we make the plan simpler to understand?
  • Can we make the plan easier to administer?
  • Are sales quotas penalizing our best performers?
  • How can we set quotas that better represent the sales potential in our markets?

Too often these battles lead to sales compensation programs that are compromises between parties, ultimately leading to underperformance in the business. Above the fray, senior executives look on, often asking only the most general questions. Many of these senior executives, concerned about the next quarter and the remainder of the year, miss opportunities to use sales compensation as tool to drive growth.

What Your CEO Needs to Know About Sales Compensation is not a technical guide for designing a sales compensation plan. This is a book that tells the stories of how senior leaders in a company can understand the connection between their goals and sales performance to leverage sales compensation as a driver of real growth in their organizations. We’ll focus on the top challenges in companies today and offer logical leadership approaches for dealing with each of these issues.

What Your CEO Needs to Know About Sales Compensation, written by Mark Donnolo, managing partner of SalesGlobe, is available now on Amazon.com.

2013: Questions for a Lucky Year

Whether 2012 was a banner year for your sales organization or one preferably forgotten, it’s winding down. It’s time to start looking forward to 2013, that oh-so lucky sounding year.

But fear not. Even the most superstitious among us can make 2013 absolutely providential with a little planning. High performing sales organizations operate around four key areas: Sales Insight, Sales Strategy, Sales Coverage, and Sales Enablement. Together, this knowledge helps to create a clear strategy that will make sense on the front line, and drive productivity all year.

Sales Insight comes first, because it’s essential to really understand what’s happening in your market.  Without insight into your industry and competitors, it’s next to impossible to plan an effective strategy.

Take the time to consider these key Sales Insight questions before diving into sales strategy or coverage planning for 2013:

  1. First and foremost, what’s happening in our macro market? What’s happening in our economy overall?
  2. What about your market? Was 2012 really a banner year for your industry or a dismal one? Why?
  3. How did your competitors perform this year? Do you know what led to their successes or failures?
  4. What do your customers say about your sales organization? Did you meet, exceed, or fall short of their expectations this year? Do you truly understand the needs of your customers?
  5. Where did the revenue for your company come from this year? Did you retain current customers? Did you sell new products or services to those current customers? What percentage of revenue came from new customers?
  6. What were the major strengths and weaknesses of your sales organization in 2012?

What other ways can you gain insight that will help your planning, and make 2013 the “luckiest” year ever?

To learn more, visit us at SalesGlobe.

To Cap or Not To Cap?

Now that the election is over and all those spirited Republican vs. Democrat office debates will start to cool down (maybe), here’s a fun idea: why not kick up some dust with a new fight? Should the sales compensation plan have a cap, or not?

This is a surefire way for some lively conversation.

A cap is an upper limit on incentive earnings. The benefits of caps include mitigating risk for the company. We’ve heard stories, and you probably have too, of a sales team or single rep hitting a mega-deal and raking in a seven-figure commission check. These stories scare the heck out of finance.

These stories also motivate the hell out of the sales organization, which brings us to the downside of caps: they can be very demoralizing. Even if the cap is way out in the stratosphere of potential earnings, its existence is felt. The sales organization knows there is a limit to their earnings, and they don’t like it. For the highest performing reps, they might ultimately look for a role in another company, one that doesn’t cap incentives.

While we don’t recommend caps, there are some legitimate reasons a company may employ them. For example, caps protect you against unexpected payouts resulting from mega-deals or bluebirds beyond the rep’s control, poorly set quotas, unreliable financial modeling, or production-constrained environments where demand may outpace supply or the company’s ability to maintain quality levels.

On the other hand, uncapping the plan requires good historic data and financial modeling. An uncapped plan must also be consistent with the sales culture of the organization, especially if reps may earn more than their managers or senior sales leaders, in some cases.

Caps are less about the math and more about the people and behaviors.

What’s your position in this spirited debate?

To learn more, please visit us at SalesGlobe.

Bus Accidents & Sales Comp: Thresholds

What do bus accidents and thresholds have in common? Well, a (pretend) bus accident is an important way to think about thresholds (we don’t actually want or advocate anyone getting hurt).

Within sales compensation, a threshold is the performance level at which the plan begins to pay incentive. For example, if a rep’s quota is to sell $1,000,000 in revenue annually, she might have a threshold of $400,000, or 40 percent of quota. If she sells less than that, she’ll only earn her base salary, without any incentive compensation. Once she sells that $400,000 – the threshold point – then her incentives kick in. She can earn these incentives up to her target incentive, which she would earn once she’d sold the full $1,000,000 of her quota. And of course, if she sells beyond $1,000,000, then she’s eligible for upside (the really good stuff).

But, are thresholds fair? To say a rep cannot earn incentive pay until she sells a certain amount could sound like she’s selling for nothing. But don’t forget, the company already pays a base salary for the core job responsibilities and minimal performance. So some companies believe paying incentive on top of that would be double-paying.  Thresholds also set a clear minimum performance expectation: performing below a certain percent of quota (or a certain dollar level) is unacceptable, and may ultimately find the rep looking for a new job. Withholding incentive is the first painful step but send a clear message that that level of performance is unacceptable in this company.

So for what types of jobs are thresholds appropriate? That decision is largely based on the job’s sales strategy and type of sale. This is where the (pretend) bus accident comes into play. Ask the question: “If at the beginning of the year the rep was hit by a bus, what percent of his annual quota would come in without him there?” If the answer is, “All or most of it,” because a large portion of his revenue is recurring, then you might want to consider a threshold for that role.

If your answer to the (pretend) bus accident question is, “None of it,” because the rep is focused on new customer selling or working with current customers that have little recurring revenue, then each new sale may simply not exist without the rep. If that rep has a high degree of influence for each sale, then plan should have little or no threshold.

The (pretend) bus accident question is a great tool to cut through the arguments about thresholds with some straight logic and cross-industry practices. The actual level of the threshold, in terms of percent of quota, is usually set either mathematically or through management expertise. Using the mathematical approach, the organization should look at quota attainment historically at the 10th percentile, and use that as an estimate of a reasonable threshold. The management expertise approach answers the question, “Below what point would it simply not be acceptable to pay incentives?” Most executives will have an immediate answer to this question.

Once the threshold point is set, beware of changing it from year to year just because the performance distributions change. Expect variability and keep a steady hand over time unless the market, nature of the sale, or job role change significantly.

How do you determine whether or not to set thresholds? Do you think they’re fair?

To learn more, visit us at SalesGlobe.

 

Making More than the Boss: Sales Incentive Pay

How much cash should a top sales person potentially earn in a given year? More than her manager? More than the head of sales? More than the CEO? The answer to this question is indicative of an organization’s pay philosophy and its ability to attract and retain the best talent in the industry. We recently surveyed C-level executives in top companies around the country, and nearly all agreed that a top sales person could earn more cash in a year than the head of sales. While that high earning rep may be a different person each year, and that earnings level may not be attained every year, the event would not be unheard of in the organization. In fact, many C-level executives said that these events would be motivational to the organization.

 

As for earning more than the CEO, many C-level executives philosophically agreed that this wouldn’t be an issue given the right level of sales production, but it’s not usually realistic. Nevertheless, “sky’s the limit” potential is inspiring to reps who see no limits to their capabilities.

 

Organizations that know how to use the Reverse Robin Hood Principle typically set the pace with the leaders in their industries. One director of compensation told us, their top performer made $4.5 million in one year. “We had another person who made $2 million, another who made $2.5 million and then we had about 10 to 15 people that made over $1 million,” he said. “That’s probably eight to 10 times their target. So, there’s no question; we have a very aggressive comp plan that pays well. The incentive plan is a motivator. That’s the bottom line.”

 

How much can top performers earn at your company? More than the head of sales? More than the CEO?

 

To learn more, visit us at SalesGlobe.

Sales Comp & Merry Men in Tights

Let’s just pick up where we left off last week: the case for upside potential. You want to reward those top performers, not just pay them. You want to incent them to repeat their performance next year. And you want to engender loyalty to your company by ensuring they feel like the critical contributors that they are, through recognition and financial compensation.

 

But finance will ask, “Where does all this money for upside come from?”

 

Our old friend Robin Hood has inspired the answer. While that merry fellow worked (robbed) to promote less division between the high end and the low end of the village, we suggest that when it comes to sales compensation, the reverse should be true.

The Reverse Robin Hood Principle states that an organization doesn’t overpay the low performers but instead significantly rewards the high performers. Instead of paying low performers below threshold, the organization uses those funds to reward the top. Perhaps surprisingly, this can be a big challenge. Some companies simply are uncomfortable with a huge disparity among members of the sales organization. The Reverse Robin Hood could upset the company culture, or the way it’s always been done in the past.

But, if the outcome is rewarding, celebrating, and retaining the top performers, perhaps at the expense of the bottom 10 percent, perhaps a meritocracy isn’t so bad, after all.

What are the potential risks and rewards you see with the Reverse Robin Hood?

To learn more, visit us at www.SalesGlobe.com.

What’s So Great About Pay Mix?

According to the founder and CEO of a large, public communication company, incentives are everything. “The vast majority of people in companies work for two things: ego and money,” he has said. “What are we incented to do? How are we incented to behave? Incentives drive trained behavior. Period. We don’t spend enough time on getting it right in our company, and I guarantee not enough companies do. As a CEO, I have to hear my CFO and the finance department say, ‘Well you can’t do that because we can’t afford it. We can’t have that much incentive pay.’ That’s absolutely ludicrous. It’s not a question of affordability; it’s a question of sustainability.”

It’s a great point. The sales organization drives the bottom line, whether finance likes it or not (with respect to finance organizations everywhere). And sales people are motivated by their potential earnings. Would a great sales rep work just as hard and bring in as many deals if he were paid a flat salary? Yes, many of them would, but he or she would probably be looking for a new job at the same time.

So how can you responsibly incent, and pay, for the best sales teams out there? Through the correct pay mix and upside (We’ll talk about upside next week).

Pay mix, which refers to the portion of base salary and target incentive an individual in a job earns at quota, is usually the single most influential driver of behavior for a salesperson and the largest financial decision for the company. It establishes the company’s commitment to fixed (base salary) and variable (incentive pay) costs while setting the stage for upside payouts for high performers. A job may have a sizeable portion of pay or a modest portion of pay in target incentive, which reflects the desired role and, if designed correctly, will motivate the right types of behaviors.

Your company may have three job roles for example, new customer acquisition, current account penetration, and current account management which may earn the same amount of target total compensation for at-quota performance (let’s say $100,000), but they may earn that pay in different proportions. Those proportions of salary and incentive are affected by factors that include the sales role and sales process. But each type of job should have a pay mix that motivates the right type of behaviors for that job.

A new account acquisition role will usually have a relatively aggressive pay mix, say 50 percent salary and 50 percent target incentive. While their DNA will naturally drive the rep, significant pay at risk supports the types of hunting behaviors we want to encourage with this role. A more complex sales process will sometimes lower the percentage of pay at risk to enable the rep to work through the intricacies and duration of the process as well as multiple buying points in the case of global accounts or government accounts. As new customer acquisition is usually the most expensive type of sale, an aggressive pay mix also puts a large portion of pay in variable cost rather than fixed cost which lessens risk for the organization. However, with risk comes potential reward for the rep. Pay mix carries with it a corresponding amount of upside potential for top performers, usually in proportion to the pay at risk. Total incentive earnings for a top performer may be 200 percent, 300 percent, or more as a percentage of target incentive. If a person in this role earned $100,000 in a year, he would earn $50,000 in base salary and $50,000 in incentive pay. (We’ll discuss upside potential and differentiating top performers later.)

A current account penetration role is busy building relationships and may have a moderate pay mix with 70 percent of pay in salary and 30 percent in target incentive. We want to motivate performance but not typically with the level of risk and corresponding aggressiveness as the new account acquisition role. To maintain a balanced customer solution orientation and achievement orientation, most organizations will offer a pay mix somewhere between 70/30 and 80/20. If a person in this role earned $100,000 in a year, she would earn $70,000 in base salary and $30,000 in incentive pay. This role also receives upside potential relative to the pay she puts at risk.  

A sales role concentrating on customer service and revenue retention will usually have a relatively shallow pay mix, for example 90 percent salary and 10 percent target incentive. This minimal risk allows him to have the patience to work through customer challenges and strengthen relationships without the stress of trying to close the next sale. A role of this type with a more complex sales process will usually have a shallower mix than someone with a more transactional sales process, as the complexity will add to the time and patience required to work through creating the right customer experience. If we use a pay mix with too much incentive relative to base, we run the risk of creating a very anxious rep concerned more about attaining a sales result quickly than serving the customer correctly. If a person in this role earned $100,000 in a year, he would earn $90,000 in base salary and $10,000 in incentive pay.

More about incentive pay and upside next week.

To learn more, visit SalesGlobe.

2012 Staffing Industry Sales Force Compensation Survey

 

We are pleased to announce the 2012 Staffing Industry Sales Force Compensation Survey, the exclusive benchmark of pay practices for the staffing industry, has launched! We invite you to participate.

This survey is a landmark study of sales compensation and job roles and is the only compensation benchmark exclusively for staffing firms. Last year 60 large, mid and small staffing firms participated in the survey, including Robert Half International, Randstad, and Adecco.

Please use the link below to access the survey:

http://www.surveymonkey.com/s/2012SalesCompJobsSurvey

 Only survey participants will be able to see the final results. Staffing firms can use this report to benchmark their sales organizations.  The 2012 Staffing Industry Sales Force Compensation Survey covers major sales and recruiting roles, pay practices, and performance data for the industry’s leading companies. Topics include:

  • Key job roles for new customer acquisition, account management, and recruiting
  • Hybrid sales, operations, and branch management roles
  • Target and actual compensation levels
  • Pay ranges
  • Incentive levels and pay mix
  • Upside earning potential for high performers
  • Performance metrics and priorities
  • Commission and quota mechanics practices
  • Quota levels and practices
  • Productivity levels
  • Plan administration and challenges

Participants and Report

As a thank you for your participation, we will provide you with a complimentary copy of the Participants’ Survey Report for your use. This detailed report will include statistics on roles, pay levels, and performance levels by job type. All statistics are reported at a multiple company level and preserve the confidentiality of participating companies. The report also includes information on key challenges and trends around performance, compensation and year over year analysis.

The data you will need to complete this survey includes:

  • Basic information on company size and focus areas
  • Information on the roles of each major sales management and recruiting job. NOTE: Participants will only provide date for the job relevant to their company.
  • Most recent year’s compensation data for each role, which should include target and actual base salaries and incentives (highs, lows, midpoints, and averages for the people in each job role)
  • Information on the types of performance measures (e.g., revenue, gross profit, product mix) used in each compensation plan
  • Information on the types of mechanics (e.g., commission, bonus) used in each compensation plan
  • Information on approximate quota size for each job
  • Descriptions of any rewards and recognition programs used by your company
  • Description of how you administer the compensation plan    

 If you have your sales job and compensation data available, this survey should take about 60 to 90 minutes to complete. You may also save your work on the survey by selecting “save and continue,” and then finish the survey at a later time on the same computer.

I am happy to provide an Excel spreadsheet that matches the survey questions to help you gather and track the information needed to complete the survey. Please email me at cparker@salesglobe.com, or Eileen Gold at egold@salesglobe.com.

Please contact me at cparker@salesglobe.com if you have any questions or concerns regarding the 2012 Staffing Industry Sales Force Compensation Survey benchmark study.

Thank you for your participation!

 

 

 

CEOs and Incentive Compensation – Partners or Strangers?

Do CEOs become involved in the design of incentive compensation programs, or just pop their head into a meeting and ask, “Will this cost me more or less than it did last year?” Are there advantages to either approach?

Somewhat surprisingly, in a lot of large companies we see CEOs or presidents that are very involved in the compensation design process.  It doesn’t mean that they’re getting down to the details of the process – modeling numbers and trying to be creative about SPIFFs.  What it means is that they are giving strategic direction and staying informed throughout the process. 

We recently worked with a large telecom company whose CEO is really involved in the sales compensation design process – for thousands of employees and a lot of different job types. It’s an important message for the CEO to communicate, and it’s a positive reinforcement to the sales and sales operations organizations that there is indeed a connection between the c-suite and the front line: incentive compensation.

In our experience, a C-level executive generally asks questions about how the business priorities are represented in the compensation plan.  One key question is: are the problems associated with the comp plans really compensation issues or are they broader sales effectiveness issues? Sales compensation kind of has a magical quality. It’s a tactical program that churns up more strategic issues. For example, a problem that may first be blamed on a poorly designed sales compensation plan might really be the fault of vague and uncertain job roles.  Sales compensation demands specifics, and because of that it can quickly identify other issues – kind of like a circuit breaker that pops. 

So how do you get the C-level involved?  Some CEOs are naturally involved, some are not.  Often the CEOs who came up the organization through sales have more engagement. CEOs with a background in finance might be more interested in the cost rather than the potential to incent behavior.

It’s worth consideration. Several years ago we designed a new sales compensation program for a manufacturing company. Right before we were supposed to interview the CEO, the project leader, who was the head of sales, stopped us and said, “I’ve got to tell you that the CEO doesn’t know why we need to meet.”  I couldn’t believe that the leader of this organization really didn’t understand the importance of the program.  We had the meeting, and about half way through the CEO got it. Ever since he’s been very deeply involved. 

The CEO connection is critical for the sales organization, in terms of strategic involvement. Whether it comes naturally or has to be coerced, it’s a worthwhile partnership.

Please visit SalesGlobe for more information or email mark.donnolo@salesglobe.com. 

Communicating Change to a Sales Team

Perhaps the hardest aspect of business communications is the timing. You’re always behind the 8-ball. So much of communication is formally announcing what people already know thanks to the rumor mill and the water cooler.

 So there’s a natural pause. “Do I really need to announce to my sales team that we’re redesigning territories? They already know it.” But avoiding that formal announcement is a mistake: it’s a missed opportunity to frame the change in positive language and directly address the natural fears associated with change.

 Before you talk yourself out directly communicating to your sales team what to expect with their new sales comp plan or job roles, consider making time for an “assessment phase” to do the following:

1. Send a clear message from leadership making a compelling case for why change is necessary now.

2. Gather input from the people who will be most affected by the new sales comp plan or territory redesign (or other change) through formal or informal interviews and/or mini-surveys.

Whether rumors have begun flying about an expected change, or you’ve just noticed a few fearful glances around the office, beginning effective communication early will usually garner a greater percentage of buy-in from people who feel they’ve been heard.

 

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

Part III: Aligning Comp with Sales Roles

This is the third installment of a blog series on Rapid Sales Comp Design. Read Part I here and Part II here.

MARK DONNOLO: I’d like to spend a few minutes on the aligning of the sales roles and some practical thoughts on that. We do a lot of work with companies that have multiple sales roles and multiple groups for the sales compensation plan. We recently worked with a company that had 57 sales roles. I’d say they probably represented the 50th or 60th percentile in terms of complexity – certainly I’ve seen them with more than this. But this company is a good example of an organization with unnecessary complexity and too many mechanics to measure the plan.

This company had 57 unique roles and unique definitions and alarmingly unique compensation plans. You look at a situation like this and you think, “Wow. How do we make some sense out of this? Are there really 57 roles? Do we really need 57 different compensation plans?”

Sales roles and compensation plans are like tree roots. Uncontrolled they’ll branch out and organically multiply. So we took these 57 roles and sorted them by looking at their strategies and the responsibilities around the sales process and markets. That group of 57 actually sorts out into about eight different job families.

For an organization trying to manage compensation plans in this range, they become unwieldy. Each of those 57 plans had multiple measures, more than three – in some cases five or six measures. It can become really a nightmare in terms of communication and administration. It also raises questions about whether it’s really supporting the business as best as it can. Simplifying to eight job families makes a big difference.

How do you get a handle on something like this from a comp design standpoint?

PANELIST 2: I really try to keep it simple when I’m dealing with the sales leadership and even the operations leadership. I ask, “What of this is core critical?” So if we agree on
the account manager structure, in principle we try to keep it straightforward and consistent across the globe. Of course, I can see here how this actually translates into the plans that we have to operate on. We’ve got multiple variations for different reasons and nuances that each person gets approved for the exception.

I think what I try to do is to keep it as close to the core that’s been approved.  Identify why we have a nuance. We’ve done some interesting things in the matrix that we use to line up the systems we need. I try to make it as straightforward and simple for our operations teams and sales leadership as possible. “Here is what we’re using; this is the core.” We try to keep it to a select group that can manage through that and understand how that translates when you’re talking about 300+ plans.

MARK DONNOLO: Wow, so 300. That’s quite a number to manage. Do you manage that to a smaller number?

PANELIST 2: We usually start off the year with 35 different core plans, from your top management plan down to your inside sales specialist or your technical role. The reasons we’ve got so many permeations – and I’m sure a lot of other people struggle with this same thing – how the information flows determines how we design our compensation system to make that core plan work.

It doesn’t originally start off as 300. I would say we have 35 really core plans that we have designed with our leadership and have rolled out globally, and then there are variations that happen over the year. This year we’re probably closer to 200. But that’s how it happens.

MARK DONNOLO: How do you sort those out? We tend to sort it into different sales strategies: new customer selling or current account management, for example. Or, are they covering a range of products or single products? Are they specialized? Are they focused on certain segments? Do they cover a certain piece of the sales process or the whole sales process? Do they have certain technical knowledge or even management responsibility? Are they selling sales managers?

We tend to group by dimensions like that. Do you use a process to sort down to the true core roles?

PANELIST 2: Yes. It’s pretty easy once you become familiar with it. It’s sorted by management role. Usually we define it as the general management of the field, channel management, and technical management.

We’ve really got this definition of a front line vs. non-front line role. Then you’ll see which ones are more of your generalist that will receive credit for all variations. Then you’ll get into your specialists roles. So I’d say over the last couple of years we’ve gotten to the point where it’s very intuitive as to what that role will receive and what their responsibilities are. The
number of variations is voluminous, and that’s where we get lots of questions. “Why do you have to have lots of nuances?” I won’t bore you with all of the reasons why. It’s pretty intuitive. We separate it out by responsibility and then all of the unique specialty type roles we try to keep clustered as a group so we can identify the product specialty or service specialty.

Read Part I here and Part II here.

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

Rapid Sales Comp Part I: Setting Limits on Change

This is the first in a three-part series. Read Part II here and Part III here. 

SalesGlobe recently conducted a panel discussion with several experienced compensation executives to explore last minute sales compensation design. Mark Donnolo, managing partner of SalesGlobe, facilitated.  In case you’re scrambling to put together a sales comp plan, or maybe your plan is complete and you’re curious what the procrastinators have in store, here are a few of the highlights around Step One: Setting Limits on Change.

MARK DONNOLO: How do you look at change at your company, and what drives any shifts in the plan?

PANELIST 1: That’s a good question. For us, we try to keep the North Star really around what the strategy is for the business. Our fiscal year starts October 1, so the whole process starts in January after the end of our Q1 or calendar Q4 end. There’s a nine month planning cycle, so a lot of time is spent with the CEO and his executive staff to really understand where the company is going in the marketplace, our strategy, and which customer segments we want to be in. Are we rolling out solutions? How do we want those solutions to mix with our existing strategy? From that we start to build what the coverage model looks like and how we are going to deploy resources. The sales comp plan really is one of the last things we talk about, even though it’s one of the first things that everybody likes to jump to. “How am I going to pay people? We hope to roll out a new product and I want to pay them more for this.”

 We have done a nice job of coaching the leaders that sales compensation is really the caboose; it’s not the engine. While it tends to be the solve-it-all solution for everybody, it’s really not, right? We need to solve how to run the business and drive the business first, understand how we want to go to market, and then let the sales compensation plan structure really be the vehicle for executing on the strategy. That’s important for us.

 MARK DONNOLO: You’re getting a head start then. I think nine months ahead is insightful, especially for a lot of organizations that will pop up at the last minute and say, “Hey, we have to look at the sales compensation plan.” It’s been talked about during the year, but it hasn’t really been part of an evaluation or planning process.

 PANELIST 1: Yes. And I’m not going to lie to you, because it sounds like, “Oh wow, you start nine months ahead. Everything must be perfect and everyone is aligned.” But just like in every company, the executives change their minds a lot. For example, recently we were hosting a call with the international and U.S. divisions, and finance and operations were saying, “We’re three weeks away from the launch of the new plan and the end of the year. Here are the critical changes that we are aligned on. Is everybody prepared for communications? Are we ready to start rolling out quotas next month?”

And a lot of the sales leaders started questioning some of the decisions that we had aligned on in July. “Is this the right decision? Should we maybe change the mechanics of the plan? Should we go to this third measure vs. this measure we took out?”  And you’re sitting here thinking, “We’ve got three weeks left. It’s not like it’s a quarter to go.”

But I think the planning process is continual until you actually communicate it. Because you might have someone from the product house say, “I told you I wanted to pay this product differently.” And maybe you structured the plan to have a separate measure or a multiplier or something. But what we find is that it’s very difficult to corral the leaders and have them stick to something. So we are going to be tweaking things almost up to the last minute, which I guess is appropriate for this topic. But I think the overall structure – we’ve done a very good job of keeping that consistent from the decisions made a couple of months ago. Even though the mechanics might change slightly with three weeks left to go in the year.

MARK DONNOLO: I know one question that comes up is: where do you stop? How do you put an end to it? Someone said recently, “It’s as if our sales leaders have free reign to continue to change things all the way up until the last minute.” We really need to end it at a certain point and move ahead. Is there a way you’ve found to do that?

PANELIST 1: I think you’ve got to be positioned well in the organization. I think the sales compensation function has to be seen as a leadership role that has authority to push back. If it’s not, I think it’s going to be much more difficult. The sales leaders or the others will run wild.

If you’re set up in your organization to have that leadership role, it’s just a matter of saying, “Guys and gals, it’s T minus three weeks, these are the decisions we aligned on. Here’s why we can’t make a change. Here are the cost implications. Here are the ramifications. We’re going to move forward. If it’s a tweak – change this accelerator, change this threshold level – you can do this until after the plan rolls out. But as far as large structural changes, we’ve made it clear.”  

I don’t know if you’ve ever seen that movie Armageddon where there’s an asteroid coming in and there’s a little plane on the computer, where, if the asteroid passes that point the earth will blow up. We sort of set that up for the sales compensation design changes. We have said, “Beyond this date it is not feasible to make structural changes because quotas can’t be set on time. You won’t be able to pay people on time because you’ve got to redo the structure of the Oracle or Callidus or Excel or however you’re calculating sales compensation.”

You lay out exactly what the implications are, right? So if the business says, “I value your opinion but we do want to make the changes.” Then you’ve got to make it very clear. “Ok, guess what? You’re not going to pay people accurately in month one; or quotas won’t be out until month two.” They can think through it and say, “What is the business rationale for the change? Are we willing to take that risk for the change we’ve requested?

 MARK DONNOLO: Good point. So the wheels start coming off at a certain point, if we go beyond that.

 PANELIST 1: Correct.

SGF Member: We definitely have this problem. We have constant change. We just recently went through a pretty large change and we’re just trying to get our arms around some things. We definitely had that issue ongoing.

 MARK DONNOLO: It seems, and you described it well, that having the authority to push back and let people know what the implications are, that things really do start to fall out. Have you been successful in being able to push back effectively?

SGF Member: Yes. One of the key things I think you hit on is making sure that we have leadership buy-in. If we don’t have leadership buy-in, it’s very difficult for us to limit the process. And a lot of times we’ve noticed what you’ve mentioned before, where we are trying to do the compensation plan as the forerunner rather than trying to support what the sales strategy is. I think sometimes we get it backwards. We try to flip flop that to indicate we need to know what the strategy is and we’re really here to help set the behavior vs. drive that behavior. I think that’s something that’s really important. But I think at this point the success we’re seeing is making sure we’re getting executive buy-in. If we don’t have that it makes it really difficult.

This is the first in a three-part series. Read Part II here and Part III here To learn more visit SalesGlobe or email mark.donnolo@salesglobe.com. 

 

 

The Revenue Roadmap

The Revenue Roadmap model is something that we put together after working with hundreds of companies and asking, “What is the difference between high performing sales organizations and the average (or lower than average) organizations?” It really comes down to four major competency areas: Insight, Sales Strategy, Customer Coverage, and Enablement. These four disciplines, and their relationship to each other, provide a context for any driver of sales effectiveness – especially compensation and quotas.

1. Insight: Insight refers to how much we know about what’s happening in our market and understanding what’s happening with our competitors and our customers. If we don’t have our finger on the pulse of the macro market, we can’t develop our strategies with any degree of precision.

2. Sales strategy is an action plan to achieve a sales goal. The strategy converts high level (often financial goals) down to the front line that we can take to market. So it involves the types of services and products that we’re going to offer, our customer segments and our target customers. We have to have a solid value proposition for those products and services that translates well into a message sales reps can take to the customer.

 

3. Customer coverage: Customer coverage refers to how we align to our customers in a very practical, tangible way. What types of sales channels are we using? Direct sales organizations or other types of third party channels outside the organization, such as resellers, distributors, or other partners that help us during the sales process. The sales roles and the structure define how our organization lines up to the customer. Are we using different types of account managers, and are they focused on different segments? Do we have major account managers? Do we have new business developers?

The sales process itself should simplify customer coverage by outlining how the organization moves from the generation of an opportunity through the close and implementation. (And one of the pitfalls of simplifying the sales process is putting too many parts of the process on one sales role.)

4. Enablement: Once we’ve answered all upstream questions – Insight, Strategy, and Coverage – we finally get to the level of enablement. Sales compensation, quotas, recruiting and development of people and all the other support programs live here. But none of these programs – or the people they were designed for – can succeed without a solid foundation of Insight, Strategy and Coverage.

 

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.

Pay vs. Performance: Do you know what your plan is paying for?

It’s almost September. Do you know what your plan is paying for?

It might sound obvious (we’re paying reps to sell our product/service!) but a quick analysis of pay versus performance can be revealing.

So what’s pay and what’s performance? ‘Performance’ looks at different types of performance measures. We might look at revenue, bookings, revenue growth, year-to-year change, performance to quota, or other measures. What’s ‘pay’? Pay may be total pay, total compensation, total incentive pay, or maybe  just incentive pay for that particular measure. Basically, once we recognize what the big priorities are in the business, we want to understand what the plan is paying for and make sure it matches our larger strategic objectives.

We recently worked with a company that said achievement of quota was the most important objective of the sales organization. So we looked at the correlation between attainment of quota and incentive pay. But we discovered, however, the company was actually paying for total bookings (or total revenue) for the company. There was a much tighter correlation between what they were paying and total revenue for the company, than there was for attainment of quota.

So we told them, “Guess what? You’re not paying for quota attainment. You’re actually paying for bookings. If quota attainment is still your strategy, you may want to change what you’re doing.”

It’s a simple examination of some facts that, within a little compare and contrast graph, can uncover huge potential pitfalls.

Key Considerations

  • Are the most important business measures well correlated to pay?
  • Are the top earners the top performers?
  • Are there aberrations in pay relative to performance?

Components

  • Pay Components – Total compensation, total incentive, incentive by measure.
  • Performance Components – Bookings, revenue, profit, net growth, quota attainment in total or by measure

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

The Quagmire: Where Performance Measures Get Messy — A Roundtable Discussion

Mark Donnolo is managing partner of SalesGlobe.

 

Companies that have long sales cycles often use leading indicators to pay those sales reps – after all, they’re working long hard hours but the revenue might not come in for a year or more. Leading indicators can work very effectively when the standards are clear – a design win, for example – but what if your industry lacks clear indicators?

Members of the SalesGlobe Forum met recently to discuss this performance measure potential quagmire.

SGF Member: Can you consider the pipeline a leading indicator?

MARK DONNOLO: I know a couple firms in particular in professional services – very large professional services firms – that will actually pay their business developers on the pipeline, which is actually kind of hard to believe. It’s very, very unusual. Now, I’ll say it’s a combination of partners and sellers and these people are highly trusted. If there’s a violation of that trust that person’s probably not going to be around for another year. So there’s a code of conduct. In a lot of sales organizations you can’t do that. I wouldn’t recommend that at home. But potentially, with leading indicators, you could go that far.

SGF Member: If you use a leading indicator – like a contract signed, for example – we’ll do something like that for a long sales cycle. We’ll pay an upfront bonus based on the potential value of that. But that merchant has to be boarded already so we have a chance to make some revenue.

But we also have a policy that says, if we don’t earn the revenue the rep says we’re going to earn according to the sales contract we have the right to take it back from a person. That can get a little risky, I think, because it’s sort of like a de-motivator, right?  That’s tricky, when you get a year down the road and you say, “Oh well, we didn’t earn this revenue so we’re now in a
position to take money back from you.” That’s tough. But I don’t know of any better way.

SGF Member 2: But it’s better than waiting until the money came in.

SGF Member 3: We do the same thing, paying people on bookings rather than billings.

SGF Member 4: Sometimes it’s how you position it. We position it as advance.

SGF Member 5: We did it as a recoverable draw.

SGF Member: Do they have to earn it back?

SGF Member 5: Yes. We paid them at the beginning of the month. They had a draw, based on two measures: revenue and margin. And it was typically between six and eight weeks, and quarterly we measured up. If you were on plan, here’s your bonus. Your paycheck could vary, but the rep always knew if the customer didn’t pay his bill.

SGF Member 2: Do you keep out a portion of that, when you pay up front? Do you pay only a portion of what the commission was and then pay the rest on actuals?

SGF Member 5: It’s not a draw like that. This is sort of in addition to what they’re going to earn over time. It’s like a signing bonus. We have a recurring revenue stream and we pay them for a certain period of time on that, but that period of time may not start for 9-12 months from the time in which they make the sale. So we can’t wait until 9-12 months later, we’ve got to give them something now. But we don’t take it as a draw against anything in the future. They’ll still earn what the comp plan says they’re going to earn.

 

MARK DONNOLO: I have a couple of thoughts, because we run into this a lot.

The first is, when you have a long sales cycle, you still want to have a ‘pop’ – some payment to the rep – to recognize the event when it happens. That’s important because it creates excitement. One thing I like to do is understand what the actual risk of take-back is. A lot of that is going to be a question of policy – whether you want to forgive those advances or whether you want to actually take the money back.

If you look historically at the pull-through on those kinds of deals, you can get a sense of if and when that will work in your organization. You can also get a feel for the amount you’re paying. Sometimes when we do an upfront bookings bonus, we’ll discount. For example, if we’re going to pay on the value of the first year’s bookings we may discount that back a certain percentage. We may say, “We’re going to pay 60% of the first year’s bookings because we know on average 60% of that revenue actually comes through, so we’re fairly safe. So we discount it back.” The idea is they’re definitely getting something up front for that ‘pop.’

Upfront payments also drive certain behaviors. A lot of times if you pay a lot up front, when the deal closes the rep is off to the next deal. So if you want them off to the next deal, pay them in full because they’ll be gone. If you want them to stay involved, pay them very little, because they’ll stay involved and pull the rest of the deal through. The bad news is they’ll be hanging around the hoop – they’ll probably turn into more of an account manager role as they try to bring in the rest of the deal. You may say, “Well just get out of here and go sell the new thing.”

You have to find the right balance between the amount of money and the role of the rep.

 

To learn more, visit  SalesGlobe 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. 

Top Comp Challenges I: Plan Complexity

It’s sales comp design season (yay!), which means long days, frequent meetings, and calculators.

It also means facing some of the same old compensation demons, who resurface every year to throw a wrench in comp plans with even the best of intentions. Let’s take a look at a few, and how to slay them.

1. Plan Complexity. One of the first is the complexity of the plan. For any organization that’s been around for more than a year or two or has complex products or services, the plan itself tends to get complex as well. It just happens naturally over time.

But often, people at these companies don’t understand the compensation plan. It really happens at two levels: people don’t understand the compensation plan; and the plan itself is too complex to administer as a business. We’re trying to track – and pay people – on multiple measures. Or, we’ve got mechanics in the plan that are creating complexity because we’ve got hurdles, or thresholds, or gates, or multipliers that make the plan a lot more complex.

You might even have a plan that has just two or three measures. We hear, “It’s a simple plan. It’s only got three measures.” But once you really look, each measure has different gates in it which makes it hard for the rep to understand how they’re going to get paid.

Look at line of sight. Does the rep know when they close a sale what they’re going to make, or how it’s going to contribute to their quota? If the answer is no, the plan is too complex.

Simple enough.

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

The Creative Quotient Part II: Steps for Breaking the Boring Mold

This is the second in a two-part series. Read Part I here.

The philosophy of “We’ve always done it this way before” is way too popular for its own good, especially when it comes to account planning. The same stale plans, the same stagnant process, probably yield the same results.

What would happen if you injected some real creativity into your sales accounts?

Using innovation wins deals and helps the customer. Over several decades of working in both the sales effectiveness disciplines and creative disciplines with major corporations, we’ve learned that the Creative Quotient drives growth. The idea is to challenge a sales team’s thinking and then leverage their creative and quantitative sides to develop solutions that differentiate the company from competitors.

1. Define customer or sales challenge. Start by defining your specific sales challenge and your objectives for the outcome. A major staffing company we recently worked with (let’s call them Acme Resources) had a large prospective customer, a manufacturer that used a competitor to staff hundreds of light industrial personnel on its assembly lines. The customer’s challenges were that their temporary personnel had high turnover, the company had numerous safety violations, and the business had incurred high costs to continuously replace headcount. Stealing this account from the competitor would be a big win for Acme Resources but the competition was fierce.

2. Determine parameters. Each challenge has parameters for its solution. The most creative solutions come from within some limitations, rather than from complete freedom. For Acme, their parameters were the customer’s cost and resource limitations. For many sales teams, their immediate response would be to find a way to cut costs and price to win the sale – a sure path to a bad solution.

3. Create first generation approaches. With a clear challenge and parameters, we put the initial ideas on the table – the first generation approaches. These are the typical solutions. Acknowledge them, and put them aside. Although one of those ideas could be part of the answer, most will block our thinking. Acme’s team brainstormed its first generation list and cataloged it for future reference.

4. Destroy false assumptions. The next step is to destroy false assumptions. For the Acme team, their environment was full of assumptions, many based on “the way we’ve always done it.” Identify every assumption about how we address the challenge, rate their validity, and remove the ones that don’t hold absolutely true. Then question these true assumptions again as you move ahead.

5. Combine horizontal possibilities. This is where things get exciting. It’s been said that there are no new ideas. While this could be true (or a false assumption), an abundance of innovation today comes from combinations of ideas and applications of existing ideas to new challenges. One of Henry Ford’s innovations, the moving assembly line, was actually the improvement of an existing approach for a new business challenge. In sales, the application of existing technologies for telecommunications and the web has opened a new world of methods for working with customers, from telesales to social media for sales. Draw upon sources such as parallel examples from other businesses and industries, examples from history – even unrelated situations might spark new thinking.

6. Walk away (temporarily). After intense sales process innovation, briefly moving to other business will allow the team’s subconscious to digest this work and generate additional solutions. Ever wonder why your best ideas spontaneously come to mind in the shower?  It’s your subconscious at work, and it will produce the same results with sales process innovation.

7. Develop solutions vertically. With a range of horizontal possibilities developed, the Acme team scored each one and then developed the top three vertically. Vertical development entails going deep and building out the solution. Acme then took its top choices, tested them, and proposed them to the prospective customer. The solutions included new methods for forecasting attendance, gaining feedback from temporary workers, improving the work environment, and enhancing safety processes that would reduce turnover
and costs.

It might seem like a lot of work, but while Acme employed its Creative Quotient process its competitors proposed lower rates in an attempt to “buy the business.” For its hard fought sales process innovation, Acme won the business, and earned a place as a partner who crafted a new solution for the customer rather than a supplier who facilitated a historic problem. Acme applied the Creative Quotient to unleash its sales team’s power.

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

People and Politics of Sales Compensation II

This is the second in a two-part series. Read Part I here.

While the group of folks charged with designing a sales compensation plan can put the “fun” in dysfunction, the group can also work beautifully together. After all, they share a common goal — to create a comp plan than harnesses all that power behind the sales force, and make everyone some money.

Consider your current mix of people and the following key points when creating the sales compensation design team.

1. Listen to the sales organization. As participants in the plan, this group can offer insight into how well the plan works, as well as any challenges. Interview sales managers, survey front line sales reps and be receptive to feedback throughout the year.

2. Include a cross-section of leadership in the planning and design process. Leaders from the major functions involved with sales and sales compensation should be
included during when making major decisions. Involving executives from sales leadership, financial leadership, administration leadership and human resources leadership ensures each organization has a voice at the table.

3. Follow a design guide and establish a decision making procedure. A design guide outlines the process – soup to nuts – of evaluating and creating a sales compensation plan that is aligned to the goals of the business. A guide keeps people on track and focused on the strategic goals of the plan, and prevents individual functions from getting sidetracked by a separate agenda. Make sure the guide outlines how decisions will be made within the group to prevent disagreements from becoming stalemates.

4. Gauge and then respect your CEO’s level of interest in the design process. While some CEOs like to be involved as the compensation plan is designed, others just like to hear the final number.

We’d love to hear who is involved in your organization’s sales comp design team and how it works — or doesn’t.

To learn more, visit SalesGlobe or email 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. 

 

Rapid Sales Comp

We all know time can get away from us; and sometimes the consequences are bigger than others. When it comes to designing a sales compensation plan, it helps to have months of input and design meetings. However, it can be done quickly if need be. We can abridge the process for efficiency and still retain its power.

Consider these five points when designing a sales comp plan – even if you’ve run out of time.

1. Clearly define the sales strategy and roles, and align your compensation plan. Sales strategy and sales roles provide the foundation for the direction and actions of the business. Sales compensation should align with the sales strategy and motivate the sales organization.

2. Differentiate top performers. Make sure your plan rewards top performers competitively with the industry and significantly differentiates them from the average and low performers. Don’t over pay for low performance; instead, use those funds to invest in attracting and retaining the right talent.

3. Keep your plan simple and clear. Pay for three or fewer performance measures that match the strategy, and don’t put any less than 10% of target incentive on any one measure. Use plan mechanics (e.g., commission or quota bonus structures) that are simple and clear with minimal use of modifiers such as hurdles, gates, and links.

4. Formalize the solution selling process and use sales compensation to support it. Beyond the headlines of solution selling, define what it means to your organization, the sales process, and how the organization should work with customers. Don’t hard-wire sales compensation to solution selling unless the process and skills are well developed and
opportunities exist in all markets.

5. Develop a market opportunity driven quota setting process. Quotas are the lynchpin between pay and performance. A well-designed sales compensation plan can be rendered ineffective with poor quota setting. Make sure your quotas represent the growth opportunities in each market rather than a future projection from historic performance.

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

Strategy and Sales Comp Part II: Putting it in Action

With all the power sales compensation can wield, it pays to invest the time to connect sales comp with the strategy of the business. Below is the second installment of nine important factors to consider when designing a sales comp plan that will drive more revenue. Read the first five in Strategy and Sales Comp Part 1: Making the Connection.

4. Reduce the complexity of the sales compensation plan. Often, the more technical an organization is – or the more engineering-oriented an organization is – the more complex the sales compensation plans will be. There’s a temptation to include everything even remotely important in the compensation plan. The key, however, is to include the two or three things that are most important to maintain clarity of message.

5. Manage the crediting and compensation costsMake sure you’re crediting the appropriate amount to people involved in the sales process without over-crediting. It’s a balance. We don’t want a single credit in a team sale or a complex sales process, nor do we want to over-credit. If you have too few credits people run to the opportunity and then run away very quickly once they realize somebody else has grabbed the credit. If you give too many credits, too many people belly up to the chuck wagon, and it motivates the wrong behaviors.

6. Increase sales productivity. The right daily actions of a sales person increase the overall activity of the organization. Sales compensation can be a powerful tool to motivate the right actions. Use sales compensation as a lever to drive productivity and to create the right motivations in the organization.

7. Control channel conflict.
In a multichannel environment with a direct sales organization and indirect channels, getting those resources to align to the customer is essential for success. Get these parties to work together without competing with each other or degrading your value proposition in front of the customer.

8.  Build a sales culture. The sales culture is an unspoken but powerful force in the organization. But assessing it is fairly subjective. A lot of organizations will say, “We’re over the top in sales culture.” Others will say, “We need to move in the direction of being sales-oriented but we don’t want to destroy the culture that we have. That’s very important to us.” As you make changes in sales programs and sales compensation programs, ask how those changes are going to support the culture. Also question the degree of change the organization can handle to make sure that we don’t push it in the wrong direction.

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

Recruiting and Retaining Sales Talent Part II

From SalesGlobe Forum
Held in Dallas on 11/6/09

This is the second in a two-part series. To read Part I click here.

SGF Member: One of the things we struggle with is, unlike someone who sells a product, we sell a service. Attracting the right people who know how to sell a service versus a product is very difficult. So I’d be interested in feedback, and what processes they’ve gone through to find that type of person.

We’re finding difficulty in finding sales people that have that aptitude to sell it. Is that something you can see on the front end? Do you have a process to pick up on a person’s competency to sell a solution, or beyond the product?

SGF Member: We spend a lot on the profiling, but for the most part, you’re still trying to get the right skills and profile for that person to be long-term successful.

SGF Member: A really interesting concept in the business or consulting industry is to take a person who is really an expert in what we do, and based on that, maybe they can sell. They are a consultant, they start as a specialist or a practitioner. Because they can’t sell consulting unless they really know how to do it.

But the dilemma is interesting. Your grow people up and you say, “Ok, now you’re a partner. You’ve got to sell it.” And suddenly he can’t sell. You’re moving people from expert to seller. And here we’re talking about: how do we take an expert and make them a seller?

SGF Member: See, for us the challenge is to find someone who is operational on the client side, who is part farmer and part hunter. Pretty simple. We do it the exact same way. They understand the breadth of it, and then you maybe help form the growth from a client relationship side.

And then, on the sales side, they’re purely hunters. Their job is to go in, understand the unmet needs of the clients, and see if there’s something our organization can do for them. Then convince them at a very senior level to do that, and then be willing to divorce themselves from it, with no emotional tie: “Charles, it’s nice doing business with you. I’m going to hook you up to Simon. He’s your client relationship manager, he’ll love you. See you later.”  So that I can focus on sales.

The challenge is finding that individual. We’ve done a great job at integration, handing it off so it’s seamless, and the client really feels engaged. What we struggle with is finding that person to do the job Simon would do. I’m not going to say it’s an easier job, to find those types of people that go out and have the grit to sell a service.

I’m wondering how others have dealt with that themselves.

SGF Member: The one thing that’s difficult is you’re not hiring entry-level sales people in that kind of job. You can have a fine track record of success in selling services: you just have to tell them what’s unique about your services versus what they’ve sold in the past. I also think you can’t hire them en mass. This is where search firms and networking come in, to hire them one at a time.

But I think you have to look at a track record of success at selling services. I don’t think you can take a product person and make him a service sales person.

SGF Member: I would agree. At my company I didn’t know anyone who made the transition from applications to the services side. We did have some people who came from the services side who made the transition to the applications side, but they had the credibility to back them up.

SGF Member: So what I’ve done is, I take a look at the most successful profile. And my business developer officer and I try to match that up. It’s difficult. You need a combination of skills. The ones that are very successful have to have the credibility, so they have to have the knowledge, the terminology, the experience.

SGF Member: We have a very solid team today, 94 people. But finding those people, you make a lot of missteps. You use a lot of recruiting firms. It’s been a challenge. So we’re very patient in the process.

SGF Member: Is there any other process? Any other way to adapt or to speed up the process? Are you able to test drive them?

SGF Member: Well not necessarily test drive them, but we talked about psychology – people, psychology and the process really then allows you to test all three of those before you ever make that hiring decision. In a 30-60 minute interview you really can’t take that much away. You really want to spend three to four hours getting these guys together and see what they would do, long term.

You can take a page from consulting – running through the pieces of what you’d want them to do. Or put them in a job, and see them in action. That’s one of the things with sales people is, they’re sales people. They’re really good in a short period of time. They’re really convincing. You get them and really see how they are in time.

This is the hardest. I got fooled many times.

SGF Member: I am a big fan of case interviews. I like to hear cases of them on a job because that’s how you really hear things. Give them a period of time. See how they deal with situations selling to you what you need. When we used to hire applications sales folks, we used to have a 95 percent success rate.

SGF Member: Is it unchartered that you can do that?

SGF Member: Nobody in our space approaches businesses like we do. So that’s great. We like that. We like unchartered. But it’s strange. We worked with a couple headhunters, and when you look at these people, at their credentials – they’re awesome. So I went before anyone else met them, and I asked a couple questions. And they said they were really good in this particular space. I don’t want a box.

So you get people who –  maybe you run into this –  if they were acceptable in their environments, they would die in another environment.

SGF Member: So are you having trouble finding the right candidates, or are the ones you’re finding not performing?

SGF Member: Well form follows function on that. I’m through with the other piece of that. It costs a lot of money to bring people on, it costs a lot of money to train them, it costs a lot of money for that entire process. If they don’t develop to the level of some of your expectations…

I’ve hired some great candidates, but the company hasn’t put them in the right position. Classic sales guy here, but guess what the company spend $5 million last year and they’re not going to buy anything for the next two years. We’ve got a great guy on the account – he’s a great guy. He didn’t suddenly forget how to sell. So you’ve got those issues.

SGF Member: So I’m asking, do you have the right candidates, and are you doing the right things for them, putting them in the right position, to be successful?

SGF Member: I want to go back and make sure I answer that properly. I think it’s a little bit of both, but more times than not it is people in the environment that’s nearest or exactly like other environments, and they’re just not having the same level of productivity.

SGF Member: I think I made my errors in that. I got in this trap: I was going out to hire sales people, and that’s what I should have been hiring. It was a large complex sales organization. The sales people didn’t develop relationships with the customer. They were more used to a lot of environments. They weren’t as successful with the longer term, ongoing relationship with the client. And so I brought in a relationship management.

I learned there are more differences there than commonalities. You don’t have to get an account manager for this customer, but it’s another filter. And looking at this candidate, if they have this kind of relationship.

In our organization that kind of relationship guy, that’s how we separate those components. Because if it’s a client you’re already engaged with and doing business with, you just trying to nurture, grow and develop that relationship.

For a client manager, put that person in front of clients that you trust. Ask your clients, “How would you feel about doing business with this person, versus your original contact?”

SGF Member: I like that trusted customer relationship.

SGF Member: I like that idea. Throwing someone new out there?

SGF Member: That doesn’t have to be the customer that guy services.

MARK DONNOLO: Ok, any other points to bring up?

SGF Member: I don’t know if you guys have exposure to this or not, but our company uses the Gallup Poll exclusively, for psychological profiles and things like that, hiring sales people across the business.

When we start a new division we go to Gallup and say, “We want these characteristics for a communications rep.” Or you can probably call Gallup and create a profile, and say, “We want these characteristics profiled.”

For us, that’s the first step: put them through the interview process. But if they don’t score well on the Gallup, they don’t move on. If they do score poorly in some areas, at least we know where. If they have vision, or know how to build a relationship, at least we know where to dig deep.

It was discussed earlier: some of those tools, when we start a new division, it’s very helpful. We know what we want in a sales person and we know the characteristics that need to be there.

SGF Member: So you’re using a good filter then to increase the probability that you’ll have a good candidate.

SGF Member: Yes, for people who work in our business units who are going to have to go in and sit down to talk to Mr. Chairman and CEO of PepsiCo or Walmart or Walgreens.

SGF Member: Can they design a profile for that as well? They can? Excellent.

SGF Member: I’m a big fan of psychological profiling; I’ve taken a half a dozen. And I’ve been impressed. I took this 30 minute test and you nailed me. I mean it was really telling. And it’s good for the candidate as well, just as it’s good for the company. Because it makes sure you get somebody that’s a good fit for them as well.

I spent the last few weeks looking at this thing. And what I liked about this approach as opposed to the Gallup plan is they analyze the top-middle, and they build a profile for your company versus a generic, this is a hunter, farmer, whatever it is. And then the system kicks out a set of interview questions, based on those questionable areas where they don’t fit.

So those people in the remote stores or wherever it is, so that’s actually a good guide. It’s kind of interesting, and seems like it’s taking us to the next level.

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

Recruiting and Retaining Sales Talent

From The SalesGlobe Forum
Held in Atlanta on 11/13/09

MARK DONNOLO: In this current economic climate, it’s a good time to recruit or upgrade your sales talent; to get rid of your bottom performers and actually bring in, ideally, a top ten percent. How you systematize an approach and adjust the compensation for those coming in? The top performers are leaving their company. They’re unhappy, so you have a chance to get them, but there’s a dollar figure hanging over the head.

Has anybody had any luck with a program or a system for that?

SGF Member: That’s a pertinent question for our organization. There’s a lot of available talent, and if you’ve got an attractive environment for winning sales people, true pros, you want to get them. It’s also a time to call underperformers.

We racked our brains because we don’t have the most lucrative compensation package. But we’re post-acquisition, and there’s always an integration budget that’s really nice and flush. And you have to have a good idea of how you’re going to use those dollars. So we’ve considered formalizing this “upgraded talent” and creating a sales bullpen. And, in order to have people come in that are attractive to your business, based on their historical performance and what they’re going to do for you going forward, we have used some integration dollars to formalize this upgraded talent and create a sales bullpen.

And I’m not sure if this is going to be successful or not. It was a great idea, because you’re talking about affording good sales people. So, once we create this bullpen and recruit the best talent, they would be joining the organization to bring new talent and bring the organization to a new level. But they wouldn’t be placed in roles right away. You’d have your own sales team seeing this unfold and probably raise their own performance. So, hold them in a bullpen and try to place them quickly, and use integration dollars to afford good sales people.

SGF Member: Definitely in today’s environment – in the macro economic situation – there’s tremendous talent out there. The talent I see out there is the talent that’s still with companies, not having left, because usually they’re the ones companies are trying to hold on to.

When someone asked, “How do you get rid of the lower ten percent?” I look at it somewhat different. I’ve inherited a highly tenured sales force – people who have been around for a long time. One of the fallacies is trying to look at how their performance has been over the years. The lower ten percent may not be the people who have had the worst results.

The change-out might be needed of people who have consistently hit their numbers. And the reason for that is you’ve got to look at the skills that they have and how they got there. And sometimes the reason they are where they are is they have the right customers. And what they’re bringing in every year, you might want to get double. Look at the existing team. It’s not just about who’s got the numbers and who hasn’t.

But the flip side is: when you’re looking at bringing someone in, the first thing I tell the HR people is, forget about this benchmark data you have. If you go after eight players it’s just like acquiring a company. They’ve got their own profit and loss statement. So first, what are your expectations out of some of the people you’re bringing in? If their compensation expectations are high, then the return you expect from them should be high as well. And when you get top talent like that, they don’t mind when you set the bar high.

SGF Member: For adding top talent to the organization, we look at people within our organization that are top talent. Because if I bring people from outside at income levels that are significantly higher, I put my top talent internally at risk. I’d rather cut more than the lower 10 percent because I think I’ll get more out of the higher performers than I would …

SGF Member: If you look at deals won over last few years – significant deals – and you look at the 80/20 rule, does it follow what you’re saying? That the top performers are bringing in 80 percent of your revenue, not 80 percent of your deals but 80 percent of you revenue?

SGF Member: Yes. And you know those people are your go-to people on everything.

SGF Member: So you’re loving on them more than usual right now because you don’t want them to look around or get discouraged.

SGF Member: That’s right. And to the question you had about the executive team who doesn’t love paying sales people a lot of money. We actually are led by a CEO who came up through sales, but I think some people say, “Well that’s a lot of money to make, I didn’t make that when I …”

But I say, “Well it may be different today.” We are pushing that envelope really hard. I think I’m putting a lot of personal reputation on the line, for that, because I think that is the way to transform our sales organization. The investment in the sales people will be required to change our company. But it’s scary, because you have to pay a lot more than people are used to.

SGF Member: Just yesterday I had a conversation with my CFO, and said this person is way out of line. We got through the conversation and bumped him up $40,000 in total compensation – some salary and some variables. You absolutely have to reinvest in your folks. You have to be continually recruiting your folks.

You made a great point about another company. I spent a lot of time talking to another company before making my decision, and I had an option to potentially join them. They were dangling those $800,000 – $1 million compensation packages in front of me. But they were 2008 figures. So I said, “Show me the 2009 figures,” and that dog’s not hunting in 2009.

So I think from the recruiting standpoint, from your perspective, it’s about, “Where’s the puck going?” A lot of people have had great years, and they are looking at W2 statements for 2009 and asking if they’re at the right place.

Everyone’s asking that. Everyone’s sales compensation is coming down. There is a great opportunity. And everyone’s open. And if there’s a compelling story to where your company is going, and what the upside is – no caps, a big market opportunity – if you’re as good as you say you are, the sky’s the limit. So I think I’ve seen a market that’s extremely receptive.

SGF Member: Just a quick question if you find this in your experience. Your top performers – it doesn’t matter what you pay them, they are workaholics. They’re going to give it all to you no matter what. Why not take care of them and love on them and appreciate them, those top performers. Are you finding that to be true?

SGF Member: I paid our top twice as much this year. Because I paid them for the responsibility that they were shouldering. Like you said, they work so hard, they contribute to every deal, they’re helping sales people in other territories. So I started giving them money. I had sales people that made $200,000 more this year than they did last year. And nobody can believe that. But we’ve had a phenomenal year on the backs of a few.

SGF Member: I have one question about an issue I’m facing in my company.

I have a tenured sales force, and our focus is clearly on business development. I’ve emphasized a key account owner; I want these people to feel they own the account. The challenge I have is focusing on business development and account ownership. A lot of time my sellers are in involved in service delivery and problem resolution. But there needs to be more focus on business development.

I see two questions. One, how do you deal with that with the seller? I’m trying to get that emphasis on new business development and not so much on service delivery. And the other question is, how do you get the other folks in the organization that are responsible for service delivery to step up to the plate and do that? Because right now, it gravitates to the seller.

SGF Member: This is absolutely something I see this time and time again. I’m responsible for service delivery and sales. When I came in I said, “You know what? The services delivery element is as important in terms of the ongoing sales as anything.” So we changed our model to show that. Then, when I look at that, there’s a couple of things:

Whoever is leading the service delivery side, if your sales people are spending that much time on service delivery, you have the wrong person leading the charge. The person has to basically tell the sales guys to get out of the way. It has to be that brutal. Now what you’re going to find, there are going to be sales people who choose not to get out of the way. They’re not the right sales person. I mean, yes, a sales person cannot ignore the fact the customer has an issue, but he’s got to facilitate to get the right people involved, not be the person. Once you’re in that position, you’re always in that position. You can never get out of it. So, it’s a combination of the two. The answer, in my experience, is you have to have the right person leading charge on service delivery end.

SGF Member: We actually have a hard line of demarcation between sales and delivery, and there’s an account manager – really a project manager – who takes over.

And there are hunters and farmers, and they look very different. You will get the deal closed and at the 60 percent sales stage we’re going to introduce the professional services team. We’re going to say, “This guy right here will manage the entire delivery process. Bottom line accountability, here’s his home phone number.” The sales person will delegate that.

Where I’ve seen that not work in my previous career is when there’s not a clear delineation between roles and responsibilities. I’ve seen sales people gravitate towards that. Because cold calling and business development, that’s the harder part of the job. So one piece is structure. And then the second piece is stack ranking – pipelines. And peer pressure from a continuous track record. Stack ranking to me has been one of the best performance management tools in my career.

SGF Member: When you talk about the delineation, how does the customer like that?

SGF Member: Well, I’m 45 days into it. One of my observations is that we break a relationship a little, and that’s not ideal there. But the point still remains the same, and that is there is a role in the company that that person is solely responsible for.

SGF Member: I buy into that. Let the hunter be the hunter and cut them loose. It’s always soft. We’ve adopted this thing where the person that takes the account, they go in there, and then the hunter leaves, but doesn’t leave for first six months. We make sure there’s a transition and a time period.

SGF Member: That’s a big key – that relationship and the expectations with the client. But the sales person should be out looking for revenue. You remember the NRGAs – the non revenue-generating activities. You don’t want your hunters involved in those.

The NRGAs is a big topic with us right now, and also they’re hard to do business with. I formalized it. We’ll see how effective it is, but we formalized it as a pinnacle issue. We’ve got sales people doing what we’ve not hired them to do, and we need to stop that. So we’ve got an executive sponsor on the non revenue-generating activities that are contaminating their performance. We’re trying to shift that to someone who’s got the pull in the organization to make it happen, and trying to cut sales people loose.

To learn more about recruiting and retaining top sales talent, visit SalesGlobe or contact Mark Donnolo at 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

%d bloggers like this: