Sales Comp 201 090426 0041

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Presented at the Sales Performance Conference, May 2009

Presented at the Sales Performance Conference, May 2009

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  • 1. Sales Comp 201 Application of the principles of sales compensation plan design in tricky situations Donya B. Rose Managing Principal, The Cygnal Group, Inc. 1
  • 2. You’ve got the basics, including… • Understanding the roles for which you are designing • Building an appropriate pay structure (total comp, pay mix, and leverage) • Using the right incentive measures and weights 2
  • 3. But your leaders are saying… “These commission rates were fine when we set them, but we just paid Sam $50k for something he did three years ago, and now he’s coasting…” “I hardly know what our market will do next month – how can I set a reasonable quota for the whole year?” “We believe in simple plans, but it’s not enough to make the sales goal – we need some focus on product mix as well. How do we put that into the plans without separate quotas for each product?” 3
  • 4. But your leaders are saying… “It takes a village to close some of our deals, but we simply cannot afford to double-comp – how do we reward teaming and collaboration without overpaying?” “Sales are declining, and sales comp is declining a bit too, but profits are declining faster. How do I adjust comp to fix it?” “We only control the comp plans, not the quotas that come from corporate – and they have been unattainable the last few years. How do we keep our sales people motivated?” 4
  • 5. Your plan has a tail “These commission rates were fine when we set them, but we just paid Sam $50k for something he did three years ago, and now he’s coasting…” This typically happens with – Commission-based deal level plans – High prominence sales roles – Expectations that sales remains involved through implementation, or throughout an annuity relationship – Significant risk that actual deal value may be different from value apparent at signing – Significant time between signing and cash 5
  • 6. Your plan has a tail Comp Design Principle: Cost of Sale vs. Cost of Labor Commission Incentive Bonus Incentive Form Form Mechanics A “piece of the action” is The target incentive for the role is delivered for selling – usually earned for meeting the sales goal communicated as a percent of set for each individual seller revenue or margin sold Pay philosophy Cost of Sales: The sale has an Cost of labor: The sales job has a economic value to the company, market value, and we will pay a and we will pay a portion of our targeted compensation level for profits for successful selling effort meeting sales goals   Earlier stage companies, or More mature companies/ Appropriate new product/service markets for . . . introductions  Strong brands, well-supported  Equal selling opportunity sales organizations across all assigned territories  Significant differences in  Goal setting challenges selling opportunity among sellers  New account hunting roles  Solid goal setting processes  Retention/penetration roles 6
  • 7. Your plan has a tail Comp Design Principle: Cost of Sale vs. Cost of Labor Revenue Introduction Growth Maturity Time Cost of Sales philosophy is typical Cost of Labor philosophy is typical Sales person “owns” the customer Company “owns” the customer   (territory/account changes may be difficult)  Separate departments are in place for lead  generation, sales, fulfillment, collection Sales person may be heavily involved in servicing and delivery  Sales person typically part of a larger selling “team”  Sales person prominence in the selling process is high “Best” sales people are good at matching  “Best” sales people are well-known in the  customer needs to company offerings, great at industry, very aggressive, and entrepreneurial follow-through and relationship management, and solid team players inside the company 7
  • 8. Your plan has a tail Comp Design Principle: Payout Timing Payment should be… Made when the sales person has achieved a significant  milestone Made when the value to the company of the deal is known  Completed at the point at which the sales person should  typically disengage and move on to the next sale Subject to charge-back in case of unexpected reductions in the value of the deal to the company (non-collection, serious delays, volume shortfalls, etc.) 8
  • 9. Your plan has a tail Comp Design Principle: Predictable Compensation, amount and timing Compensation plans are most motivating when… They are linked in a straightforward way to measures that are  clear and understandable to the sales person They are paid as close to the sales person’s main success as  practical Payments are accurate and supported by clear and concise  reporting How many plans can you administer, report and pay concurrently and accurately for any one person? 9
  • 10. Your plan has a tail What are your options? A: Live with it Benefits Risks • Promise of substantial future • Reps are spending time on old payouts can help keep reps deals, not new ones • Would you rather retain reps who involved with deals, and help with retention think they have great deals in their future (than those who want to be paid for past deals)? 10
  • 11. Your plan has a tail What are your options? B: Taper or shorten the tail How Benefits Risks • Decrease the rate paid for later • Pay better • New deals may years to keep the focus on this aligned with become so year OR reduce the length of effort attractive that • More risk this time over which the rep relationships aren’t maintained continues to be comped year based on • For all future deals, OR this year’s results (increased churn) retroactively • Increase the first year or up- front payment 11
  • 12. Your plan has a tail What are your options? C: Amputate How Benefits Risks • Pay all compensation • Clear focus on new • After-care may for a deal within a year business suffer if there are • Compensation is much of closing implementation • Increase rates to keep easier to administer (one, or retention risks reps whole or at most two plans for customers • Buy-out of “old tails” • Reps may feel being maintained) • Better ability to realign may be necessary freer to leave the (usually at a discount) territories, redirect reps company 12
  • 13. Your crystal ball is broken “I hardly know what our market will do next month – how can I set a reasonable quota for the whole year?” This can be due to – Unstable markets – Unpredictable competitive activity – New product or service launches – Product defects or recalls – General economic uncertainty 13
  • 14. Your crystal ball is broken Comp Design Principle: Cost of Sale vs. Cost of Labor Commission Incentive Bonus Incentive Form Form Mechanics A “piece of the action” is The target incentive for the role is delivered for selling – usually earned for meeting the sales goal communicated as a percent of set for each individual seller revenue or margin sold Pay philosophy Cost of Sales: The sale has an Cost of labor: The sales job has a economic value to the company, market value, and we will pay a and we will pay a portion of our targeted compensation level for profits for successful selling effort meeting sales goals   Earlier stage companies, or More mature companies/ Appropriate new product/service markets for . . . introductions  Strong brands, well-supported  Equal selling opportunity sales organizations across all assigned territories  Significant differences in  Goal setting challenges selling opportunity among sellers  New account hunting roles  Solid goal setting processes  Retention/penetration roles 14
  • 15. Your crystal ball is broken Comp Design Vocabulary: Performance levels Productivity Definition Level 90th percentile performance (only the top 10% of your sales Excellence people do this well or better) Target The expected level of productivity for the on-target (not a problem, not a star) performer The level of productivity below which an employee’s Threshold contribution is unacceptable for the long run 15
  • 16. Your crystal ball is broken Comp Design Principle: Curve shape anticipates goal setting accuracy 450% Payout % Target Incentive 12.00% Percent of Sales People 400% 350% 10.00% 300% 8.00% 250% 6.00% 200% 150% 4.00% 100% 2.00% 50% 0.00% 0% 0% 50% 100% 150% 200% Actual Sales % Goal  The payout curve (blue) shows a typical performance distribution for individual contributor territory sales people with good goal setting accuracy  Motivational traction from the compensation plan begins when the sales person sees that s/he is “in the money” (at or above the first acceleration point = 70%)  The accelerated slope between target (100%) and excellence (130%) keeps the motivation high for over- target performance  Deceleration over excellence recognizes the likelihood that performance beyond this level, while desirable, is 16 likely the result of a bad goal and/or a windfall, and perhaps at a lower level of profitability
  • 17. Your crystal ball is broken Comp Design Principle: Curve shape anticipates goal setting accuracy, continued 350% Payout Percent Target Incentive Typical Quota Accuracy 300% Quotas Questionable 250% Quotas Inaccurate 200% 150% 100% 50% 0% 0% 50% 100% 150% 200% Actual Sales % Goal As confidence in quotas decreases the curve flattens 17
  • 18. Your crystal ball is broken What are your options? A: Flatten your curve How Benefits Risks • Differentiate less • Quota attainment Lower the stakes on quota attainment right at the point becomes less • Reduce deceleration below of quota important to reps • Overpayment for quota attainment • Reduce acceleration above • Acknowledge under- quota uncertainty and performance • Reduce or eliminate any quota maintain attainment bonuses credibility 18
  • 19. Your crystal ball is broken What are your options? B: Shorten the measurement period How Benefits Risks • Move from an annual • Ability to adjust as market • The quota setting quota to quarterly conditions become work has to quotas (or even clearer happen more • Better overall quota monthly?) times per year • Announce the quota for • The reps may accuracy for the year • Ability to continue to have suspect you’re the coming “quota teeth” in the comp measurement period as going to see to it that they can’t firm plans • Announce quotas for over-achieve later measurement periods as tentative, or don’t announce yet 19
  • 20. Your crystal ball is broken What are your options? C: Adjust quotas during the year How Benefits Risks • Deploy your best quotas at the • A clear plan from • The debate is beginning of the year the start just postponed • If, as the year unfolds, it • Some security for • Reps may put a becomes clear that quotas are the reps that a lot of energy into unattainable, adjust them reset will be making their down considered if case for reduced • IF you announce at the outset expectations quotas of the year your intention to become clearly review and consider a reset, unattainable provide criteria for when it would be considered 20
  • 21. Mix matters “We believe in simple plans, but it’s not enough to make the sales goal – we need some focus on product mix as well. How do we put that into the plans without separate quotas for each product?” Mix is important when – Different product deliver different margins – Production capacity needs to be fully utilized – Volume commitments to suppliers are important – Product focused business units are accountable for their results 21
  • 22. Mix matters Comp Design Principle: Measure selection Good measures are. . . – Aligned with key accountabilities of the role – Directly influenced by the sales person in the role – Track-able based on existing systems (or systems that can be created) – Three or fewer in number – Measured at the level at which results are generated (individual, small team, division, etc.) 22
  • 23. Mix matters What might be proposed From this Total Sales Quota Based Regional Profitability Incentive Opportunity = + Incentive Quota Based Incentive Weights at Target 80% 20% To this High Margin Lower Margin Important Regional Product Product New Product Incentive Profitability = Sales Quota + Sales Quota + Sales Quota + Opportunity Quota Based Based Based Based Incentive Incentive Incentive Incentive Weights at 50% 20% 10% 20% Target 23
  • 24. Mix matters What’s wrong with this? High Margin Lower Margin Important Regional Product Product New Product Incentive Profitability = Sales Quota + Sales Quota + Sales Quota + Opportunity Quota Based Based Based Based Incentive Incentive Incentive Incentive Weights at 50% 20% 10% 20% Target – Too many measures – Measure with < 20% weight – Inaccurate quotas (the finer you cut them, the lower your accuracy) – For some sales roles: contrary to solution selling 24
  • 25. Mix matters One approach: Product breadth multiplier ( ) Regional Total Sales Incentive Product Breadth Profitability = Quota Based x + Opportunity Multiplier Quota Based Incentive Incentive Weights at Target ------------ 80% ------------ 20% Multiplier on Total Product Quota Sales Quota Based Attainment Incentive All three >= 95% 1.1 Modify multipliers Modify ranges and to change degree rules depending on All three >= 85% 1.0 of emphasis on how exactly quotas product breadth should be attained At least 1 < 85% 0.9 25
  • 26. Mix matters What are your options? C: Solve it with product focused sales roles How Benefits Risks • Assign product overlay • Help sales people • May be cost- specialists to support sales learn and prohibitive in smaller people in selling the most succeed with the organizations • May disadvantage challenging, complex or more difficult new products products some product lines • Rep quotas should increase • Keep all the based on quality of in anticipation of their comp plans overlay reps increased productivity from simple this support 26
  • 27. It takes a village “It takes a village to close some of our deals, but we simply cannot afford to double-comp – how do we reward teaming and collaboration without overpaying?” This may be an issue when… – Product or technical specialists are vital in defining requirements or configuring the deal – Decision makers are in different parts of the organization/world (corporate, divisional) – Channel partners are involved 27
  • 28. It takes a village Comp Design Principle: Use of team measures Mechanics For a team incentive, a measure is defined for the entire team, and all members share equally in the reward generated by the team’s performance Appropriate when . . . – Team membership is well-defined – The team is small enough that each person feels s/he can make a meaningful difference in team results – Team results can be measured reliably – Members of the team depend on each other to sell Not appropriate when . . . – Team members are linked only by reporting relationships (not shared effort on shared accounts or opportunities) – The only real reason is to share the upside (“pooled lottery ticket”) Note that team measures may be combined with individual measures when team members back each other up, as in many Inside Sales teams. 28
  • 29. It takes a village What are your options? A: Layered quota/ layered credit How Benefits Risks • Strong • Difficult to model Each participant in a sale receives full quota encouragement for selling costs in and full credit for the participation of relation to sales sale (or “their” piece, e.g. multiple sellers in an productivity by Product Specialists take opportunity product or sales team • Clear message • Special care must be only their product slice) regarding taken to ensure the expectations team size is communicated via appropriate for the quotas opportunity 29
  • 30. It takes a village What are your options? B: Finder’s fee How Benefits Risks • Easy to model, • Can motivate Bonus paid for leads turned over to another communicate and pay behavior to sell • No downside for seller resulting in closed products not needed deals over a specified by the customer bringing in another • Difficult to predict size seller selling costs 30
  • 31. It takes a village What are your options? C: Credit splits How Benefits Risks • Easy to model and • Disincentive to team Credit for all sales is divided among anticipate selling costs with others due to participating team in relation to results anticipated reduction in • Opportunities will tend members, with total sales credit • Expectations regarding credit adding to to be handled by the 100% of actual sale smallest effective team degree of teaming are value not communicated via quotas 31
  • 32. Shrinking profit “Sales are declining, and sales comp is declining a bit too, but profits are declining faster. How do I adjust comp to fix it?” This may be an issue when… – The business is maturing and the offering is becoming more of a commodity – Product with very different margins may relieve the same quota – Challenging quotas and market conditions are combined with sales person control over discounting 32
  • 33. Shrinking profit Comp Design Principle: Choose the right measure Some of the common measures in sales compensation plans Type of Measure Use when . . .  Sales people have little to no control over pricing Volume  Different products and customers with the same volume have similar value to the company  Sales people have little control over pricing Revenue  Different products and customers deliver similar profitability as a percent of sales  Sales people influence profitability via product mix and/or pricing Profit  The company is comfortable with sales people knowing at least relative profitability of products  Profit can be measured reliably at the sales person level  Market dynamics affect all providers in the market similarly so that the Market share size of the market is not the direct result of effective selling  Market share can be measured reliably and frequently 33
  • 34. Shrinking profit Comp Design Principle: The lower your margins, the more likely you should be goaling in margin dollars, continued 100% 80% 60% 40% 20% 0% 34
  • 35. Shrinking profit What are your options? A: Make profit a minor plan component How Benefits Risks • Carve out 20% - 30% of the target • Begins the • May still incentive and assign a profit goal process of allow reps to • Assign it at the level at which it can focusing reps ignore on profit profitability be reliably measured (sales rep, • Requires good and remain region, business unit) comfortable • Provide helpful reporting so reps profit performance understand how they influence before profitability leveraged pay • Limit upside for over-goal is delivered performance on primary component unless the profit goal is achieved 35
  • 36. Shrinking profit What are your options? B: Move the primary measure to profitability How Benefits Risks • Aligns sales compensation • Sales people may try to Set sales goals and directly with value created manage the cost side of the measure for the company profit equation • Requires sales people to • Sales people know a great results in terms of focus on the ways they deal about the operating profit influence profitability model, which might be (usually shared outside the gross company margin) • Sales capacity may be squandered in arguments about profit calculations 36
  • 37. Shrinking profit What are your options? C: Use a profitability proxy How Benefits Risks • Create a new sales • It is not required that sales • Sales credit will not match crediting “currency” people know the cost of any income statement that increases credit products, or even that they value, and so cannot be for more profitable know the new currency is validated easily at an sales (and reduces profit-based aggregate level • Sales people will focus on • The initial measurement credit for less popular sales) the sales that provide the period will be a bit • Restate history in the most credit and comp, disoriented due to the new new currency to help aligning them with the currency • Can feel more complex to with the transition business goals and goal setting sales people than straight sales (top line) measure 37
  • 38. Unattainable quotas “We only control the comp plans, not the quotas that come from corporate – and they have been unattainable the last few years. How do we keep our sales people motivated?” This may be an issue when… – “Corporate” mandates a goal, and requires that it be fully deployed to the sales team – Sales leaders have a belief that higher quotas create more sales – The compensation levels required to attract talent aren’t “affordable” for the true productivity expected 38
  • 39. Unattainable quotas Comp Design Principle: Lessons from behavioral science Incentives and rewards will be most effective when…  Used for the benefit of the employee(not just to create benefits for the employer)  Focused on challenging activities (not on activities that employee salready like to do)  Tied to specific reasonable, objective, and attainable standards of performance  Accompanied by celebration of significant successes by the organization Reward systems that are discretionary, subjective, or based on pleasing the people in charge are often seen as unfair and coercive. What is “good” today may not be good enough to earn a reward tomorrow. *Judy Cameron and David Pierce, Rewards and Intrinsic Motivation, c 2002 39
  • 40. Unattainable quotas One Idea: Shift the curve to pay the target incentive < 100% 350% Payout Percent Target Incentive 300% Most People >= Quota 250% Most People >= 90% Quota 200% 150% 100% 50% 0% 0% 50% 100% 150% 200% Actual Sales % Goal 40
  • 41. Unattainable quotas What are your options? A: Shift the payout curve How Benefits Risks • Rearrange tiers in • Allows full deployment • May over-pay for the the payout table so of mandated quota sales function vs. • Delivers market that market business model competitive pay is competitive pay to most assumptions • More challenging to delivered at the people expected design, document performance level rationale, and explain • Continue to publish forecasted comp performance against costs quota 41
  • 42. Unattainable quotas What are your options? B: Adjust the target incentive How Benefits Risks • Reduce the official • Achievable quotas • Sales leaders may be target incentive to provide realistic basis hesitant to the level the for assessing communicate the business feels is performance reduced target incentive • Most people earn the • Management may balk affordable for expected median target incentive at deploying less than performance • Plan design and the full quota and/or • Use best practice modeling are simplified adding sales staff to curve shape supply adequate (accelerate at new coverage reduced quota) 42
  • 43. Unattainable quotas What are your options? C: Switch to a commission How Benefits Risks • Devise commission rate that • The plan designs can • Modeling the cost of deliver market competitive be somewhat comp under different pay at expected productivity independent of quotas scenarios can be • Communicate the plans • Some sales leaders complex feel a quota provides a • Quota-less plans may using commission tables “stopping place” and without quotas (tiers defined be disorienting to sale by YTD sales, for example) that no-quota plans people and sales create more sales leaders 43
  • 44. About The Cygnal Group The Cygnal Group is a consulting firm specializing in sales compensation plan design. We are based in Chapel Hill, NC and serve clients headquartered all over the U.S., and even some in Europe. Our practice spans large and small companies, public and private, global and locally focused. Clients include very large companies (e.g., Home Depot, Comcast), mid-sized companies (e.g., Valassis, Misys, Thomson), game changers (e.g., Red Hat, Sensus Metering), and smaller companies (e.g., GXS, Prometric), and even some companies hiring their first sales person (e.g., Meritech, Magnet Street). Donya Rose is the Managing Partner of The Cygnal Group. She speaks regularly to audiences of Business, Sales, and HR leaders, and has contributed to numerous articles on the subject of compensating the sales force. Prior to founding The Cygnal Group, Ms. Rose was a consultant in the Sales Rewards practice at Towers Perrin. Learn more about our services, and read our sales comp blog at www.cygnalgroup.com Contact us at info@cygnalgroup.com 929-933-2290 44