» What are the advantages of linking two measures of a sales compensation plan together?
» Over the course of last year we discovered errors in our sales compensation calculations after having already distributed the payments-and now the sales force is getting vocal about its distrust. How can we prevent such costly mistakes going forward? » Should there be secondary objectives in a sales comp plan? Can companies achieve secondary goals like introducing new products or improving the product mix or the average unit price through comp plans? Is it advisable to pursue more than the number one goal of rewarding sales? » When companies merge or buy a new business, it often requires that they change territories and quotas in the middle of a plan term. What is the fairest way to do this since quota attainment before and after the quota change affects participants both positively and negatively depending upon each individual situation? » As the result of a recent merger, our sales force doubled. Our salespeople’s current comp is a low base with high commission earnings potential, while the incoming sales force has a high base with little at-risk pay. The new plan likely will be somewhere in the middle. How do we communicate this to the new sales force without alienating either group? » As we emerge from the recession, how are companies adjusting their 2010 sales compensation plans to better manage financial risk associated with potential windfalls and other unanticipated consequences caused by inaccurate quota setting based on prior period results? » What is “best practice” in how we would reward sales managers for covering open districts? We have a number of open sales territories in the U.S. right now. What is considered "best practice" in how we would recognize and reward sales managers for covering open district? » There are wide-ranging discrepancies between our company’s sales reports and incentive compensation reports. As a result, each department is looking at a different set of numbers, and no one seems to have confidence in the accuracy of the data. Is there a way to standardize sales and compensation reports so that we’re all on the same page?
» Our salespeople’s objectives have been based solely on individual performance. Recently, we’ve decided to add a team element. Can you offer suggestions on how to go about evaluating, weighting, and scoring a team objective?
» Some companies compensate their entire staff on pay-for-performance based on overall company success. How can I go about implementing a company-wide incentive pay plan? How can I quantify performance for people in non-sales roles? » What are the best practices to ensure that plans will perform as expected and that we won’t end up overpaying or underpaying our people? » A previous article talked about resetting quotas during the year if the market changes. In this economy, the change would be to lower quotas. How do you balance resetting quotas with the incentive budget? If you lower quotas, more people may attain 100% or higher, which will result in more commissions while potentially generating less revenue. » We have some sales reps that consistently make sales but are not executing the company’s strategic plan. How can we design a compensation plan that puts the focus on the quality of sales we need to achieve our corporate goals rather than the quantity? » We have a high number of disputes and inquiries each pay period. How do we determine what the problem is and what can we do about it? » Our company has no sales quotas at the salesperson level. What are different ways to structure an incentive plan for individual salespeople? » The number of salespeople inquiring about or disputing their compensation payments seems high. How do we determine if this is an indication that a change in the plan’s structure is needed? And if it is, what should we do? » Setting and adjusting sales quotas is very time-consuming for us. Any tips for speeding up the process » Historically, we have always left compensation disputes up to the individual manager but lately we've received complaints of unfair and unequal resolutions. What are the first steps to developing a standardized process for managing compensation disputes? » Aside from a survey, is there a way to accurately measure the sales force's satisfaction with their comp plan? » What do sales organizations need to do with respect to setting sales quotas during difficult economic conditions? » Have economic conditions caused a shift from goal-based, quota plans to forced ranking plans? What is the impact on the ratio of at-risk pay (bonus or commission) vs. protected pay (salary) for sales reps? » What factors should be considered to determine an achievable sales quota? Are they different for new products vs. those with data histories?
Q: What are the advantages of linking two measures of a sales compensation plan together?
A: By linking two measures in a sales compensation plan, a company is stating: "Before we recognize a sales rep for the success in one area of the compensation plan (measure), we need to make certain that the rep is also focused on the second area (measure).” This linking of measurement components helps an organization ensure that a representative is doing the "complete job" and not either over- or under-estimating one of the measures. In other words, linking helps keep a rep focused on all the selected strategic priorities of the organization. The primary benefit is that no one area is overlooked. This is accomplished by limiting earnings or achievement until the selected and linked measures reach acceptable targets.
Linking ensures that the strategic sales priorities that were aligned within the sales compensation plan continue to be aligned as sales reps execute their jobs. It is common to link plans by either tying accelerated payouts to levels of performance for each measure, or tying excellence payments to the successful attainment of a target for each measure. The caution or risk includes making sure that the plan is not over-complicated by linking too many things or with the addition of accelerators or decelerators.
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Joseph DiMisa
Senior Vice President,
Sales Force Effectiveness Practice Leader, Sibson Consulting
www.sibson.com
Mr. DiMisa is the author of the new book, Sales Compensation Made Simple, which gives an insider’s look into sales compensation design, from interactions and observations about how sales organizations do — and don’t — work to concepts, process charts and graphics.
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Q: Over the course of last year we discovered errors in our sales compensation calculations after having already distributed the payments—and now the sales force is getting vocal about its distrust. How can we prevent such costly mistakes going forward?
A: Achieving sales compensation accuracy requires a three-pronged solution:
- the right processes in place
- the right technology to automate the processes and enforce adherence to standards and rules
- the right people to administer the processes
The right processes
The number one cause of errors is the lack of a formalized quality assurance program with defined and documented processes and controls. For example, a sales compensation management process might include: planning and scheduling; data transfer and validation; calculating performance measures, earnings, and payments; report distribution; and dispute reconciliation. For each discrete part of the process, rigorous change control procedures must be applied to ensure changes are fully tested and don’t have adverse effects:
- define who, how, and when to verify results at logical intermediate points
- establish documented guidelines for handling exceptions and adjustments
- identify who is authorized to make changes (and when changes can be made)
- determine what approvals are required, by whom, and when
- put controls in place to ensure that those procedures are followed, e.g., that adjustments submitted outside of the window are deferred to the next cycle
- track and document the path of errors at every step
- work to eliminate those errors at the source
The right technology
Data issues are another big cause of errors, and most data problems occur because of the inability to automatically identify and fix errors during the process. Doing this requires technology that is able to:
- provide extensive automation, reducing manual steps and minimizing the opportunity for errors
- provide tools to validate incoming data for accuracy and completeness
- be flexible to implement processes exactly as desired, and not force the user to do things awkwardly or in roundabout ways
- provide visibility into results for easy verification
- use business logic to draw attention to outliers and other situations that warrant further investigation
The right people
The lack of discipline to use the technology and follow the processes is also a major source of errors. People need to know how to verify complex data, how to check for data completeness, and how to question if the results are reasonable or need investigation. This requires people with experience and skills, who are disciplined in their approach, understand the rules and rationale for your compensation plan, and embrace the importance of correct data in every step of a complicated process.
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Jeff Evernham
Regional Vice President, Synygy, Inc.
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Q: Should there be secondary objectives in a sales comp plan? Can companies achieve secondary goals like introducing new products or improving the product mix or the average unit price through comp plans? Is it advisable to pursue more than the number one goal of rewarding sales?
A: While some sales are more valuable than others (e.g., they may be literally more profitable or strategically important, etc.), a sales plan with just one objective can’t cover everything in a selling environment with any complexity at all.
While I am a passionate advocate for simplicity in sales plan design, most of the plans I have helped to create include more than one component. Examples are:
- revenue on legacy products, revenue on new products
- existing customer sales, new customer sales
- first year contract value, out-year contract value
- sales value (e.g., dollars), margin value (e.g., dollars)
- individual sales, total team sales
- bookings, recognized revenue
Having two measures in a comp plan doesn't worry me since it probably means the comp plan accurately reflects the sales priorities. Three measures may be warranted as well. Four measures can sometimes be justified, but usually is not a good idea. Five measures are more than I can recommend.
You can "say" all you want to in a comp plan, but only about three things can be "heard." So, three measures is a good maximum, with fewer better as long as you don't over-simplify the business priorities.
Q: When companies merge or buy a new business, it often requires that they change territories and quotas in the middle of a plan term. What is the fairest way to do this since quota attainment before and after the quota change affects participants both positively and negatively depending upon each individual situation?
A: Mergers and acquisitions frequently result in changes in the business landscape that may necessitate account movement or quota adjustments.
A three-step process comprising evaluation, execution, and communication will help you efficiently move forward with your strategies and eliminate lingering distractions that risk the effectiveness of future sales execution.
First, evaluate the business landscape to ensure that a deployment change is truly needed. Sometimes the change can wait until the next regular realignment or quota-setting period. Carefully look at the percentage of business affected to verify if an immediate change is necessary to provide direction and set new expectations.
Second, execute on the change. Keep in mind that you are altering only future activity for the purpose of tracking which salesperson had responsibility for each account throughout the year. In other words, only move future quota—not the performance and quota prior to the transfer. If you have a long sales cycle, this could also mean slowly moving the quota from the former salesperson to the new salesperson and crediting sales in a split manner during the transition period.
Third, communicate the changes to the sales force. Make sure to explain how and why the changes were decided, outline which customers are now part of their new plan, and provide information about those customers to get the sales reps up to speed and selling quickly. This is a good time to reinforce the incentive compensation plan and remind them of the upside opportunity if they perform well.
Although large-scale sales plan changes always cause some disruption, you can limit the distraction to your sales team by following this three-step approach.
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Erich Sachse
Managing Consultant, SPM Consulting Practice, Synygy, Inc.
Erich Sachse is a Managing Consultant with Synygy and has over eight years of experience in all aspects of Sales Operations Management. |
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Q: As the result of a recent merger, our sales force doubled. Our salespeople’s current comp is a low base with high commission earnings potential, while the incoming sales force has a high base with little at-risk pay. The new plan likely will be somewhere in the middle. How do we communicate this to the new sales force without alienating either group?
A: As a first step, let’s investigate your concern about alienating your sales people. Consider the following:
- Why were the compensation plans of the two original sales forces very different?
- Did those plans make sense for those sales forces prior to the merger?
- Have the roles of the sales forces changed in the reorganization?
When two companies merge, they usually create a new entity with new goals, strategies, and objectives. With that in mind, changes made to the compensation plans should:
- reflect changes in the roles and activities of the combined sales force
- be in alignment with the strategy of the new entity
- support new goals, cascaded down from corporate levels
If you accomplish those objectives, communicating the new compensation plan will be relatively straight-forward and you’ll have few problems creating buy-in.
On the other hand, don’t be tempted to simply modify old plans to create a compromise position that probably won’t take you in the direction of likely new strategies. If neither of the former plans fit the new situation, start from scratch to create something that looks and feels like the new company.
Here are tips to make the most of your plan design and rollout:
- conduct surveys and focus groups to understand the combined sales team’s and other stakeholders’ expectations of compensation plan goals and design
- complete and communicate the new plan design well before the start of the plan period to allow time for questions and obtain maximum engagement from the sales force
- supply easy-to-use tools such as dashboards, reports, alerts, and “what-if” calculators that clearly explain individual performance and earnings—and provide actionable information for how to earn more
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Holger Nickisch
Managing Consultant, Synygy, Inc.
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Q: As we emerge from the recession, how are companies adjusting their 2010 sales compensation plans to better manage financial risk associated with potential windfalls and other unanticipated consequences caused by inaccurate quota setting based on prior period results?
A: This is an extremely pertinent question as experts debate daily as to the magnitude and timing of the current economic recovery. While challenging enough to forecast at the macro-level, we can well expect the recovery to further vary by industries, regions, and even account segments. This has caused great concern in how to best set quotas and then how to handle recovery-fueled sales spikes that may expose companies to undesirable financial risk. Companies are addressing this important topic in several ways:
First, companies are spending more time trying to set appropriate quotas. In many cases, this includes looking beyond last year’s results and attempting to use more typical growth rates or even ones with recovery expectations factored in. Many of our clients are working with their marketing departments to find market growth trends that they can apply to their key customer segments and types. This requires more sophisticated modeling based on account type but leads to explainable quotas and better attainment chances. Not applying custom growth rates risks creating poor morale when goals look too daunting based on the recent experiences of a down economy or if the current recover falters. Regardless, the goals need to be affordable both at target and when people over-achieve, so minimum quotas by job and in geography should be enforced. Overall, the urgency to set defensible quotas has never been higher, and companies are starting earlier and committing more resources to this effort.
Second, companies are sometimes pairing these informed quotas with relief on the lower end of the pay line, particularly in the form of reduced thresholds. A salesperson’s perception of the challenge to meet an assigned goal can be somewhat relieved by the opportunity to earn a portion of variable pay at lower achievement levels.
Third, as companies are increasingly hesitant to assign larger or aggressive quotas at the potential risk of poor seller morale, some sales organizations are lowering accelerators above plan which effectively pushes out the expected excellence point, i.e., the achievement percentage where they expect top performers to reach. Excellence points tend to shift out in periods of volatility; attempting to forecast the timing and impact of an economic recovery certainly qualifies as volatile to the sales managers and operations team members trying to set fair, achievable, and believable quotas. A variation on this approach is to leave the acceleration rates above goal as-is but to implement a reduced acceleration rate at a high level of achievement. For example, an organization may offer a 3x rate above goal, but at 200% of goal achievement, the rate may drop to 1.5x. This allows for continued payment for superior results while including an element of cost containment. It should be pointed out that best practices continue to encourage the absence of hard pay caps which greatly demotivate in most sales environments.
Fourth and of key importance, many companies are reexamining or at least ensuring that a large deal clause is in place. While the definition of a large deal can vary based on the selling environment, plan policies often include a clause where a deal of a particularly significant size or type can be pulled out of the core compensation plan and reviewed for appropriate payment. While not always popular in practice, the spirit of evaluating a large deal and ensuring the result was driven by seller efforts rather than exogenous events (i.e., a windfall) is indeed aligned with the concepts of fairness and rewarding for controllable outcomes. A company will need to define its own Large Deal Clause criteria, but as an example, some high tech organizations use a filter where any deal that represents half of a seller’s total quota is reviewed. As a modification of this concept, many companies have established “low margin modifiers” to deals. In challenging times, price becomes a more critical lever in closing deals on a timely basis. Customers, sellers and sales managers often drive pricing as the carrot or stick (depending on your side of the deal). When deals fall below a margin threshold, the revenue value of the deal can be modified (reduced) to reflect that the revenue has less value (e.g., 85% of the deal when margins fall more than 5% off minimum levels and 75% of the deal when margins fall more than 10% off minimum levels). This reduces the credit and creates less pressure on upside and accelerators. However, full deal value is still often used for top-achiever’s club recognition.
While the best answer would be to miraculously discover a crystal ball to predict the future, the real answer is to employ rational and carefully reasoned strategies that best fit your unique environment. As there is no silver bullet that works in all cases, be prepared to enlist several strategies that best position your organization for the economic recovery and beyond.
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Clinton Gott
Principal, Better Sales Comp Consultants
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Q: What is “best practice” in how we would reward sales managers for covering open districts? We have a number of open sales territories in the U.S. right now. What is considered "best practice" in how we would recognize and reward sales managers for covering open districts?
A: I think the question of appropriate arrangements for sales managers with open positions (/territories) needs to be handled differently in different situations.
For sales managers who are expected to keep their territories fully covered, maintaining a pipeline of candidates and connections, it makes sense to expect them to continue to produce sales out of an open territory, which would mean no quota adjustment, extra credit, etc. Their ability to meet their quota would almost certainly be impaired by an open territory, but then they haven't maintained a full staff - so some penalty is appropriate.
For sales managers who are not expected (or allowed) to hire staff to support an open territory, and who expect to fill the open position within a few months (3-12 perhaps), they could either cover the open territory using others from their team, or cover the open territory themselves.
If they cover the open territory using others from their team, then their team members should receive credit and compensation for the sales to the assigned opportunities (or zip codes) outside their territory, and the manager may or may not need to have a quota adjustment (depends on how long the condition is expected to persist).
If they cover the open territory themselves, then the manager could receive individual contributor type compensation for sales into that territory, but probably at a reduced rate (50% of that generally paid to individual contributors?), and perhaps a somewhat reduced total team quota (again depending on how long the no-hire situation is expected to continue).
For sales managers who are expected to downsize their staff until market conditions change (a year or more), reassigning territories among their team members to "absorb" the open territory is probably the right approach. The quota should be adjusted as needed to reflect the market conditions that led to this change and reasonable productivity expectations for the newly reduced team size.
Q: There are wide-ranging discrepancies between our company’s sales reports and incentive compensation reports. As a result, each department is looking at a different set of numbers, and no one seems to have confidence in the accuracy of the data. Is there a way to standardize sales and compensation reports so that we’re all on the same page?
A: When the data that feeds both sales reports and incentive compensation reports comes from different sources, it’s not surprising that there are discrepancies between the reports. A prime reason for this is because separate crediting and commission rules are being applied to each report’s data source, resulting in slightly different results. Often, the error is compounded by a lack of data validation.
One remedy is to utilize a single data repository for the various data streams. In any case, upstream data cleansing and validation processes must be established to ensure that consistent rules and validations are applied to both sales and incentive compensation data management.
Another suggestion is to establish an automated process that allows salespeople to view, validate, and request corrections to their own individual data, in either a credited or un-credited state. The output of this process is then fed into the sales reporting engine, which ensures that changes made in the compensation management process are reflected in the sales reports.
With consistent, validated data being used for both calculation of incentive compensation and reporting of sales, sales compensation, and sales performance, you establish a closed-loop process that ensures consistency and accuracy in your reports.
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Nilesh Murthy
Managing Consultant, Synygy, Inc.
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Q: Our salespeople’s objectives have been based solely on individual performance. Recently, we’ve decided to add a team element. Can you offer suggestions on how to go about evaluating, weighting, and scoring a team objective?
A: Although team objectives are often considered in sales incentive plan design, remember the caveat that “selling is rarely a team sport.” Start by identifying the specific teaming behaviors that you need to encourage in order to execute your sales strategy. Remember that these behaviors are not always a team metric (such as total sales within a broader geography), but can be an individual metric that benefits overall team performance, such as the number of qualified leads captured and passed on. With that clarity established, you can follow these steps to create and evaluate teams and their objectives:
1. Define the team and set shared objectives
Determine the best team configuration to achieve a shared goal. Creating teams based on reporting hierarchy—that is, all of the salespeople who work for a district manager—may not result in the most effective alignment, because in many cases those salespeople do not work together. You may more effectively drive teaming behaviors if you identify a cross-functional group, such as a combining a new business executive with a product specialist, an account manager, and a customer service representative, all of whom focus on generating and sustaining business from an overlapping group of accounts.
2. Weight the team objective
Weighting the objective should take into account what percentage of each team member’s time is spent on teaming activities and the importance of the objective to organizational success. Make sure that the weighting is substantial enough to change behavior—at least 20%. If you find that you cannot justify a weight that high, it may be a sign that you may not need a team objective within the sales compensation plan.
3. Evaluate the team
Make sure that you have (or can collect) the data you need in order to effectively evaluate the team. If you do not have automated processes to collect this data in a timely manner, it can lead to inaccurate payouts and dissatisfaction among your sales force.
Carefully consider whether implementing a team objective creates a need for changes to the remainder of your incentive plan. For example, your top salespeople will perform above the average of a team, and so a team objective can lower their overall performance and affect their compensation. Also, you’ll see an increase in the pay to your bottom performers, who may be able to free-ride on the performance of the team, unless you appropriately model the changes to the plan in a holistic manner.
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Erich Sachse
Managing Consultant, SPM Consulting Practice, Synygy, Inc.
Erich Sachse is a Managing Consultant with Synygy and has over eight years of experience in all aspects of Sales Operations Management. |
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Q: Some companies compensate their entire staff on pay-for-performance based on overall company success. How can I go about implementing a company-wide incentive pay plan? How can I quantify performance for people in non-sales roles?
A: To implement a company-wide plan, you need to identify how each group or department contributes to the success of the company, find a way to measure that contribution, and then design a pay-for-performance plan based on metrics that will drive desired outcomes.
The connection between personal goals and company performance is easiest to make within sales departments and when the benefits of a good sales compensation plan and its impact on company performance are well understood. You need to make a similar connection for employees of other departments by identifying how each department contributes to overall company success and then determining how to measure the department’s contribution.
One caveat comes to mind: frequently, sales and revenue are the most critical measure for a company. But, if a department can’t impact sales, their plan should not be based on sales metrics.
As an example, consider an IT department and its contribution to company performance. You don’t want IT’s incentives to be tied to revenue. Rather, suppose that IT is a key to the successful rollout of an important initiative in addition to their normal work ensuring that data and finance systems remain running throughout the year. You would discuss which of those roles has the greatest impact on company performance, and might decide that IT’s contribution is greatest if they support a fast and accurate rollout of a the new system. The next step is to create the metrics to evaluate their results, and these measures can be the basis for the pay-for-performance plan.
A general rule is to avoid pure activity metrics; instead, measure the desired results from an activity. For instance, if you measure the success and contribution of your marketing department on the number of events they host, you certainly will drive a lot of events (and possibly expense). But, follow ups—prospect inquiries or client requests for follow up—are more appropriate pay-for-performance metrics for a marketing compensation plan.
Once you have identified how a department or group contributes to overall performance and you can measure that contribution, apply the usual guidelines and best practices for pay-for-performance plans.
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Peter Lamb
Managing Consultant, Synygy, Inc.
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Q: What are the best practices to ensure that plans will perform as expected and that we won’t end up overpaying or underpaying our people?
A: When plans are not properly modeled before they are rolled out to the sales force, companies must deal with the consequences of unknown budget risk, unanticipated compensation costs, and unexpected mid-cycle modifications to plans. Many companies lack the time and resources to model new compensation plans, but not doing so can lead to some nasty surprises. So, the first step to modeling is to simply allocate time and resources to people with the right experience.
Once you’ve established modeling as part of your compensation planning process, the next step is creating a plan model. Building plan models requires a specialized set of skills so that the resulting plan model can be tested easily in a range of likely scenarios. You have to know where you’re headed with your testing to know what kind of model you need to build.
Once the plan model is created, the next step is using it to test different scenarios. The first run of the model should be “at plan,” or assuming achievement of the sales target. That is, if your company performs as you expect it to for the plan year (or whatever appropriate timeframe you’re modeling), what will the commission/bonus payments be?
If your results are not what you expect, the problem could be related to the structure of the plan or to the plan parameters. If adjustments to the commission rates, products weights, or other parameters do not produce the expected results, the problem is likely structural, which means rethinking and redesigning the plan itself.
Assuming your results are in line with your expectations, the next step is testing the plan’s budget sensitivity. What happens to payments and the cost of sales if goal attainment is 50 percent, 75 percent, 90 percent, 110 percent, 125 percent, or even 200 percent of target? Note the expected payout of each of those scenarios and match that against what is acceptable.
When running the various scenarios, be sure your modeling data sets are representative of typical performance distributions rather than assuming that everyone overachieves at exactly the same levels.
If you are satisfied with the model results under a wide range of scenarios, you are ready to launch your sales compensation plan, but modeling does not end there. After plan launch, track actual performance against predicted performance on an ongoing basis. Investigate any deviations that you may find and consider making mid-course adjustments to your compensation plan if the consequences of not making adjustments are severe enough.
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Dan Ganse
Vice President, Strategic Accounts, Synygy, Inc.
Dan Ganse has over 14 years experience with all aspects of enterprise-wide incentive management, including evaluating and streamlining internal incentive compensation processes and designing systems for the field that aid in business performance analysis.
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Q: A previous article talked about resetting quotas during the year if the market changes. In this economy, the change would be to lower quotas. How do you balance resetting quotas with the incentive budget? If you lower quotas, more people may attain 100% or higher, which will result in more commissions while potentially generating less revenue.
A: Your company’s management may feel that they should not adjust quotas downward because of the danger of paying higher commissions when overall revenue is down. It is important to balance cost containment and risk management with maintaining fairness and sales force retention.
Revisit your organization’s pay philosophy. Some companies want their salespeople to share in the success of the organization, which also means sharing the downside when the company doesn’t make its numbers. Other companies want salespeople to stay laser-focused on selling, without worrying about things that are outside of their control, like economic conditions.
If you’re among the former, you may want to keep quotas at their current levels. If you’re in the latter category, you’re likely to adjust quotas downward; in which case the question becomes “How far?”
If you have an absolute ceiling on your incentive budget, then you need to set quotas that will keep you within your budget under an optimistic sales scenario. However, if you have leeway on the incentive budget, then the trick is to balance:
- the fiscal realities of the business if the company doesn’t make its numbers
- the desire to keep salespeople focused on selling (and not polishing their resumes)
- the uncertainty of accurately forecasting this year’s results
- the increased cost of incentives from lower quotas
One excellent way to evaluate quota changes is to calculate an ROI for the quota adjustment. This calculation must consider how lowering quotas can drive incremental short and long-term revenue, including:
- incremental revenue driven by enhanced motivation
- estimated cost of turnover
- longer term sales momentum
Depending on your company’s individual situation, this calculation could point to the value – or lack of value – that an adjustment to quotas could provide. It can also help to make the discussion fact-based, rather than an emotional discussion of doing the “right” thing.
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Erich Sachse
Managing Consultant, SPM Consulting Practice, Synygy, Inc.
Erich Sachse is a Managing Consultant with Synygy and has over eight years of experience in all aspects of Sales Operations Management. |
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Q: We have some sales reps that consistently make sales but are not executing the company’s strategic plan. How can we design a compensation plan that puts the focus on the quality of sales we need to achieve our corporate goals rather than the quantity?
A: Make sure your sales team understands the company’s near-term and future strategies and the reasons for them in the current business environment. Then, getting your sales force to make the “right” sales requires returning to the basics of sales compensation management, including these components of effective sales plans:
- Establish objectives (MBOs) that are in alignment with the organization’s strategic goals yet specific to each salesperson’s situation and territory potential.
- Set quotas and targets that demonstrate the sales that achieve maximum return. Set weighting to drive the product sales you want most. Then, add a portfolio component to the plan to ensure across-the-board sales success.
- Boost specific sales activity with ad hoc incentive programs such as spiffs, kickers, and contests.
- Create key account lists to drive sales to specific targets.
- Clearly communicate the “why” and “what” of the plan—along with “how” success will be measured.
- Prompt desired behaviors through regular and frequent training and coaching.
- Provide accurate, timely, and meaningful information and tools (such as “what if” calculators) that allow the salespeople to track their individual progress throughout the sales period.
A well-crafted compensation plan that is clearly aligned with organizational goals, plus regular and consistent communication, training, and coaching, are the keys to driving quality sales.
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Arturo Bentin
Managing Consultant, Synygy, Inc.
Arturo Bentin is a Managing Consultant with Synygy and has over eight years experience in Sales Performance Management. |
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Q: We have a high number of disputes and inquiries each pay period. How do we determine what the problem is and what can we do about it?
A: Begin by tracking, investigating, and analyzing the most common inquiries for baseline information. You may uncover errors in transaction crediting or payments, for instance, that point to problems with the calculation process. Or, your analysis may show correct results, but your salespeople do not understand how commissions are calculated. Inquiries stemming from causes other than accuracy or misunderstanding may point to a lack of trust in the process of calculating payments.
Inaccurate results
Are your results often inaccurate? If so, your sales team is justified in their concern over errors in data, payments, or reports. Start by targeting the sources of errors that are having the greatest impact on the productivity of the sales force. Fundamental quality issues take time to resolve, so keep the sales force well informed of your findings and your progress.
Misunderstood plans and calculations
The goal of incentive compensation is to motivate specific sales force behaviors, so it’s important that the plans and results are communicated in an easy-to-understand and timely manner.
- Do you find yourself having to explain why a result is correct? Take a closer look at your plan design; it may be too complex to drive the desired actions.
- Do you find yourself saying repeatedly that an adjustment will appear in next month’s report? Investigate automating your communications; increasingly, companies are providing daily sales updates—in many cases with the ability to inquire about discrepancies on demand.
- Do you find that the inquiry is answered elsewhere? Your reporting may not be transparent, consistent, or thorough. Synygy’s sales compensation software provides a powerful web-based portal with handy dashboards to maximize plan understanding, information access, and communication.
Lack of trust
Have there been problems with accuracy in the past? People remember quality issues related to their pay for a long time. Consider publishing quality and timeliness statistics to start building trust. Reinforcing the message over time will steadily build credibility.
Whether real or perceived, excessive inquiries and disputes point to larger problems. Revisiting your sales compensation management processes and communications will go a long way to reducing the volume of inquiries and disputes—or even eliminating them all together--which will improve sales force satisfaction, loyalty, and productivity.
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Holger Nickisch
Managing Consultant, Synygy, Inc.
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Q: Our company has no sales quotas at the salesperson level. What are different ways to structure an incentive plan for individual salespeople?
A: It is common for companies to establish incentive compensation plans without quotas since setting them can be difficult. Quotas can also be ineffective or inaccurate due to an inability to perform accurate sales forecasting, a highly volatile market, or the impact of a new product launch.
A plan without quotas may be warranted if the company needs to tightly control incentive payments regardless of product performance. Such a plan even may give better results in instances where the salespeople either are very highly leveraged (i.e., they have little or no base salary) or have low prominence in the sales process (i.e., they do not play a significant role in creating sales).
Here are several approaches that can drive individual results in the absence of quotas:
- pay a straight commission rate from dollar one
- pay a tiered commission with rate increases as sales increase (e.g., 2% on all sales up to $100K, 3% on sales between $100K - $499K, 4% on sales $500K and up)
- pay based on relative measures such as growth of sales, share increase, etc., over the previous period
- pay based on profitability or contribution margin
- pay relative to total sales force performance (e.g., relative ranking, relative earnings, relative work activity, relative sales results, and relative value and skills)
Whichever direction you take, test your plan with “what-if” scenarios to ensure the salespeople are compensated fairly within the context of the company’s overall goals.
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John Ristuccia
Managing Consultant, Synygy, Inc.
John Ristuccia has been with Synygy for more than 10 years, and during that time has worked on many aspects of sales performance management, including incentive plan design, implementation, and ongoing management of sales compensation for some of Synygy's largest clients in a variety of industries.
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Q: The number of salespeople inquiring about or disputing their compensation payments seems high. How do we determine if this is an indication that a change in the plan’s structure is needed? And if it is, what should we do?
A: The goal of any organization should be to have zero inquiries or disputes from salespeople about their compensation plans or plan results. While this might seem like an impossible goal, coming close to zero is within the grasp of even the most challenged organizations.
Your first step should be to gather and categorize the nature of inquiries and disputes to determine the underlying causes. Typically, the root causes of excessive inquiries and disputes are directly related to either misunderstood plans or errors in results, so check whether the causes fit into one these two categories.
Addressing the underlying causes of inquiries and disputes is essential, because if the problem is allowed to linger, the result is a lack of trust in your sales compensation plan. This leads to shadow accounting, lost selling time, and lost revenues. It also results in lower sales force effectiveness, lower sales force productivity, and higher sales and administrative costs.
For inquiries that include comments like “I don’t understand something,” or “I think my pay might be wrong, but I’m not sure,” the problem likely is related to misunderstood plans and ineffective communication of results.
To solve this problem, design compensation and performance reports that allow salespeople to easily understand how their pay is calculated. Synygy’s best practice for report design shows each step of the calculation—from presentation of credited sales details, to calculation of performance measures, to how those measures are translated into payouts. If your incentive reports are designed to effectively communicate plan constructs and performance results, you will dramatically reduce the number of inquiries and disputes you receive. More importantly, effective reports will help drive salespeople’s behaviors by keeping them focused on the behaviors that lead to success.
For inquiries regarding the accuracy of results, the problem is more fundamental to your compensation management process. There are two potential sources of calculation errors: problems with underlying data quality or errors in your calculations.
To resolve these issues, you need a strong quality assurance process that detects data problems and validates incentive calculations. This must be built into your process, so errors can be identified and resolved before sending results to your salespeople. Synygy’s experience has shown us that time spent on quality early in the process is well rewarded with significant reductions in inquiries, adjustments, and recalculations.Most inquiries are preventable. While many companies work to create a scalable inquiry and dispute resolution process, we believe you should first focus on building quality into your compensation management process to work toward zero inquiries.
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Ken Bjorkelo
Regional Vice President, Synygy, Inc.
During his seven plus years at Synygy, Ken Bjorkelo has worked on numerous sales compensation programs, involving compensation plan design as well as ongoing management of the sales compensation process for some of Synygy's largest clients in a variety of industries.
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Q: Setting and adjusting sales quotas is very time-consuming for us. Any tips for speeding up the process?
A: The ever-growing complexity of today's sales organizations, selling models, and sales compensation plans-combined with the need to make frequent adjustments to these things-makes setting and adjusting quotas in an accurate, auditable, and timely fashion challenging.
Synygy has found that the three root causes associated with these challenges are: 1) an inflexible system for streamlining and automating the end-to-end process; 2) inefficient business processes for setting, adjusting, and approving quotas; and 3) a lack of expertise, experience, and time to effectively structure and manage the necessary business processes.
With an inflexible system, such as a multilayered spreadsheet or a system where the logic of the plan is hard-coded, even a minor change becomes a major programming project when it comes to the setting, allocation, modeling, and adjustment of quotas. Utilizing a quota-setting application to automate the data consolidation and calculation processes associated with setting corporate-level goals and allocating them to territories or individuals can significantly cut down on the overall quota-setting timeline.
Inefficient processes occur primarily in the setting, adjusting, and approving of quotas. By providing integrated workflow tools to your sales managers, you can eliminate the inefficiencies and delays associated with spreadsheet or e-mail-based processes to manage adjustments. In addition, to simplify the field adjustment process and ensure that rules are being applied consistently across your organization, consider automating and systematizing the quota adjustment process.
We've found that the most significant root cause of poor sales quota management is the lack of expertise, experience, and time to effectively model, allocate, and set quotas. An inability to do quota modeling forces companies to rely on guesswork and assumptions for setting quotas. It also may increase financial risks as a result of not being able to determine compensation payments under various quota attainment scenarios.
By addressing all three root causes, organizations can reduce the turn around from receiving corporate goals to setting quotas from weeks or months to just days, which results in an ability to respond to changing business conditions where revised quotas are needed.
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Amit Gupta
Regional Vice President, Synygy, Inc.
During his 11 years at Synygy, Amit Gupta has designed incentive plans and implemented sales compensation management solutions for some of Synygy's largest clients in pharmaceuticals, financial services, and consumer packaged goods.
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Q: Historically, we have always left compensation disputes up to the individual manager but lately we've received complaints of unfair and unequal resolutions. What are the first steps to developing a standardized process for managing compensation disputes?
A: The first step is to investigate why there are disputes. For example, they may be related to misunderstood plans, errors in results, or late payments.
The second step is to then identify the root causes of these issues, which might be related to poor communications, bad source data, inaccurate or manual processes, or inefficient systems.
The third step is to fix the root causes of the problems so that the number of disputes goes down. In fact, we have seen the number of disputes go down by more than 90 percent once the underlying problems are fixed
To the extent that disputes still remain, you may need a centralized process for tracking and resolving disputes in an organized and consistent manner. Such a system uses business rules to establish guidelines for dispute resolution and create a workflow process to manage approvals of proposed resolutions.
When disputes are minimized and the remaining disputes are more fairly managed, sales force productivity increases-because salespeople are happier and because sales managers are spending less time dealing with disputes and the effects of sales force turnover as disgruntled people leave the company.
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Dan Ganse
Vice President, Strategic Accounts, Synygy, Inc.
Dan Ganse has over 14 years experience with all aspects of enterprise-wide incentive management, including evaluating and streamlining internal incentive compensation processes and designing systems for the field that aid in business performance analysis.
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Q: Aside from a survey, is there a way to accurately measure the sales force's satisfaction with their comp plan?
A: S ales force feedback is not necessarily a reflection of how “good” a compensation plan is, or how effective the compensation plan is in supporting your business strategy. Athough surveys can play an important role in evaluating sales force satisfaction, the results of surveys need to be taken with a grain of salt. Salespeople are generally going to be happy with their plan if they feel they are being paid well, even if the plan is designed poorly. In addition, you may create an expectation that changes are coming, which may not be the case.
There are several perspectives to consider when gauging the success of a sales compensation plan, such as:
- direct feedback from the sales force (participants and management)
- measures that may indicate sales force satisfaction
- financial performance
- plan effectiveness
Feedback from the sales force is the primary measure of sales force satisfaction, but is often focused on the results of the plan. Two ways to improve the quality and depth of feedback that you gather from your sales force are to use smaller focus groups, and to conduct surveys early when implementing a new compensation plan. By using smaller focus groups, people have to stand behind their feedback, and you get a better perspective on whether the feedback is driven by the plan or the results under the plan. Surveys are best conducted just after communication of the plan, but prior to communication of results under the plan. This helps to remove bias from the sales force and also provides an opportunity to reinforce the new plan and test how well it is understood.
There are other, but possibly indirect, measures that may give you an indication of sales force satisfaction with a compensation plan. Consider employee turnover, as benchmarked against other companies in your industry, and exit interviews as a source of feedback. Also, you can consider collecting and evaluating operational measures, such as the number of inquiries or disputes that come into your sales operations group.
Although sales force satisfaction is important, there are other important measures of a compensation plan's performance. A financial perspective can give you a clear understanding, at a macro level, of how the compensation plan is performing against financial goals. It might be used to answer the following questions:
- Assuming the business is performing as expected, is the compensation plan paying out as budgeted?
- Which product lines are under- or overperforming against plan; are commissions being paid appropriately based on product level performance?
- Are subsets (of your products or sales force) consuming a disproportionate percentage of your compensation budget? Are the reasons for this understood?
A plan effectiveness perspective offers a different, but equally important, macro level understanding of how the plan is succeeding and can help you identify opportunities for improving performance. This perspective might be used to answer the following questions:
- How are total payouts distributed across the sales force (an indicator of possible design flaws in the compensation plan)?
- Are you seeing expected percentages of top / bottom performers, based on your plan design?
- Who are the top and bottom performers, and are they whom you expect based on subjective performance reviews?
We find combining the above perspectives will provide you with a balanced view of how your compensation plan is performing, and will give you a high level of confidence in your decisions around making adjustments to the compensation plan .
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Ken Bjorkelo
Regional Vice President, Synygy, Inc.
During his seven plus years at Synygy, Ken Bjorkelo has worked on numerous sales compensation programs, involving compensation plan design as well as ongoing management of the sales compensation process for some of Synygy's largest clients in a variety of industries.
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Q: What do sales organizations need to do with respect to setting sales quotas during difficult economic conditions?
A: Setting accurate quotas in a declining economic climate is more challenging than doing so in times of growth because economic volatility makes sales forecasts less reliable.
Each organization must determine the balance between allowing the sales force to share the pain while keeping morale high enough to retain the sales force. On one hand, adjusting quotas downward can erode sales force effectiveness and degrade corporate performance. On the other hand, maintaining existing quotas may lower morale and increase sales force turnover, leaving your company ill-prepared to capitalize when the economy stabilizes.
Be open to revising the overarching sales compensation plan if you are thinking about resetting or adjusting the quotas. Reworking the plan or target compensation in concert with revising quotas enables you to maintain control over your cost of sales while maintaining achievable goals. Make sure your top performers still will be able to over-perform and differentiate themselves from their peers.
Be sure to model the proposed changes under many scenarios to ensure financial control. Carefully document the change process and all underlying assumptions as you create the new quotas. This will help you answer questions about the accuracy or fairness of the quotas, and you will be better prepared in case further changes are required.
There is no easy solution to this challenge, so be prepared to be flexible and to adjust your plans and goals to achieve fairness for all parties. Remember that complete, effective communication around such changes is a critical part of the process.
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Peter Lee
Managing Consultant, Synygy, Inc.
Peter Lee is a Managing Consultant with Synygy and has over fifteen years of experience in system implementations and Sales Performance Management.
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Q: Have economic conditions caused a shift from goal-based, quota plans to forced ranking plans? What is the impact on the ratio of at-risk pay (bonus or commission) vs. protected pay (salary) for sales reps?
A: The current economy appears to be forcing companies to make sure their sales compensation plans drive behaviors that align with company strategy and maximize profitability.
At Synygy, we had been seeing increased momentum toward quota-based plans and away from other plans, like forced ranking or "bell curve" plans. Lately, however, we have observed companies becoming more aware of the need to find the right balance between protected and at-risk pay and a shift away from pure quota plans as quota attainment becomes difficult to achieve.
Although there isn't one “correct” mix, we see a movement to offering more in the way of guarantees, draws, and a pay mix that keeps the risk shared equally between the company and its salespeople.
The balance between risk and reward should be one that:
- motivates salespeople
- helps retain top performers
- provides a good up-side opportunity without overcompensating
- focuses the sales force on measures that are aligned with company strategy
- is fair and attainable
- provides the appropriate target cash compensation rate at the end of the day
Are you working through, planning to work through, or thinking that you should be working through these challenges? Consider a compensation plan review to make sure your plan is working for you.
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Arturo Bentin
Managing Consultant, Synygy, Inc.
Arturo Bentin is a Managing Consultant with Synygy and has over eight years experience in Sales Performance Management. |
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Q: What factors should be considered to determine an achievable sales quota? Are they different for new products vs. those with data histories?
A: Quotas are top of mind now what with 2009 corporate budgets being set and communicated. And with individual quota attainment driving budget achievement, it is important that the sales force believe in its quotas. To help evaluate whether your quotas are achievable, delve into some analytics:
- Historical attainment data
Perform a multi-period analysis of your quota attainment distribution over time to understand what portion of the sales force has been able to meet quota, and how many consistently achieve quota.
- Historical growth information
If the historical data trend and the quota change do not match, explore the reasons for that. Perhaps the market has changed; or, it may signal an unattainable quota.
- National budget certainty
Often, the easiest way to understand if a quota is attainable is to understand how likely the corporation will achieve its overall budget. If that budget number is realistic, the individual quotas that build to it generally will be achievable. If that number is aggressive, the individual quotas are less likely to be so.
Obviously, a lack of historical sales information makes this analysis more difficult for new products. If you have competitive intelligence or information from similar prior launches, analyze how they performed for insight into whether the new set of quotas is achievable. You can also look at national forecasts for help. For example, if the national forecast assumes a 5% market penetration in the first year, you can use that as a yardstick against which to measure each salesperson's quota. (Under this scenario, an individual supposed to achieve 25% market penetration is unlikely to succeed.)
Clearly, critical to keeping salespeople properly motivated by achievable quotas is taking the time to do the quota-setting analysis beforehand. Resist the urge to over-allocate the budget to the sales force, as this will only decrease the likelihood that it will be achieved—not to mention diminish the motivational value of your sales compensation plan.
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Erich Sachse
Managing Consultant, Sales Operations Management, Synygy, Inc.
Erich Sachse is a Managing Consultant with Synygy and has over eight years of experience in all aspects of Sales Operations Management. |
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