Sales Compensation Forecast: Optimism Tempered with a Sharp Focus on Performance

Better times ahead, sales-wise?  A newly released Watson Wyatt survey on sales force compensation and management suggests cautious optimism for the 2010 sales outlook, but also reveals plans for a sharpened focus on performance and productivity in the coming year.

From the Watson Wyatt survey results:

Cautious optimism is in play...

A large majority (83 percent) of respondents expect at least modest growth in fiscal 2010.

More than half (51 percent) expect to increase next year’s fiscal goals/quotas.

... But 2010 is looking to bring a sharp emphasis on improving sales performance ...

Six in 10 companies list sales force productivity/efficiency as the most significant human capital issue currently facing their sales forces.

Other main concerns cited include sales force quota/goal setting (48 percent), coaching/development (40 percent), training (39 percent), and morale and motivation (35 percent).

While responding companies are confident in the current alignment between sales performance and sales compensation ...

79 percent report their top performers earn the highest levels of sales compensation, indicating a strong link between pay and performance.

... Many are planning changes to sales compensation plans in the coming year ...

Companies expect to change performance measures (60 percent), performance measurement weightings (50 percent) and incentive formulas/mechanics (49 percent) in the next fiscal year.

All signs pointing to an interesting year ahead for sales compensation!

Sales Commission Calculation - Just the Basics, Ma'am

Like many of you, my fourth quarter included a lot of sales compensation design, review and revision.  Given the business environment and the forecasting difficulties that many organizations are facing, some are still working - even now - to get sales incentive plans nailed down in final form.  With this in mind, I thought it might be helpful to dedicate a post to the basics of sales commission calculation.

No, don't run away yet - I promise you it is clear, straightforward and relatively painless.

At its heart, sales commission calculation rests on a simple formula:

(Target Incentive Amount/Target Volume) x 100 = Commission Rate

Target incentive amount represents the amount of incentive (commission) that the sales person should receive if they achieve target sales volume.  Target sales volume (which may also be expressed as a quota) is the sales production goal for the sales person, in revenue dollars, gross margin dollars, units sold - whatever metric is determined to best fit the sales job's focus and responsibilities. (Note that I am leaving the design questions aside here - although they are clearly critical - in order to focus solely on commission calculation.)

Let's say that a particular sales job has a target incentive amount of $40,000 and a target volume of $2,000,000.  In other words, we have set a target or quota of $2,000,000 for the position, and we intend to pay $40,000 in commissions if the sales person achieves that target.  The commission rate necessary to accomplish our objectives is calculated by applying our simple formula, as illustrated below.

($40,000/$2,000,000) x 100 = 2% Commission Rate

That's it.  What you have in this 2% is a classic flat commission rate, which pays out at the same rate for every sale. On its own, a solid approach for many sales jobs.  There are also multi-stepped commission rates, progressive or accelerated rates in order to provide greater upside for outstanding performance, regressive or decelerated rates in order to "tamp down" earnings beyond a certain point (typically an alternative to any kind of "cap") - even "matrixed" commission rates as a way of addressing competing sales objectives.  The list is probably endless.

But I thought this basic formula might be a good place to begin, and to help my HR colleagues start gaining a solid footing in the sales incentive arena.  Happy calculating all!

Image: Creative Commons Photo "Studying till the Sun Goes Down" by Jekert Gwapo

It's That "Tweaking the Sales Compensation Plan" Time of Year!

There's a lot of sales compensation plan activity in my world this time of year - whether it be finalizing a new plan design for a client or helping them identify and make adjustments to the existing plan.  And this year, our economic crisis has driven a heightened sense of urgency into this already challenging annual exersize.

"Tweaking" any compensation plan is inherent with dangers, and this is particularly true for sales compensation plan.  Here to help, Jerry Colletti and Mary Fiss of Colletti-Fiss LLC, in the newest edition of their sales compensation "short", point out five common design flaws that too often occur as a result of tweaking sales compensation formulas and provide us with suggestions on how to avoid each one.

Potential Flaw #1 – Incentive rates based on "optics"

"Optics" refers to adopting the practices of competitors or other internal divisions because it looks good, for example, adopting a 10% commission rate because that's what others do. One potential problem this approach causes is commission costs that are too high or not aligned with the desired target total cash compensation. It's best to avoid this practice. The way to do so is to: 1) set an incentive comp target by job; and, 2) link rates to the incentive comp for performance in the job and business plan – particularly if it's a commission rate.

Potential Flaw #2 – Too many payout "modifiers".

This practice is rooted in the belief that "...if you don't pay them, they won't do it..." The consequence, of course, is too many measures or modifiers on measures in the plan. This flaw can be avoided by limiting the number of measures to three including modifiers. Also, other performance management tools – merit pay, performance appraisal, contests, and recognition, wisely used, can serve as more effective alternatives.

Potential Flaw #3 – Performance range "too-high; too low".

When the performance range is set too high – meaning the range from threshold to excellence -- too few sales people gain entry into the plan; and, even fewer benefit from the over- achievement (OA) or leverage opportunity. A performance range that is set too low means just the opposite, that is, too many sales people not only gain entry into plan payout but also those who do exceed quota benefit from over- achievement pay without true overachievement performance. To avoid either case, the best approach to take is to complete thorough historic performance and cost modeling exercises to validate the right performance range anchors (threshold; excellence) associated with plan cost.

Potential Flaw #4 – Rate change(s) disconnected from where selling makes a difference.

This flaw is often the result of management's desire to use multiple points of acceleration in the incentive payout line. Of course, those points of acceleration result in incrementally higher incentive costs; thus, it is critical to confirm that accelerated rates are a factor in moving sales performance to the next level. One way to address this design challenge is to: a) identify the highest performing sales people; b) identify the point of sales performance between (a) and the next highest performers (i.e., cluster) and, finally, (c) "test" or model the cost consequence of putting an acceleration point in between.

Potential Flaw #5 – Misuse of advance design techniques.

This flaw is the result of using formula design techniques – linkages, matrices, multipliers – that may be either inappropriate or unneeded relative to the desired selling behavior and performance. Too often we see formula designs used – complex ones in particular – that do not solve the sales performance problem. The most common is to use multipliers or accelerated rates to mask overly aggressive sales quotas. Because complex formulas often add to sales force confusion about incentive pay, it is wise to first validate that a performance problem is solvable through the comp plan irrespective of formula type.

Behind Many Poor Sales Compensation Plans Lurks Poor Job Design

Dig beneath a sales incentive plan that is too complicated and - as often as not - you'll discover a sales job with way too many angles and focal points.

Sales jobs that require constant shifting from prospecting to account management to order administration/tracking to installation/set-up and then back to prospecting may not be the best use of your available sales talent.  Particularly if you've staffed the jobs with hunters.  And, for a profession where variable pay can be a significant piece of the overall compensation package, jobs like this can present real challenges for sales incentive design.

I realize that, particularly in smaller businesses, people have to wear more than one hat.  But even in these circumstances, a thoughtful approach to sales job design can make a real difference in motivation and productivity.

Sales jobs, and sales incentive plans, are most effective when their focus is as clear and singular as possible.

Image: Creative Commons Photo "How Far?" by Alisdair McDiarmid

Your "No-Ob" Chance to Check Out Sales Performance Management Tools

Are you involved with designing, managing and/or administering your company's sales compensation program?  Wouldn't it be great to have a complimentary, anonymous, no-obligation opportunity to check out some of the different sales incentive software solutions out on the market?

OpenSymmetry, a consulting firm focused on sales performance management and business intelligence, is presenting their First Annual Anonymous Vendor Demo Series, an free opportunity to preview some of the leading solutions offered in the market - and even interact with the vendors - in an anonymous setting. If you are interested in finding new ways to improve the way you manage your sales compensation program or about to start a formal vendor selection… this series is a great chance to do just that!

Here are the details:

Webinar Demo Events will take place at 8AM PST on the dates indicated below. Each webinar demo event will last approximately 60 minutes with Live Q&A allotted at the end of the event.

Participating software companies include: Callidus Software, Merced Systems, nGenera, Varicent, Versata, Xactly, and ZS Associates.

Webinar Schedule:

• October 16th, Varicent
• October 20th, Merced Systems
• October 23rd, ZS Associates
• October 27th, Xactly October 30th, Versata
• November 3rd, nGenera
• November 6th, Callidus Software

Register here for any and all of the series webinars.  I am signed up for several, and I urge any of you with responsibilities in this area to do the same!

Wanted: HR Seat at the Sales Compensation Table

The table, the table, the table.  You can't turn sideways these days in the HR blogosphere without bumping into a post, an article (or a carnival!) that discusses HR's eternal quest for a seat at the table!  The mythical table referenced in all the angst is, we presume, the one at the top of the corporate house, where leaders fearlessly plan and plot business direction and strategy.

But HR is often missing from another table.  There doesn't seem to be a lot of teeth gnashing and hand wringing over this one, but in my line of vision, it is a problem.  The table I'm referring to is the sales compensation design table.  There has been a historical tendency, not in all but in many organizations, to exclude HR from sales compensation design.  I suspect that some of the reasons for this are as varied as the organizations in which it happens, but there is one reason that I see popping up repeatedly, and that is an unwillingness to develop the necessary business and sales acumen.  In short, they don't think we "get" sales, and often we agree with them.

Designing effective sales compensation plans is an intricate and technically challenging effort, to be sure.  It is not necessary that HR professionals become sales compensation design experts to participate successfully in the effort.  It is necessary, however, that the HR professionals develop an understanding of not only how the organization creates and delivers value to its customers, but also the competitive landscape, the company's particular competitive strengths and weaknesses, its specific sales strategy and objectives, and the role that different sales jobs play in executing that strategy and those objectives.

Too many of my HR - and even compensation - colleagues shy away from the whole sales compensation process.  It's easy to rationalize doing this; it is a challenging area and - let's face it - in many organizations the sales management group doesn't necessarily want HR deeply involved to begin with. 

Why bother?

Here's why.  Sales compensation plans - in my opinion - usually suffer for lack of an HR perspective in their design and communication.  Like any incentive plan, and maybe even more-so than any other, these compensation programs tend to be most successful when their design reflects a variety of disciplines and perspectives - and the HR point of view is an invaluable part of that mix.

So here it is: A call out to my HR colleagues to press for a seat at the sales compensation table, and to do the necessary preparation and information-gathering to ensure that you are positioned to bring value to the discussion and decision making. Corner a sales manager and ask a ton of questions.  Find a sales buddy and learn to love their shadow for a day.

Can we make this happen?  Will we?

Image: Michael Connors

Sales Compensation: Rethinking the Hunter/Farmer Model

Designing sound sales compensation programs always begins with a clear understanding of your company's sales structure and specific sales roles (which presumably have been thoughtfully defined in light of your overall sales strategy, right?).  One common, and perhaps potentially overused, sales model is that of the hunter and farmer.  In this model, there are sales people in the role of the hunter, whose charge is to find and bring in new customers, and other sales people in the role of the farmer, who are responsible for building and nurturing the customer relationships. 

In their recent newsletter as well as their article in the July/August 2008 issue of the Harvard Business Review , Jerome Colletti and Mary Fiss advise against the often leapt-to conclusion that this popular approach is always the right sales staffing solution, and walk us through some of the hunter/farmer sales model's more serious shortcomings:

• It rests on the assumption that the business of selling to new customers is transactional rather than consultative; hence, it is easy to "hand it off"
• It assumes that the skills required for the hunter and farmer business development roles are fundamentally different
• It assumes that there is more business to be had from new than existing customers - not always the case
• It trivializes the cost of the hand off from hunter to farmer
• It disregards that the hunter may leave a fair number of "loose ends" since they don't have to deal with the consequences of on-going customer relationship

A reminder that it is always a smart step to carefully assess your own company's situation and strategy, and select a staffing and compensation approach that truly fits and supports it.

Are Sales Managers Being Left Out of the Sales Compensation Loop?

Sales compensation plans undergo frequent change these days; 76% of respondents in a recent study say their plan is revised either every or every other year, with 65% indicating that a plan revision occurred in 2008.  And yet many organizations appear to be leaving first line sales managers out of the loop at launch time.

New research from WorldatWork and the National Association of Sales Professionals, featuring over 400 participating HR, compensation and sales professionals, indicates that nearly 40% of the responding organization do not appear to have a clear strategy or approach for preparing first-line sales managers to manage the launch of a new or revised sales compensation plan.  In fact, 14% of the respondents say that they bypass sales managers and go directly to sales employees when communication new pay plans.

To me this is symptomatic of a bigger issue surrounding sales compensation and sales management.  Because of the heavily leveraged (read low or no base, high incentive or commission) pay plans for most sales people, there appears to be an underlying assumption that the pay package will, and in fact should, manage the sales people for us.  This can be (and often is) an issue with any incentive plan, but it makes a more acute appearance in the realm of sales incentives.

I see it frequently when I participate in sales compensation design team discussions, where we are constantly battling the urge to have the plan address each-and-every-possible-desired-behavior-or-outcome, until the plan threatens to collapse under its own weight.  As if the sales managers themselves have no role or authority to deal with performance questions or challenges.

And maybe they don't.  But that - our apparent failure to capitalize on the role of sales managers in driving sales performance - seems like a pretty big oversight to me.

Readers, are you seeing this trend in the organizations where you work and/or consult?  What are your thoughts?

Sales Roles & Incentives: Administrative Vs. Selling Activities

Continuing our now daily coverage of sales compensation happenings (you can't stop the beat )...

I spoke to a group of CEOs and General Managers earlier this week on the topic of sales compensation.  One of the topics we discussed at length was defining the role of the salesperson.  As customers demand ever more of their vendors (from inventory management to distribution solutions), these leaders were finding that the roles of their sales staff are becoming ever broader as they try to oversee and manage this larger set of deliverables.  The initial question that came up was:  How do you adjust the sales compensation plan over time to respond to this shift/growth in responsibility?

But the bigger/better question is:  Do you simply stand by and allow your sales positions (hunters, in particular) to get broader in reaction to customer demands - or do you regularly examine the sales role(s) to see which new demands should be addressed by those in a traditional "sales representative" position, and which demands should shift to other, perhaps new, positions in order to allow the sales staff to stay focused on sales activities?

And here comes Watson Wyatt with a new study and some interesting findings that are very relevant to this dilemma.

According to Watson Wyatt's newly released 2008 Report on Sales Effectiveness and Compensation, companies are leaving millions of dollars in revenue on the table as a result of not organizing, deploying and compensating their sales forces effectively.  Specifically, the study focuses on how the structure of NBDs (New Business Developers) versus AMs (Account Managers) can enhance sales performance and company growth.  The study also addresses different approaches for high growth versus low growth periods (see related posts here and here).  Findings include:

• Shifting two hours a week from administrative to selling activities could lead to as much as $225 million in additional sales for a company with 1,800 NBDs.
• Companies can derive even greater value from their sales forces by carefully allocating activities between NBDs and AMs. Reallocating time and resources can create more than $600 million in additional sales for a $20 billion company.
• For NBDs, sales is a “contact sport” that rewards high touch and persistence. Top-performing NBDs prefer to communicate with clients and prospects in person (other NBDs rely more on the phone) and are more likely to cultivate a prospect over an extended period of time.
• Administration creates more than $300,000 in lost expected sales per NBD per year. Pushing nonselling administrative activities downstream from NBDs to AMs, and then from AMs to an administrative sales support role, can increase productivity.
• Top-performing salespeople report annual incomes that are 24 percent (NBDs) and 23 percent (AMs) higher than those of other salespeople in the same roles. Sales-related variable pay for top performers represents 90 percent (for NBDs) and 75 percent (for AMs) of this difference.
• Optimal productivity for sales roles varies considerably based on the company’s level of growth.
  • During periods of high growth: NBDs should focus on prospecting, qualifying leads, entertaining customers and closing deals. AMs should conduct business planning with customers, focus on needs identification and solution development, handle sales administration and concentrate on professional development.
  • During periods of lower growth: NBDs should focus on identifying opportunities to expand existing customer relationships, conduct needs identification and solution development, continue to entertain customers and close deals. At this level of growth, successful AMs become more prominent in the business development process, prospect more among existing customers, qualify leads, develop proposals and help close deals.

To summarize - astute companies will be reviewing/refining all aspects of how they go to market on a regular basis and particularly in the face of a potential economic slowdown, and not just the tweaking of their sales compensation plans.

If Salespeople ARE Different, What Does It Take to Steal One?

As part of the recent wall-to-wall coverage of sales compensation (sometimes you just have to go where the universe is sending you...), I direct you to The HR Capitalist where Kris Dunn (riffing off my recent post on how salespeople differ from other employees) asks the question "What Percentage Increase Does it Take to Steal a Sales Rep from your Competition?"

To get the discussion rolling, and acknowledging the newly confirmed fact that salespeople are - indeed - more motivated by money than the rest of us, Kris throws out his initial guess of 20%

What say you?  Join the conversation and put your opinion in there.