Are You Paying For Performance? How to Measure Sales Compensation ROI

Are You Paying for Performance? How to Measure Sales Compensation ROI
Mike Rose
Infotensity
Sal DiFonzo
Upside Solutions
October 1, 2009
© 2009 The Sales Management Association

The Sales Management Association
Visit Us Online at www.salesmanagement.org
A global, cross-industry professional association for sales operations and sales management.
Focused in providing research, case studies, training, peer networking, and professional development to our membership.
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Copyright © 2008 - 2010 The Sales Management Association. All rights reserved.

ContentsToday’s Presentation
Defining incentive compensation plan effectiveness
Correlating pay and performance
Measuring incentive compensation plan effectiveness
Implications for incentive compensation plan changes
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Case Study
Technology company with history of rapid growth
Three month project completed in January 2009
Analyze the company’s pay according to the standard methodologies used for high-performance sales forces
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Case Study
CurrentSituation
Growth rates beginning to decelerate
Organizational road blocks
Technical support reporting to sales
Sales does not have time to manage technical resources
Technical support consumed with clerical activities
Senior management determined that the cost of sales was too high
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Case Study
CurrentSituation
Pay Data for 2008
Salary
Total Field Sales
Field Bonus
Extra Bonus
Performance Data for 2008
Quota Achievement
Quota size
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Sales Incentive Compensation Principles
Normal distribution of performance – The Bell Curve
Healthy sales forces exhibit a normal distribution of performance
High-performance sales organizations exhibit a high correlation between pay and performance

Sales Incentive Compensation Principles
Threshold = 10th Percentile = 70% Goal Achievement
Target = 30th Percentile = 100% Goal Achievement
Excellence = 90th Percentile = 120% Goal Achievement
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Hypotheses
Pay and performance follow normal distributions
Pay is highly correlated to performance
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Analysis and Observations
Total Incentive Compensation
On average, Field Sales account for 62% of Total Incentive Compensation
The allocation of payments shows where sales reps earn their income. Do payouts match the component weightings in the sales compensation plan?
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Pay vs. Performance
Q3 shows a weak correlation between pay and performance
Q3 Attainment vs. Payout
Named Account Manager
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Pay vs. Performance
No relationship between quota attainment and quota size is ideal
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Recommendations
Emphasize the connection between pay and performance
Investigate reasons for under performance
Understand causes for weakening pay vs. performance correlation
Examine quotas for equity issues
Change compensation plan accordingly
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Sales Compensation Design Outcomes
Preserved the earnings opportunity for high performers in a higher quota environment
Offered middle performers an extra incentive to achieve target by offering “The Money Zone” at 100% revenue and gross margin achievement
Significantly reduced earnings opportunity for low performers
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Appendix: Pay Mix
The pay mix is the ratio of base salary to incentive at risk, expressed as a percentage of target pay
For example, a “75/25 plan” features 75% of target pay in base salary and 25% in incentives
Degree of influence determines pay mix
High influence means low base, high risk
Average business to business sales person in U.S. has a pay mix of 70/30
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Appendix: Leverage
Leverage is also known as “upside”
Leverage represents the number of dollars available at excellence for every dollar earned at target
The dollars earned at excellence should approximate the 90th percentile of the labor market
“Two for One” is a common rule
For example, a 70/30 pay mix results in an additional “two more thirties” or two times target incentive at excellence
Excellence is defined as the 90th percentile of performance
For some situations the 90th percentile is 110%
In other situations the 90th percentile is 150%
Depends on how difficult it is to achieve goal
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Learn More
The Sales Management Association
This abridged presentation is provided as a preview.
Our members may download slides and view archived webcasts of this material. Find out more and consider joining the Sales Management Association: www.salesmanagement.org
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About The Sales Management Association
www.salesmanagement.org
The Sales Management Association is a global professional association for sales management and sales operations. The SMA fosters a community of interest among sales force effectiveness thought leaders, consultants, academics, and sales management practitioners across many industries.
Through training workshops, online resources, and research materials, The SMA addresses the management issues of greatest concern to members. The SMA’s focus areas include management leadership, sales force performance coaching, sales planning, sales process management, enabling technologies, incentive compensation, and sales force support.

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Are You Paying For Performance? How to Measure Sales Compensation ROI

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Are You Paying For Performance? How to Measure Sales Compensation ROI Presentation Transcript