TrueConnection Sales Performance Management Conference 2007 November 13, 2007 The Myth of Planned Obsolescence Why the Sales Compensation Plan Must Change

Today’s objectives Discuss the tension between Corporate and the field Identify the key drivers of sales compensation change Consider case examples that illustrate each of the change drivers Reflect on the lessons learned

Discuss the tension between Corporate and the field

Identify the key drivers of sales compensation change

Consider case examples that illustrate each of the change drivers

Reflect on the lessons learned

When it comes to sales compensation plan change, the voices heard from the field… “ Why should we change the plan; we’re not losing staff?” “ We just figured out how to make money on the old plan, so they have to change it!” “ Management’s just trying to cut costs!”

… typically don’t reflect reality Sales compensation is a dynamic management tool Communicates management’s strategic priorities As business conditions change so should the approach to compensating the sales force There are any number good reasons for changing the sales compensation plan Most notably anything that fundamentally alters the charter of a sales role

Sales compensation is a dynamic management tool

Communicates management’s strategic priorities

As business conditions change so should the approach to compensating the sales force

There are any number good reasons for changing the sales compensation plan

Most notably anything that fundamentally alters the charter of a sales role

WorldatWork survey of sales compensation practices – reasons for change WorldatWork Survey of Key Sales Compensation Practices, October 2006

Definition of obsolescence… The American Heritage Dictionary of the English Language “… being in the process of passing out of use or usefulness…” Merriam-Webster Dictionary of Law “… a loss in the utility or value of property that results over time from intrinsic limitations or external circumstances…”

Intrinsic limitations and external circumstances… the drivers of sales compensation change The strategic objectives which help define the charter of the sales force Grow top-line revenue by 12% Maintain share leadership in XYZ market segment Improve margins by selling higher margin products The means by which a company takes its product/service to market Market segmentation Channel strategy Sales organization structure Sales coverage model Staffing levels What customers need and value from your sales resources Transaction efficiency Consultative solution selling Business Objectives Go-to-Market Strategy Customer Buying Preferences

The strategic objectives which help define the charter of the sales force

Grow top-line revenue by 12%

Maintain share leadership in XYZ market segment

Improve margins by selling higher margin products

The means by which a company takes its product/service to market

Market segmentation

Channel strategy

Sales organization structure

Sales coverage model

Staffing levels

What customers need and value from your sales resources

Transaction efficiency

Consultative solution selling

Intrinsic limitations and external circumstances… the drivers of sales compensation change The accountabilities of a sales role which begin to define an incentive plan’s performance measures Manage and grow strategic accounts Provide technical product support on an overlay basis Grow existing business and acquire new accounts in a geographic territory An organization’s ability to track and measure performance Data capture Level of aggregation Goal setting capabilities An organization’s ability to fund the cost of a sales force relative to: Manufacturing costs Other labor costs Pricing strategy Sales Role Definition Supporting Systems Business Economics

The accountabilities of a sales role which begin to define an incentive plan’s performance measures

Manage and grow strategic accounts

Provide technical product support on an overlay basis

Grow existing business and acquire new accounts in a geographic territory

An organization’s ability to track and measure performance

Data capture

Level of aggregation

Goal setting capabilities

An organization’s ability to fund the cost of a sales force relative to:

Manufacturing costs

Other labor costs

Pricing strategy

Telecommunications company with shifting business objectives Business objectives Telecommunications equipment company shifting from hardware to software Current revenue mix of 80% hardware, 20% software Software much more profitable Old sales comp plan did not differentiate between hardware and software revenue Sales compensation plan measures and pays for software revenue separately from hardware revenue Heavier incentive weighting placed on software results Change Driver Company Situation Resulting Change

Telecommunications equipment company shifting from hardware to software

Current revenue mix of 80% hardware, 20% software

Software much more profitable

Old sales comp plan did not differentiate between hardware and software revenue

Sales compensation plan measures and pays for software revenue separately from hardware revenue

Heavier incentive weighting placed on software results

Business services company changing its go-to-market strategy Go-to-market strategy Business services company going from three separate vertical market sales forces to a single cross-vertical sales force Similar sales process and selling skills required in each vertical Inefficient use of sales resources Each sales force paid on segment-specific results Deployment of a cross-vertical sales force Sales incentive opportunity weighted toward highest priority market segment, with a secondary incentive for balanced selling across all markets Change Driver Company Situation Resulting Change

Business services company going from three separate vertical market sales forces to a single cross-vertical sales force

Similar sales process and selling skills required in each vertical

Inefficient use of sales resources

Each sales force paid on segment-specific results

Deployment of a cross-vertical sales force

Sales incentive opportunity weighted toward highest priority market segment, with a secondary incentive for balanced selling across all markets

Consumer electronics company with a change in customer buying preferences Customer buying preferences Major retail accounts of a consumer electronics company say the vendor’s salespeople are spending too much time on low valued merchandising support Insufficient support in terms of training retail sales staff and developing co-marketing programs to grow the business Deployment of a lower cost merchandising support rep which freed salespeople to spend more time on activities valued by the customers Ability to raise productivity expectations and upside incentive leverage reflecting the higher prominence of the sales role Change Driver Company Situation Resulting Change

Major retail accounts of a consumer electronics company say the vendor’s salespeople are spending too much time on low valued merchandising support

Insufficient support in terms of training retail sales staff and developing co-marketing programs to grow the business

Deployment of a lower cost merchandising support rep which freed salespeople to spend more time on activities valued by the customers

Ability to raise productivity expectations and upside incentive leverage reflecting the higher prominence of the sales role

Clinical skin care company with a change in sales role definition Sales role definition The aggressive pursuit of a new retail channel left the core spa business in decline The sales force dedicated to the spa business was focused on account maintenance with no incentive to develop new business Redefined sales role expectations to spend equal time between new account selling and existing account management New sales compensation plan contained an aggressive first-dollar commission for new business with a quota-based bonus for growing existing business Change Driver Company Situation Resulting Change

The aggressive pursuit of a new retail channel left the core spa business in decline

The sales force dedicated to the spa business was focused on account maintenance with no incentive to develop new business

Redefined sales role expectations to spend equal time between new account selling and existing account management

New sales compensation plan contained an aggressive first-dollar commission for new business with a quota-based bonus for growing existing business

LTL trucking company change in systems measurement capabilities Supporting systems Old IT systems prevented the measurement of profit contribution at an individual territory or account level New systems implementation enabled accurate accounting for account profitability Sales compensation plan paid solely on top-line revenue Developed account contribution goals on the basis of historical performance Introduced a new sales incentive plan to reward for both revenue and account contribution simultaneously Change Driver Company Situation Resulting Change

Old IT systems prevented the measurement of profit contribution at an individual territory or account level

New systems implementation enabled accurate accounting for account profitability

Sales compensation plan paid solely on top-line revenue

Developed account contribution goals on the basis of historical performance

Introduced a new sales incentive plan to reward for both revenue and account contribution simultaneously

Corrugated cardboard company with an evolving cost model Business economics Fifty-year-old maker of cardboard boxes with the same first-dollar commission plan used from day one Salespeople earning well above competitive market rates on modest production due to high commission rate Cost of sales compensation out of line with the economics of the business Restructured sales force separating major account sellers from geographic territory sellers Differentiated sales comp plan by role: Major account sellers with a modest pay mix and quota-based bonus Territory reps paid a variable rate commission with a minimum performance threshold Change Driver Company Situation Resulting Change

Fifty-year-old maker of cardboard boxes with the same first-dollar commission plan used from day one

Salespeople earning well above competitive market rates on modest production due to high commission rate

Cost of sales compensation out of line with the economics of the business

Restructured sales force separating major account sellers from geographic territory sellers

Differentiated sales comp plan by role:

Major account sellers with a modest pay mix and quota-based bonus

Territory reps paid a variable rate commission with a minimum performance threshold

So the plan has to change – how often is appropriate? Review sales compensation plans annually relative to: Business objectives Go-to-market strategy Customer requirements Sales role changes Avoid mid-year changes if possible Minor tweaks or adjustments are common each year Major overhauls less frequently (e.g., every three to five years), depending on the pace of business change

Review sales compensation plans annually relative to:

Business objectives

Go-to-market strategy

Customer requirements

Sales role changes

Avoid mid-year changes if possible

Minor tweaks or adjustments are common each year

Major overhauls less frequently (e.g., every three to five years), depending on the pace of business change

Lessons learned… Understand that the sales compensation plan is a dynamic tool that needs to evolve with the business Pay attention to the signs – those internal and external change drivers – that signal the need to change Continuously monitor the effectiveness of your sales incentive plans Be proactive, don’t wait too long to take action Build a contingency plan at the outset Forecast the expected shelf life of your sales incentive plan relative to anticipated changes in the business

Understand that the sales compensation plan is a dynamic tool that needs to evolve with the business

Pay attention to the signs – those internal and external change drivers – that signal the need to change

Continuously monitor the effectiveness of your sales incentive plans

Be proactive, don’t wait too long to take action

Build a contingency plan at the outset

Forecast the expected shelf life of your sales incentive plan relative to anticipated changes in the business

Questions? J. Mark Davis Managing Principal Valitus Group, Inc. 18031 Irvine Blvd., Suite 205 Tustin, CA 92780 714.505.9122 [email_address] www.valitusgroup.com