Sales Comp White Paper


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Sales Comp White Paper

  1. 1. Keys to Designing and Implementing Sales Compensation Plans that Drive Business Goals and Strategies Without Breaking the Sales Budget! Jennifer Green, Green Global Resources, Leadership Coach, Principal Consultant, and Co-founder, Principal Consultant of Premier HR. Introduction Sales professionals and executives are wonderful to work with – they are able to clearly articulate what motivates and what de-motivates them! And they are very willing to tell you about it! They want to exceed their quota targets and make alot of money – preferably more than their boss! You have to talk their language. When sales professionals refer to “their plan” they mean their quota, and their targeted earnings at 100% quota achievement. They are motivated by their “upside” – their potential to earn more than 100% of their targeted earnings, only if they perceive an opportunity to over-achieve their plan. A CEO’s dream is that the sales force exceeds “their plan” and she/he pays some sales people more than she/he makes in a given year. A CEO’s nightmare is when more-than-projected exceed the plan, blowing the sales commission budget and the Company doesn’t achieve the overall financial plan. In today’s economic environment, where there is less ability to project accurately next year’s revenue and/or bookings, it is critical to establish safeguards in the sales compensation plans to ensure that the Company doesn’t risk jeopardizing profitability by paying out too much in sales commissions. How to do this and what is too much? Read on….
  2. 2. The keys to designing sales team incentives that drive business goals and strategies without breaking the Company’s sales budget are simple – whether your Company is selling hardware, software, prescription drugs, or services - there are essential steps that must be taken to drive and reward the sales team and at the same time support the achievement of the Company’s goals, both long and short-term. Keys to driving the Sales Force to align with Company goals and strategies without breaking the budget 1. Aggregate quota for your growing Company’s sales force should be above your Company overall revenue target(s), around the same as the Company’s target(s) in slower growth companies, but never below 100% of the Company’s overall plan for revenues. The smaller the Company, the more variability and unpredictability there is in achieving the overall target. a. Large, multinational companies like Cisco have found it necessary to set an aggregate quota for the sales team that is above the overall Company target (s), thereby ensuring that the Company makes its number. For instance, if the Company target represents 100%, it may be necessary to set the overall target for sales at well over the Company revenue target, depending on the size, maturity stage, the economic environment, and market stage. Sales teams in smaller, start-up companies in developing economies and emerging markets have a greater chance of exceeding the aggregate sales quota than in larger, more mature companies, in sustaining or declining industries and stable or declining economies. So too do sales regions vary in growth opportunity - aggregate quota targets may have to differentially reflect the nature of the business in those regions. Asia/Pac, for instance,
  3. 3. may have more growth opportunity than Europe and the United States. Rates of economic recovery will vary across the globe by geographic region1. b. If the sales force is segmented by product, and/or division, a similar quota-setting method applied to geographic regions may be applied to product segments. New products are wild cards and difficult to plan - product market research may be needed to determine how much “upside” and “skew” in the performance of the sales team relative to the new product quota is appropriate when establishing how much sales budget to spend on new product sales incentives. Sometimes the new product is more saleable – there is no need for extra incentives. c. The “skew’’ in sales quota performance must be taken into account in the budget. With an upside in the plan that pays top achievers accelerated commissions of 2 – 3x of their targeted commission rate at 125% to 150% of quota achievement, there will be some over- achievers (hopefully) that will be paid considerably more than under-achievers. If the quota set for the sales team at the beginning of the year is an achievable, stretch goal, then there will be more paid out to over-achievers than balanced by under-achievers. And this outcome is desirable! 2. Ensure that the sales compensation plan is aligned toward the company’s priorities every year, as well as lay the groundwork for achieving strategic company objectives in the future. It is difficult to drastically change the compensation plan in one year, but it is far better to overhaul than to “tweak” a plan that doesn’t reflect significant changes in the company’s business and strategy. Some of the “mechanics” that clearly message to the sales force what is important to the Company, as well as how the Company values
  4. 4. performance are listed below. Companies that tweak rather than review their entire plan for its appropriateness end up with plans that provide mixed and confused messages to their sales professionals: a. Differential rates of commissions for different products message what the Company is willing to invest in now and in the future – lower rates for end-of-life and/or low margin products or technologies and higher rates for high margin products, and new technology/products. b. Paying commissions from an acceptable threshold, for instance, setting commissions starting at 70% of target quota, gives the message that low performers are not going to survive. Stated another way, the Company isn’t going to carry lower performers for long. Startups in general find that they have to pay from first dollar to attract and retain key sales talent who are not willing to “risk all” for selling in a high risk company context, but as the product and company market share grows, thresholds can be introduced. Introducing thresholds at lower quota levels relative to target initially and gradually raising to higher quota % target levels in subsequent plan years is typical. c. Ensuring that the sales compensation plan, including the rules for eligibility, when commissions are considered earned, etc. are clear and as simple as possible to avoid “mixed messages” is important. Examples abound of complex plans that are the result of “tweaks” made every year, resulting in often contradictory direction to the salesforce, not to mention extensive time wasted trying to figure out the plan and how to work around it. Common mistakes are: 1. the overuse of differential commission rates on products at different levels of quota achievement, for instance 5 – 7 rate changes for a product, and; 2. multiple product gates before commissions are awarded, for instance “100% of quota achievement on product A, 80% on product B, 70% on product C, must be achieved before any commissions are paid on product D”.
  5. 5. d. Being realistic about what the Company can and cannot measure – many have found mid-way through their first quarter that they can’t track performance against an objective that was thought to be important , resulting in a scramble to find a goal the Company can track to replace it. e. Ensuring that the sales role is not diffused – having direct sales roles heavily involved in customer support, feedback, order administration, and other sales operations roles are examples. 3. Implement a sales compensation design process, incorporating key stakeholders from Finance, HR, Product Marketing, and Sales Operations with key stakeholders in Sales. It is important that Sales management and/or professionals have a place at the table to represent the types of accounts, products, sales levels, and regions. Not all of the representatives need to be in all meetings or all aspects of the design process but the design team is essential to buy-in and approval of the plan by the CEO and CFO, and Head of Sales. It is also essential to include the key stakeholders who will be responsible for communicating the plan to their constituents. In addition to contributing to plan design, the plan is to be monitored against expectations throughout the year by representatives from various organizations, at least quarterly, to ensure it is working, and to ensure adjustments are made when it is not working. a. Being clear about ownership, sponsorship, and each stakeholder’s role in the process. The Sales organization owns and communicates the sales plan, but the CEO and CFO have to approve the plan. The CEO or President is typically the sponsor, but the CFO’s approval is critical. b. Providing CEO insight at kickoff of the sales design process relative to the business strategies, organizational changes, and other relevant business data for the sales design team is critical.
  6. 6. c. Clarifying Finance’s role as the “budget” czars and ensuring all aspects of the plan are measurable and affordable, reasonable, yet stretch goals, given various achievement scenarios and business goals. On an ongoing basis, every quarter, Finance will review and payout commissions calculated typically by Sales Operations, as well as monitor the sales budget throughout the process. Key metrics about how many are achieving their plan targets on a quarterly basis are important to the success of the plan. d. Clarifying HR’s role as one of facilitating the process of designing, modeling, and reviewing the sales compensation plans, ensuring compliance of the plan and policies with the Legal department, the competitive level of the sales compensation in total at target quota, the documentation, communications, and the outcomes. Ensuring HR records changes in roles, titles, corresponding compensation at target and/or base compensation, as well as understanding how the plan is working or not working throughout the year are important to the implementation of the plan. Typically HR has little if anything to do with sales quotas, but understanding the ongoing performance to plan is important. e. Clarifying Sales Operations role in developing each employee’s plan documentation, using a logical and legally defensible template, and executing on the sales policy, and on an ongoing basis entering the orders, calculating the commissions, and reviewing/auditing same with Finance and Payroll.
  7. 7. In conclusion, obtaining buy-in from all of the key stakeholders throughout the design and implementation process is essential to a successful plan launch. Perfectly designed plans that don’t have buy-in from the key stakeholders will not succeed, and plans that are imperfectly designed, yet have buy-in, can be changed by the key stakeholders and will be more successful. Footnotes: 1. A radio announcer for National Public Radio (NPR) recently mentioned that “the recovery will be L shaped in Europe, U shaped in the U.S. and V shaped in the Asia/Pacific, in other words, ‘LUV is never having to say recession’.”