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

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How do best-practice firms figure out whether they are getting an adequate return on sales compensation investments? By measuring and managing correlation between their sales forces’ performance and pay. In this archived webinar, Sal DiFonzo and Mike Rose review several commonly used sales compensation analysis tools that quantify sales compensation plan effectiveness.

Using a case study, including performance and compensation data from a sales organization considering sales compensation plan revisions, they illustrate how easily adaptable analysis tools can reveal important pay plan strengths and weaknesses. Among the topics covered are: how to define incentive compensation plan effectiveness; the importance of correlating pay and performance; measuring incentive compensation plan effectiveness; and implications for incentive compensation plan changes.

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

  1. 1. Are You Paying for Performance? How to Measure Sales Compensation ROI<br />Mike Rose<br />Infotensity<br />Sal DiFonzo<br />Upside Solutions<br />October 1, 2009<br />© 2009 The Sales Management Association <br />
  2. 2. The Sales Management Association<br />Visit Us Online at www.salesmanagement.org<br />A global, cross-industry professional association for sales operations and sales management.<br />Focused in providing research, case studies, training, peer networking, and professional development to our membership. <br />2<br />Copyright © 2008 - 2010 The Sales Management Association. All rights reserved.<br />
  3. 3. ContentsToday’s Presentation<br /><ul><li>Defining incentive compensation plan effectiveness
  4. 4. Correlating pay and performance
  5. 5. Measuring incentive compensation plan effectiveness
  6. 6. Implications for incentive compensation plan changes</li></ul>3<br />© 2009 The Sales Management Association <br />
  7. 7. Case Study<br /><ul><li>Technology company with history of rapid growth
  8. 8. Three month project completed in January 2009
  9. 9. Analyze the company’s pay according to the standard methodologies used for high-performance sales forces</li></ul>4<br />© 2009 The Sales Management Association <br />
  10. 10. Case Study<br />CurrentSituation<br /><ul><li>Growth rates beginning to decelerate
  11. 11. Organizational road blocks
  12. 12. Technical support reporting to sales
  13. 13. Sales does not have time to manage technical resources
  14. 14. Technical support consumed with clerical activities
  15. 15. Senior management determined that the cost of sales was too high</li></ul>5<br />© 2009 The Sales Management Association <br />
  16. 16. Case Study<br />CurrentSituation<br /><ul><li>Pay Data for 2008
  17. 17. Salary
  18. 18. Total Field Sales
  19. 19. Field Bonus
  20. 20. Extra Bonus
  21. 21. Performance Data for 2008
  22. 22. Quota Achievement
  23. 23. Quota size</li></ul>6<br />© 2009 The Sales Management Association <br />
  24. 24. Sales Incentive Compensation Principles<br /><ul><li>Normal distribution of performance – The Bell Curve
  25. 25. Healthy sales forces exhibit a normal distribution of performance
  26. 26. High-performance sales organizations exhibit a high correlation between pay and performance</li></ul>© 2009 The Sales Management Association <br />
  27. 27. Sales Incentive Compensation Principles<br /><ul><li>Threshold = 10th Percentile = 70% Goal Achievement
  28. 28. Target = 30th Percentile = 100% Goal Achievement
  29. 29. Excellence = 90th Percentile = 120% Goal Achievement</li></ul>8<br />© 2009 The Sales Management Association <br />
  30. 30. Hypotheses<br /><ul><li>Pay and performance follow normal distributions
  31. 31. Pay is highly correlated to performance</li></ul>9<br />© 2009 The Sales Management Association <br />
  32. 32. Analysis and Observations<br />Total Incentive Compensation<br /><ul><li>On average, Field Sales account for 62% of Total Incentive Compensation
  33. 33. The allocation of payments shows where sales reps earn their income. Do payouts match the component weightings in the sales compensation plan?</li></ul>10<br />© 2009 The Sales Management Association <br />
  34. 34. Analysis and Observations<br />Pay vs. Performance<br />Q3 shows a weak correlation between pay and performance<br />Q3 Attainment vs. Payout<br />Named Account Manager<br />11<br />© 2009 The Sales Management Association <br />
  35. 35. Analysis and Observations<br />Pay vs. Performance<br />No relationship between quota attainment and quota size is ideal<br />12<br />© 2009 The Sales Management Association <br />
  36. 36. Recommendations<br /><ul><li>Emphasize the connection between pay and performance
  37. 37. Investigate reasons for under performance
  38. 38. Understand causes for weakening pay vs. performance correlation
  39. 39. Examine quotas for equity issues
  40. 40. Change compensation plan accordingly</li></ul>13<br />© 2009 The Sales Management Association <br />
  41. 41. Sales Compensation Design Outcomes<br /><ul><li>Preserved the earnings opportunity for high performers in a higher quota environment
  42. 42. Offered middle performers an extra incentive to achieve target by offering “The Money Zone” at 100% revenue and gross margin achievement
  43. 43. Significantly reduced earnings opportunity for low performers</li></ul>14<br />© 2009 The Sales Management Association <br />
  44. 44. Appendix: Pay Mix<br /><ul><li>The pay mix is the ratio of base salary to incentive at risk, expressed as a percentage of target pay
  45. 45. For example, a “75/25 plan” features 75% of target pay in base salary and 25% in incentives
  46. 46. Degree of influence determines pay mix
  47. 47. High influence means low base, high risk
  48. 48. Average business to business sales person in U.S. has a pay mix of 70/30</li></ul>15<br />© 2009 The Sales Management Association <br />
  49. 49. Appendix: Leverage<br /><ul><li>Leverage is also known as “upside”
  50. 50. Leverage represents the number of dollars available at excellence for every dollar earned at target
  51. 51. The dollars earned at excellence should approximate the 90th percentile of the labor market
  52. 52. “Two for One” is a common rule
  53. 53. For example, a 70/30 pay mix results in an additional “two more thirties” or two times target incentive at excellence
  54. 54. Excellence is defined as the 90th percentile of performance
  55. 55. For some situations the 90th percentile is 110%
  56. 56. In other situations the 90th percentile is 150%
  57. 57. Depends on how difficult it is to achieve goal</li></ul>16<br />© 2009 The Sales Management Association <br />
  58. 58. Learn More<br />The Sales Management Association<br />This abridged presentation is provided as a preview. <br />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<br />17<br />Copyright © 2008 - 2010 The Sales Management Association. All rights reserved.<br />
  59. 59. About The Sales Management Association<br />www.salesmanagement.org<br />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.<br />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.<br />Copyright © 2008 - 2010 The Sales Management Association. All rights reserved.<br />

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