New compensation models for maximising sales performance ron burke, towers watson (12.10.11)

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  • 1. Sales Compensation Best Practices Compensation models for maximising sales performanceSales Institute of Ireland12 October 2011 towerswatson.com
  • 2. Why do we have unique sales incentive plans? Incentive Compensation Objectives Attract and retain Focus effort Motivate performance l In turn, positive impacts on l More positive customer experience – customer more continuity experience, higher satisfaction levelsl Higher employee retention Outcome l Higher customer of retention Well-Designedl Better employee Plans engagement l Higher product utilisationl Higher recurring l Deeper relationships/ revenue, better business more cross sell activity results Well designed incentive plans focus, motivate, and engage talenttowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 2 2
  • 3. Sales compensation is only one of avariety of tools at management’s disposal Sales effectiveness is all about: l Getting the right people with the right skills . . . l Focused on the right opportunities . . . l In a highly engaged and motivated fashiontowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 3
  • 4. What makes for an effective sales compensation plan? Outcomes of Effective Sales Means of Achieving Compensation Plans I. Reinforce strategy and desired l Utilise the right performance measures with appropriate behaviours weights II. Reflect the nature of the sales role l Manage sales incentive eligibility in compensation l Clarify sales roles l Ensure pay mix and incentive form align with the role III. Maximise motivational impact of l Pay distribution incentive earnings l Pay differentiation l Pay and performance correlation IV. Support top talent attraction and l Competitiveness of total compensation retention l Maintain appropriate internal pay equity V. Govern plan design and l Track and manage compensation cost of sales (CCOS) administration l Identify potential financial and behavioural risks l Create a formal governance processtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 4
  • 5. I. REINFORCE STRATEGY & BEHAVIOURSPerformance Measures Key Considerations l Strategic — Does the measure align with the strategic direction of the company? Best Practices l Measurability — Can the measure be l No more than three different measures calculated from available data? per plan l Manageability — Do l Tied in some manner to individual managers’/employees’ actions readily performance or to a carefully defined affect the measure? group with “shared dependency” in a process or outcome l Sustainability — Can the measure accurately forecast the trend of future l Results-based rather than activity-based results? l Relevant and controllable by the l Communicability — Can the measure be individual easily explained to managers, employees, l At least 20% of incentive pay per and owners? element l Unifying — Can the measure be used by other functions with shared destiny? l Stability — Can the measure be developed so as to prevent manipulation or gaming?towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 5
  • 6. II. REFLECTING THE ROLEEligibility: Establish sound criteriato determine sales incentive eligibility If the position: If the position:l Is directly involved in the sales process l Writes proposals, but has little to no directl Spends a majority of time on selling activities customer interface (preparing for, following up to, AND conducting l Conducts research and analysis for the sales customer sales calls) forcel Plays a prominent ‘customer facing’ role l Serves as an administrative assistant to a sales personl Has the ability to impact and influence customer buying decisions l Develops marketing and sales strategies,l Generates, qualifies and/or pursues sales conducts market research, or develops marketing and sales tools leads l Develops and/or manages productsl Is expected to close sales l Spends some time on sales but the majority onl Serves as a designated customer relationship other tasks (service, operations, etc.) manager l Contributes to sales, but does not close salesl Manages a group of salespeople Then... Then... Corporate incentive plan, with some ‘Sales’ incentive plan is most appropriate customisation, is most appropriatetowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 6
  • 7. II. REFLECTING THE ROLEPay mix implies a trade off between the degree ofmanagement control and sales force urgency Sales Force Degree of Sense of Urgency Pay Mix Management Perception Control 90%/10% Asleep Highest Lowest 80%/20% Motivational High Some 70%/30% Gets attention Good Meaningful 60%/40% Drives behaviour Only key things Significant 50%/50% High risk Limited High > 50% at risk Make quota or quit Minimal to none Very hightowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 7
  • 8. II. REFLECTING THE ROLESales role clarification is the foundationof the sales compensation design process How Customers Buy Transactional Consultative l Purchase decision is simple l Purchase decision is complex l Sales cycle is short l Sales cycle is long l Price is key l Value is key l Focus on efficiency l Focus on solution New Customer Acquisition l New customer acquisition l Cold calling or prospecting l Little post-sale effort Small Game Big Game Hunter Hunter Territory Manager How Sales People Sell l Grow territory revenue based on good relationships with many customers/prospects l Growth comes from building a reputation in the territory Territory Rep Territory Consultant l Some post-sale effort Account Manager l Retain and grow accounts l Identifying and addressing customer needs Account Manager Key Account Executive l Significant post-sale effort l Penetrating customers with new services/productstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 8
  • 9. II. REFLECTING THE ROLESales compensation implications of role differences Framework Drives: l Pay mix How Customers Buy l Upside earnings potential l Performance area Transactional Consultative l Incentive form l Highest variable pay l High variable pay New Business Acquisition l Fewest performance areas l Few performance areas (2 – How Sales People Sell (1 – 2) 3) l Commission oriented l Commission/bonus oriented l High variable pay l Moderately high variable pay Territory Manager l Few performance areas (2 – l More performance areas (3 – 3) 4) l Mix of commission and bonus l Mix of commission and bonus l Low variable pay l Moderate variable pay Account l Few performance areas (2 – l Most performance areas (3 – Manager 3) 4) l Bonus oriented l Bonus oriented Position Drives: l Pay levels l Performance measures Mapping roles to the matrix helps narrow the choice of l Incentive plan mechanics optimal plan designstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 9
  • 10. II. REFLECTING THE ROLECommission vs. bonus — which makes sense? Definition When is it appropriate? A planned (or target) payout l Cost of labour philosophy ($/€/£) for reaching a l High goal-setting confidence predetermined objective(s); l Mature business/industry Bonus typically expressed as l Low or high prominence percentage of a target bonus or l Unequal territory sizes base salary, or as a flat currency amount A piece of the business or a l Cost of sales philosophy percentage of the take; l Low goal-setting confidence typically expressed as a l Immature business/industryCommission percentage of gross sales or l Moderate to high prominence profit $/€/£, or as a currency l Equal territory sizes amount per unit soldtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 10 10
  • 11. III. MOTIVATING PERFORMANCEThe most effective sales compensationplans move the middle and celebrate the stars Expected Performance Distribution 20 16 12 2 Reps 1 8 You definitely need to 4 keep the stars happy,The very low performersshould be managed out, but there are only a few 0 of them and they may and will be more <70% 71% to 81% to 91% to 101% to 111% to 121% to >130% concerned about be more motivated by 80% 90% 100% 110% 120% 130% keeping their base pay recognition and personal % Goal Attainment achievement 3 You get the biggest ‘bang for the buck’ in the middle of the pack. Most of your sales people are here and this is where the sales incentive plan is likely to be most effective. These people must participate and this is where the steep part of the payout curve should betowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 11 11
  • 12. III. MOTIVATING PERFORMANCEBest practice sales incentive design has 85% to 90%of the population earning at least some incentive Expected Performance Distribution 20 Threshold is Excellence is the point below 16 the point at which no which target incentive is 12 leverage is Reps paid. It paid. It represents 8 represents unacceptable outstanding performance, 4 performance, usually defined usually defined as the 10th or as the 85th or 0 15th percentile. <70% 71% to 81% to 91% to 101% to 111% to 121% to >130% 90th percentile. 80% 90% 100% 110% 120% 130% % Goal Attainment Below Target Above Performance Excellence Threshold (100% of goal) Excellence Percent of 55% above, 45% Rules of 10-15% 10-15% above excellence Population below Thumb Amount to Pay 10-50% 100% 200% to 300% (avoid caps)towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 12 12
  • 13. III. MOTIVATING PERFORMANCEIf you expect different distributions ofperformance, you should have different payout curves Situation Performance Distribution Appropriate Payout Curve Example A Payout Curve (Example A) 20 300% % of Target Incentive Earned 250% Typical B to B sales 16 12 200% Reps 150% or 8 100% 4 Growth products 0 50% <70% 71% to 81% to 91% to 101% to 111% to 121% to >130% 0% 80% 90% 100% 110% 120% 130% 50% 75% 100% 125% 150% % Goal Attainment Goal Attainment Example B Payout Curve (Example B) 50 300% % of Target Incentive Earned 250% Strategic account sales 40 200% 30 Reps 150% or 20 100% 10 50% Modest growth products 0 <70% 71% t o 81% t o 91% to 101% to 111% to 121% to >130% 0% 80% 90% 100% 110% 120% 130% 50% 75% 100% 125% 150% % Goal Attainment Goal Attainment Example C Payout Curve (Example C) 50 300% % of Target Incentive Earned 250% Recurring revenue sales 40 200% 30 Reps 150% or 20 100% 10 50% Mature products 0 <70% 71% to 81% to 91% to 101% to 111% to 121% to >130% 0% 80% 90% 100% 110% 120% 130% 50% 75% 100% 125% 150% % Goal Attainment Goal Attainmenttowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 13 13
  • 14. IV. TALENT ATTRACTION & RETENTIONEvaluating target total cash compensationannually helps ensure competitive on target earningsKey Considerations Total Targetl Role specific requirements (experience level, education, Cash specialised knowledge, risk tolerance) (100%)l Company pay philosophy Target The sum of the l Cost of sales Incentive base salary Compensation midpoint (60%) l Cost of labour and TIC (40%) (40% of TTC) l Percentile at which to benchmark pay levels equals 100% of target totall Competitive practice compensation (TTC) l Product/service competitors Base Salary (60% of TTC) l Labour market competitorsl Need for appropriate mix of base salary and incentivel Need for meaningful and motivational incentive levelsl Justification for different pay levels within and across the sales organisation (e.g., by role, geography) Most sales organisations target delivering compensation between the market 50th to 75th percentile for on target performancetowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 14 14
  • 15. V. GOVERNANCEStudies show sales compensation governance is oftensorely neglected “In most organisations, the term sales compensation governance is an oxymoron. Sales compensation is often a free-for-all, ‘owned’ by everyone and no one at the same time, subject to a wide variety of individual pressures, governed by exception and loosely run on an ad hoc basis”* * Source: Gundy P. and Gaeta E., “Sales Compensation Governance: The Last Frontier of Corporate Reform,” Benefits Quarterly, First Quarter 2004.towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 15
  • 16. V. GOVERNANCECreating a plan governance framework Alignment & Design Alignment and l Compensation philosophy Design l Incentive plan design l Scenario modelling and costing Codify or Œ Refine Goal Setting and Budgeting Processes and Procedures • • l Goal setting Document Expand Assign l Budgeting, forecasting and accruals Outcomes/Create Accountability & Audit Trail Consequences Ž Administration Monitor, Oversee & Enforce l Collecting and validating performance data l Calculating award amounts l Communicating, motivating and reporting l Managing exceptions, disputes and adjustmentstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 16
  • 17. Done well, sales compensation serves to align the interests of different stakeholders l Convenience l Value l Information Customers l Solutions l Shareholder return l Compensation l Profitability Sales process l Career l Growth value development l Corporate image added l Job satisfaction l Compliant sales Sales Companies personnel The topics discussed today are critical to realising this alignmenttowerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 17
  • 18. Thank you!Ron BurkeDirector, Sales Effectiveness & RewardsTowers Watson71 High HolbornLondonWC1V 6TP+44 (0)20 7170 3257 office+44 (0)7989 337 248 mobileron.burke@towerswatson.comtowerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 18