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Thursday, November 12, 2009
Reducing base to bring one sales person into alignment with the rest of the team
We have one sales rep who was brought in to sell into a different market with a base pay level that is much higher than that of the rest of the team. We have changed our emphasis and he is now selling the same products and in the same role as his 9 peers, but at a higher base. How do we correct his base pay?
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This one is tricky as you know, and fraught with opportunities to totally undermine the motivation of Mr. Overpaid. Aligning compensation is the fair thing to do (at least internally). However, a transition of some kind might be a nice compromise so here's an idea:
Reduce the base, but fund a guarantee for six months equal to the amount of the base that has been reduced. Then require that the sales person "earn through" the guarantee before additional variable pay is delivered. So let's do an example:
- Current too-high base = $80k
- Appropriate base = $60k
- New target incentive (once base is $60k) = $40k
So you'll need to take $20k out of the base, which is $5k/quarter. The sales person then is guaranteed $20k for the quarter = new base ($15k) + guaranteed variable ($5k). If the person earns less than $5k on the normal variable pay plan, then no additional pay is delivered (beyond the $20k). If they earn $7k (for example), then an addition $2k would be paid.
Continue this for a very few quarters as a transition, then they would be on the regular plan like that of their peers.
Clearly, if Mr. Overpaid is not satisfied with the lower base, he will have a look around during those six months, and may move onto a job that meets their needs for less risk if they can find one. Meanwhile, he has a chance to see what his earnings would be on the new plan and commit to the job with the new compensation arrangement at the end of six months if it works for him. And the company has established a clear endpoint by which the too-high-base will end.
Wednesday, November 11, 2009
What is the ROI on a sales compensation plans design change effort?
There are three income statement lines affected by improved sales compensation plans:
1. Revenue - total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, etc.).
2. Margin – by focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.
3. Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down either by paying less to sales people for the same productivity. More often costs are managed down by expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.
The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing their plans, what benefit you expect to gain. Ideally, substantial changes in sales focus that yield business results are the result of a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes in the sales job will be successful without support from the sales compensation plans. So the ROI is most likely on the overall change initiative of which sales compensation is a part.
1. Revenue - total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, etc.).
2. Margin – by focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.
3. Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down either by paying less to sales people for the same productivity. More often costs are managed down by expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.
The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing their plans, what benefit you expect to gain. Ideally, substantial changes in sales focus that yield business results are the result of a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes in the sales job will be successful without support from the sales compensation plans. So the ROI is most likely on the overall change initiative of which sales compensation is a part.
Should there be secondary objectives in a sales comp plan?
Do companies achieve secondary goals like introducing new products or improving the product mix or the average unit price through comp plans? Is it advisable to pursue more than the number one goal of rewarding sales?
Answer:
Most sales compensation plans include more than one objective. In a selling environment with any complexity at all, one objective rarely covers all of "the most important things." Some sales are more valuable than others. These more valuable sales may be literally more profitable (better margin products), or strategically important (solidifies a longer-term relationship with the company), etc.
While I am a passionate advocate for simplicity in sales plan design, most of the plans I have helped to create include more than one component. Examples are:
- Revenue on legacy products, revenue on new products
- Existing customer sales, new customer sales
- First year contract value, out-year contract value
- Sales value (e.g., dollars), margin value (e.g., dollars)
- Individual sales, total team sales
- Bookings, recognized revenue.
Two measures in a comp plan doesn't worry me - it probably means the comp plan accurately reflects the sales priorities. Three measures may be warranted as well. Four measures can sometimes be justified, but usually is not a good idea. Five measures is more than I can recommend.
You can "say" all you want to in a comp plan, but only about three things can be "heard." So three measures is a good maximum, and fewer is better as long as you don't over-simplify the business priorities.
Answer:
Most sales compensation plans include more than one objective. In a selling environment with any complexity at all, one objective rarely covers all of "the most important things." Some sales are more valuable than others. These more valuable sales may be literally more profitable (better margin products), or strategically important (solidifies a longer-term relationship with the company), etc.
While I am a passionate advocate for simplicity in sales plan design, most of the plans I have helped to create include more than one component. Examples are:
- Revenue on legacy products, revenue on new products
- Existing customer sales, new customer sales
- First year contract value, out-year contract value
- Sales value (e.g., dollars), margin value (e.g., dollars)
- Individual sales, total team sales
- Bookings, recognized revenue.
Two measures in a comp plan doesn't worry me - it probably means the comp plan accurately reflects the sales priorities. Three measures may be warranted as well. Four measures can sometimes be justified, but usually is not a good idea. Five measures is more than I can recommend.
You can "say" all you want to in a comp plan, but only about three things can be "heard." So three measures is a good maximum, and fewer is better as long as you don't over-simplify the business priorities.
Monday, November 09, 2009
Paying from first dollar for annuity business
My company is in the throes of revising the comp plan for next year and one of the most hotly debated items revolves around compensating a salesperson on all business generated from dollar one for the life of the account. Currently our firm doesn't discriminate between "new" dollars and what I'm calling "annuity" dollars- they pay the same rate over the account life whether it's 1 year or 10. We don't have a lot of support staff so most, if not all the account maintenance falls on the salesperson's shoulders. Most of the heavy lifting is done during the prospecting stage & within the first 1-2 years of the relationship then the historical pattern is the revenue drops (variety of reasons outside of the salespersons control and some within).
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There are several ways to put together plan mechanics in such a situation, and I have listed a few below, with some commentary.
1. First dollar payment, and “a dollar is a dollar.” This is what I believe you have now. This will focus sales people with substantial annuity business first on maintaining the base, then once that is secure, on growing new business. It generally is straightforward to track sales credit and calculate compensation – both very desirable. The cost of comp in relation to sales volume is very predictable, as is the income level of the sales person. The challenges raised by this arrangement are:
a. It does not recognize the increased degree of difficulty in landing truly new business – so that the time spent on new business development may not be worth the risk of not closing to a sales person who can farm established accounts.
b. It can result in a “phantom base” where the sales person has a large portion of their apparently variable pay that will almost certainly not vary year to year – so they have little real risk or upside in their compensation plan to help support the drive to grow.
c. Depending on how the compensation plans work, it may mean that each deal is paid over the life of the contract based on the comp plan in place at the time it was signed. If this is the case, the compensation administrator may be simultaneously administering several comp plans (this year’s, last year’s, etc.). This would tend to limit the company’s willingness to adjust the plans to focus sales effort on this year’s priorities.
d. Sales people with “rights” to an annuity stream are less likely to accept restructuring of territories to expand the sales force, reassignment of accounts, etc. This can limit a growing company’s ability to scale quickly and maximize market penetration.
2. Added payout value for new business. This is similar to #1, except that the payout on the “existing” business (“existing” vs. “new” needs careful definition) is reduced to fund a higher payout amount on the “new.” Generally the intention will be to keep total compensation the same, but to shift the emphasis to the new business a bit. This can be as simple as an increased commission rate for all new business during its first twelve months, funded by a reduction in the commission rate for existing business. This solves a above, b somewhat, and does very little to address c and d.
3. Split the compensation into a quota-based incentive for the existing business and a true commission on the new business. For the quota-based incentive on existing business, there may be a threshold below which no payout is earned (e.g., 80% of the quota), and dramatic acceleration for any over-quota attainment (e.g., double the target incentive at 120% of quota). For the new business, the payout should be from first dollar and perhaps it should accelerate over quota. In this case, business should count as “new” for the first twelve months, not just for the rest of the plan year. This approach solves issues a, b, c and d listed above; but it also undermines simplicity, makes it hard to know the comp value of existing business on a per-deal basis, and raises the stakes on setting reasonable and accurate quotas for both existing and new business.
There is not a perfect answer to this situation that will satisfy all stakeholders and be bullet-proof. But there are better and worse approaches, depending on your sales roles and your business model.
+++++++++++++++++++++++++++++++++++
There are several ways to put together plan mechanics in such a situation, and I have listed a few below, with some commentary.
1. First dollar payment, and “a dollar is a dollar.” This is what I believe you have now. This will focus sales people with substantial annuity business first on maintaining the base, then once that is secure, on growing new business. It generally is straightforward to track sales credit and calculate compensation – both very desirable. The cost of comp in relation to sales volume is very predictable, as is the income level of the sales person. The challenges raised by this arrangement are:
a. It does not recognize the increased degree of difficulty in landing truly new business – so that the time spent on new business development may not be worth the risk of not closing to a sales person who can farm established accounts.
b. It can result in a “phantom base” where the sales person has a large portion of their apparently variable pay that will almost certainly not vary year to year – so they have little real risk or upside in their compensation plan to help support the drive to grow.
c. Depending on how the compensation plans work, it may mean that each deal is paid over the life of the contract based on the comp plan in place at the time it was signed. If this is the case, the compensation administrator may be simultaneously administering several comp plans (this year’s, last year’s, etc.). This would tend to limit the company’s willingness to adjust the plans to focus sales effort on this year’s priorities.
d. Sales people with “rights” to an annuity stream are less likely to accept restructuring of territories to expand the sales force, reassignment of accounts, etc. This can limit a growing company’s ability to scale quickly and maximize market penetration.
2. Added payout value for new business. This is similar to #1, except that the payout on the “existing” business (“existing” vs. “new” needs careful definition) is reduced to fund a higher payout amount on the “new.” Generally the intention will be to keep total compensation the same, but to shift the emphasis to the new business a bit. This can be as simple as an increased commission rate for all new business during its first twelve months, funded by a reduction in the commission rate for existing business. This solves a above, b somewhat, and does very little to address c and d.
3. Split the compensation into a quota-based incentive for the existing business and a true commission on the new business. For the quota-based incentive on existing business, there may be a threshold below which no payout is earned (e.g., 80% of the quota), and dramatic acceleration for any over-quota attainment (e.g., double the target incentive at 120% of quota). For the new business, the payout should be from first dollar and perhaps it should accelerate over quota. In this case, business should count as “new” for the first twelve months, not just for the rest of the plan year. This approach solves issues a, b, c and d listed above; but it also undermines simplicity, makes it hard to know the comp value of existing business on a per-deal basis, and raises the stakes on setting reasonable and accurate quotas for both existing and new business.
There is not a perfect answer to this situation that will satisfy all stakeholders and be bullet-proof. But there are better and worse approaches, depending on your sales roles and your business model.
Wednesday, October 28, 2009
What expenses are normally covered for 100% commission sales people?
Assuming the sales people are dedicated to the company (full time, not selling complimentary products produced by a different company), then many companies offer reimbursement for business expenses based on a set policy. The eligible expenses may include mileage, car allowance, cell phone, office space, computer, internet connection at home and/or in the office, office supplies and services (receptionist, copy machine, conference room), insurance and other benefits, training, etc. And some companies do not offer any of these.
The right choice depends on the degree to which the company sees the sales person as a long-term commitment and partner vs. a way to get their offering to market quickly and affordably with as little risk as possible. Earlier stage companies tend to offer less reimbursement (guaranteed cost absorption) as they need to control their selling expense very carefully. They may know they can afford to pay 5% of revenue (for example, and percents may vary widely from that number) to get their offering sold - and they need to hold costs to that level. If that's the case, then a 5% commission makes sense, with no other compensation.
As the company grows and matures, they are likely to want the relationship to their customers to be as much with the company as with the sales person, and so they will want to be more directive about HOW things are sold, what tools are used, etc. As this happens, they will want to invest more in the sales person in exchange for some increased control over a more standard sales process and customer experience. It would be at this point that the variable pay may decrease and the guaranteed expenses may increase - so some expenses may be directly reimbursed, and a modest base pay may be added while the commission rate may actually decrease.
Then at further later stages of maturity, things may continue to change in the compensation plan to reflect the role of the sales person, the market position of the company, the company's business model and economic realities, etc.
The right choice depends on the degree to which the company sees the sales person as a long-term commitment and partner vs. a way to get their offering to market quickly and affordably with as little risk as possible. Earlier stage companies tend to offer less reimbursement (guaranteed cost absorption) as they need to control their selling expense very carefully. They may know they can afford to pay 5% of revenue (for example, and percents may vary widely from that number) to get their offering sold - and they need to hold costs to that level. If that's the case, then a 5% commission makes sense, with no other compensation.
As the company grows and matures, they are likely to want the relationship to their customers to be as much with the company as with the sales person, and so they will want to be more directive about HOW things are sold, what tools are used, etc. As this happens, they will want to invest more in the sales person in exchange for some increased control over a more standard sales process and customer experience. It would be at this point that the variable pay may decrease and the guaranteed expenses may increase - so some expenses may be directly reimbursed, and a modest base pay may be added while the commission rate may actually decrease.
Then at further later stages of maturity, things may continue to change in the compensation plan to reflect the role of the sales person, the market position of the company, the company's business model and economic realities, etc.
Monday, October 26, 2009
How do we pay a 100% commission sales person for the first few months of work? Is a draw a good idea?
I am assuming from your question that these new reps will be on 100% commission plans eventually (no base). So your question is how to structure the draw to give them some income while they fill their pipeline and get those first few sales.
To be specific enough to be helpful, I'm going to make some assumptions that will almost certainly be wrong for your roles, but you can substitute the right numbers to get your own answers. So let's assume your intended total earnings at the expected level of productivity for the new Inside role is $48k/year, which would be $4k/month. Let's also assume that you're working with a two month sales cycle so that you wouldn't expect a new rep to sell anything the first month; they might sell a little bit the second month; then by the third month they should have some real sales coming in, and really start to hit their stride in the fourth month.
If this were the case, I would recommend a guarantee designed to provide about 2/3 to 3/4 of target compensation. So let's assume it would be 3/4 of target compensation.
First month
Pay $3k as a guarantee (= 3/4 of $4k).
Second month
Assume they might close enough business to earn $1k (1/4 of expected eventual productivity), then pay $2k as a guarantee (= (3/4 of $4k) - $1k they should be able to earn).
Third month
Assume they might close enough business to earn $3k (3/4 of expected eventual productivity), then no guarantee is needed ( (3/4 of $4k) - $3k they should be able to earn = $0).
And from that point on, they are on the standard commission plan.
I suggest making this a guarantee rather than a draw. A draw is a payment advanced against future earnings. If you don't feel they could possibly earn enough to stay with you in the first few months, and if you treat any payments during those months as a draw, then they will start their productive period in arrears, owing the company money. It also gets really crazy to keep up with the calculations.
Some people make the draw non-recoverable, but won't pay any commission in excess of the draw unless the total calculated commission is greater than the draw. This actually incentivizes people to hold orders until they get past their draw period, unless they expect to spectacularly out-perform the draw amount.
Notice that the guarantee amount is less than the compensation level you feel is right for the role. So the message here is that the company is investing in the employee (paying for them to learn to sell and fill their pipeline) while the employee is investing in the company (working for somewhat less than their market value in anticipation of earning more when they are fully productive). But there is no disincentive to sell as much as possible as early as possible, as this will only add to earnings for the employee (and to sales for the company).
In this example, the company has invested $5k in paying a sales person who has not sold anything to earn that. It's a modest investment to start your sales person out feeling supported and eager to sell. However, the new sales person's success at mastering your offering and starting to fill that pipeline with good opportunities should be monitored closely in the first weeks and months to ensure that the guarantee "invested" has the promise of a solid return.
To be specific enough to be helpful, I'm going to make some assumptions that will almost certainly be wrong for your roles, but you can substitute the right numbers to get your own answers. So let's assume your intended total earnings at the expected level of productivity for the new Inside role is $48k/year, which would be $4k/month. Let's also assume that you're working with a two month sales cycle so that you wouldn't expect a new rep to sell anything the first month; they might sell a little bit the second month; then by the third month they should have some real sales coming in, and really start to hit their stride in the fourth month.
If this were the case, I would recommend a guarantee designed to provide about 2/3 to 3/4 of target compensation. So let's assume it would be 3/4 of target compensation.
First month
Pay $3k as a guarantee (= 3/4 of $4k).
Second month
Assume they might close enough business to earn $1k (1/4 of expected eventual productivity), then pay $2k as a guarantee (= (3/4 of $4k) - $1k they should be able to earn).
Third month
Assume they might close enough business to earn $3k (3/4 of expected eventual productivity), then no guarantee is needed ( (3/4 of $4k) - $3k they should be able to earn = $0).
And from that point on, they are on the standard commission plan.
I suggest making this a guarantee rather than a draw. A draw is a payment advanced against future earnings. If you don't feel they could possibly earn enough to stay with you in the first few months, and if you treat any payments during those months as a draw, then they will start their productive period in arrears, owing the company money. It also gets really crazy to keep up with the calculations.
Some people make the draw non-recoverable, but won't pay any commission in excess of the draw unless the total calculated commission is greater than the draw. This actually incentivizes people to hold orders until they get past their draw period, unless they expect to spectacularly out-perform the draw amount.
Notice that the guarantee amount is less than the compensation level you feel is right for the role. So the message here is that the company is investing in the employee (paying for them to learn to sell and fill their pipeline) while the employee is investing in the company (working for somewhat less than their market value in anticipation of earning more when they are fully productive). But there is no disincentive to sell as much as possible as early as possible, as this will only add to earnings for the employee (and to sales for the company).
In this example, the company has invested $5k in paying a sales person who has not sold anything to earn that. It's a modest investment to start your sales person out feeling supported and eager to sell. However, the new sales person's success at mastering your offering and starting to fill that pipeline with good opportunities should be monitored closely in the first weeks and months to ensure that the guarantee "invested" has the promise of a solid return.
Wednesday, October 21, 2009
Are claw backs legal when the account is past due?
Our small sales team is paid 100% commission on gross margin. Sometimes, we claw back commissions that were paid after the customer is past due and in collections, is this legal?
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I won't venture a legal opinion here -- and believe it is likely to vary from state to state. However, I will assure you that it is common practice to recover commissions paid in cases in which the company is not paid. To be sure you're covered legally, and that everyone knows what to expect, you would do well to document your intention to do that in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you'll be all set.
++++++++++++++++++++++++++
I won't venture a legal opinion here -- and believe it is likely to vary from state to state. However, I will assure you that it is common practice to recover commissions paid in cases in which the company is not paid. To be sure you're covered legally, and that everyone knows what to expect, you would do well to document your intention to do that in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you'll be all set.
Other ideas for sales measures other than hitting sales quota?
I'm looking for ideas in revamping our sales comp to include metrics and pay for items other than just meeting a traditional sales quota. Perhaps a bonus for a close rate of XYZ, for example. Any ideas are welcome!
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Our counsel is generally to pay for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside -- and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.
With that said, other great measures besides just sales/bookings/revenue generally have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others -- like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment. Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. But picking the right one is all about aligning the rewards with what is most important to the success of the business.
++++++++++++++++++++++++
Our counsel is generally to pay for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside -- and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.
With that said, other great measures besides just sales/bookings/revenue generally have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others -- like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment. Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. But picking the right one is all about aligning the rewards with what is most important to the success of the business.
Tips on putting together an incentive plan for inside sales
Any tips for putting together an incentive plan for "inside sales" employees? We are trying to get our employees into a "value-added selling" frame of mind (instead of price-point) and want to provide an incentive
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What type of inside sales are they doing? Do they qualify for the 7i exemption or are they non exempt employee? These questions must be answered because, if they are non-exempt, any incentive earned must be included in their hourly rate. If they are exempt, it would make it much easier to implement an incentive with less administrative costs. Assuming you conclude they are either exempt, or that the administrative burden if they aren't is "worth it," then here are a few tips for designing their incentive plans:
(1) Incentives are a great way to support an initiative to change behavior, but the rest of the initiative needs to be in place as well. This may include training, systems enhancements, coaching and mentoring, etc.
(2) If you really want to use incentives to motivate and excite, they need "carrots and sticks" to be part of them. Over time you will want to migrate base salaries down as a percent of target total compensation so that the target incentive must be earned in order for the employees to maintain market-competitive pay.
(3) The amount of pay at risk depends a great deal on the nature of their inside sales roles. Although it can be more complex than this, one simple division is between jobs that are primarily "inbound" and those that involve more aggressive "outbound" calling. If an inside seller mostly reacts to requests from customers and is primarily doing an order management function (perhaps with some ability to cross-sell or up-sell), then a relatively smaller percent of pay at risk (in the incentive) is appropriate. For outbound inside sales people who more strongly influence a prospect's decision to buy through their own creativity and initiative, more pay at risk (and more associated upside) would be a good idea.
(4) Beyond this, the basic principles of role-based incentive design apply, including:
- Pick measures that are linked directly to income generation for the company
(e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls)
- Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
- Design the plans with sales leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."
- Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite your inside sales people.
- As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.
+++++++++++++++++++++++
What type of inside sales are they doing? Do they qualify for the 7i exemption or are they non exempt employee? These questions must be answered because, if they are non-exempt, any incentive earned must be included in their hourly rate. If they are exempt, it would make it much easier to implement an incentive with less administrative costs. Assuming you conclude they are either exempt, or that the administrative burden if they aren't is "worth it," then here are a few tips for designing their incentive plans:
(1) Incentives are a great way to support an initiative to change behavior, but the rest of the initiative needs to be in place as well. This may include training, systems enhancements, coaching and mentoring, etc.
(2) If you really want to use incentives to motivate and excite, they need "carrots and sticks" to be part of them. Over time you will want to migrate base salaries down as a percent of target total compensation so that the target incentive must be earned in order for the employees to maintain market-competitive pay.
(3) The amount of pay at risk depends a great deal on the nature of their inside sales roles. Although it can be more complex than this, one simple division is between jobs that are primarily "inbound" and those that involve more aggressive "outbound" calling. If an inside seller mostly reacts to requests from customers and is primarily doing an order management function (perhaps with some ability to cross-sell or up-sell), then a relatively smaller percent of pay at risk (in the incentive) is appropriate. For outbound inside sales people who more strongly influence a prospect's decision to buy through their own creativity and initiative, more pay at risk (and more associated upside) would be a good idea.
(4) Beyond this, the basic principles of role-based incentive design apply, including:
- Pick measures that are linked directly to income generation for the company
(e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls)
- Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
- Design the plans with sales leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."
- Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite your inside sales people.
- As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.
Group commissions where all team members share in a commission on sales made
My company is considering instituting a plan where all team members would share in a commission on sales made. I'm looking for ideas - how is it structured, are all sales included in the group commission, etc.
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The key principle that comes to mind here has to do with how the sales are made. Do the team members depend on each other to be successful? If they do, for each sale, then a team incentive where they have a single team target and a single team actual result, all receiving the same payout, makes great sense. If each team member has his or her "own" sales, and also supports the effort of the team, then an individual sales goal and a team goal may both be indicated (usually with a higher weight on the individual goal).
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The key principle that comes to mind here has to do with how the sales are made. Do the team members depend on each other to be successful? If they do, for each sale, then a team incentive where they have a single team target and a single team actual result, all receiving the same payout, makes great sense. If each team member has his or her "own" sales, and also supports the effort of the team, then an individual sales goal and a team goal may both be indicated (usually with a higher weight on the individual goal).
Where do I get started? My new employer wants me to look at the sales comp plans!
One good place to start is with a book, and I recommend both "The Sales Compensation Handbook" edited by Stockton Colt and "Compensating New Sales Roles" by Colletti and Fiss. In addition, there is a very helpful course offered by World at Work, "Elements of Sales Compensation." And Cygnal will be offering classes in the fall as well in cities around the country. Sales compensation design is exciting and challenging, but it is high-stakes work. There are terrific ways to really create value for your company, as well as wrong answers that can create a disaster. If your company's challenges are significant, a consultant can help.
We are considering putting our Product Managers and Program Managers on comp plans. How should we go about setting it up?
A few key principles may guide you here:
(1) Be clear on how much and for what measures the managers involved can "move the needle," with a direct effect on the company's financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.
(2) Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don't want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.
(3) Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won't motivate much.
(4) Offer enough upside. If you are putting people in an at-risk pay
situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes -- it helps motivate everyone.
(5) Be sure the people in the role have the risk profile to find this
motivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are "coin operated."
(1) Be clear on how much and for what measures the managers involved can "move the needle," with a direct effect on the company's financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.
(2) Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don't want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.
(3) Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won't motivate much.
(4) Offer enough upside. If you are putting people in an at-risk pay
situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes -- it helps motivate everyone.
(5) Be sure the people in the role have the risk profile to find this
motivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are "coin operated."
Monday, October 19, 2009
Where are the sales comp plan samples?
Many people would like to find a book of sales plan templates -- but there's not one I know of. That's probably because it's sort of like asking for someone to provide a copy of their house plans for your consideration. It could be just the thing for you, but more likely isn't. There are so many variables, so many options -- usually many right answers for most situations, but also even more wrong answers.
There are principles, common industry practices, and a long list of common mistakes. And there's what has worked and what hasn't in your company. All these things, along with your current business imperatives and the role of the sales organization in executing them, will guide your plan design.
There are principles, common industry practices, and a long list of common mistakes. And there's what has worked and what hasn't in your company. All these things, along with your current business imperatives and the role of the sales organization in executing them, will guide your plan design.
What is the right comp plan for the top sales job?
For the top sales job we sometimes see a sales comp type plan, and sometimes a hybrid between the corporate executive plan and a sales type plan. Which of these two to use would depend mostly on what the sales leader is expected to do as the core role:
a. Run the sales team under the direction of company leadership with a focus on keeping the sales team recruited, coached, and productive
b. Work as a member of the company’s leadership team to set the company strategy, determine how best to address the market for the company’s offerings, and deliver both the needed growth and company financial results.
If most of the time and effort are focused on a. then it’s a sales type plan. If both, the 50/50 sales-type plan and company executive plan. And it’s rarely mostly b. unless there’s an EVP of Sales & Marketing with a VP Sales reporting in.
a. Run the sales team under the direction of company leadership with a focus on keeping the sales team recruited, coached, and productive
b. Work as a member of the company’s leadership team to set the company strategy, determine how best to address the market for the company’s offerings, and deliver both the needed growth and company financial results.
If most of the time and effort are focused on a. then it’s a sales type plan. If both, the 50/50 sales-type plan and company executive plan. And it’s rarely mostly b. unless there’s an EVP of Sales & Marketing with a VP Sales reporting in.
Tuesday, October 13, 2009
How should we pay sales people selling ongoing IT outsourcing services with monthly fees?
For people selling IT outsourcing services (the primary offering), the sales people would normally earn variable pay based on bringing in deals. The question revolves around both the right measure to be used and payment timing, so I'll address those separately:
The right measure/s:
The ideal measure for this type of business is the margin on the deal. Margin rewards sales people for selling profitable business. However, very few companies use this as it is hard to agree on the deal margin, and if cost overruns are frequent you can end up with sales people "helping" you manage the cost side of profitability rather than the price and value side. For these reasons, most use deal value, either total contract value (often abbreviated TCV) or annual contract value (ACV) to measure sales productivity. And generally you do want to pay more for larger deals, which would argue for a payout rate table (typically communicated as a commission). The actual amount of the payout per deal is a function of how much compensation you intend to deliver for at-goal performance and how big the goal is (comp / goal = rate).
Payment timing:
The principle here is that you want to finish paying the sales person for a deal at the point at which you want them to disengage and move on to focus on the next opportunity. So if you just want closed deals, you'd pay after signing. If you want closed deals with nurturing and attention through initial implementation, you might pay 50% at signing and 50% after the first check comes in for under-way monthly service. If you want the sales person staying in touch, finding ways to grow the relationship, etc., then you could pay some (20-25%?) at signing, and the rest over the life of the contract based on recognized revenue.
The right measure/s:
The ideal measure for this type of business is the margin on the deal. Margin rewards sales people for selling profitable business. However, very few companies use this as it is hard to agree on the deal margin, and if cost overruns are frequent you can end up with sales people "helping" you manage the cost side of profitability rather than the price and value side. For these reasons, most use deal value, either total contract value (often abbreviated TCV) or annual contract value (ACV) to measure sales productivity. And generally you do want to pay more for larger deals, which would argue for a payout rate table (typically communicated as a commission). The actual amount of the payout per deal is a function of how much compensation you intend to deliver for at-goal performance and how big the goal is (comp / goal = rate).
Payment timing:
The principle here is that you want to finish paying the sales person for a deal at the point at which you want them to disengage and move on to focus on the next opportunity. So if you just want closed deals, you'd pay after signing. If you want closed deals with nurturing and attention through initial implementation, you might pay 50% at signing and 50% after the first check comes in for under-way monthly service. If you want the sales person staying in touch, finding ways to grow the relationship, etc., then you could pay some (20-25%?) at signing, and the rest over the life of the contract based on recognized revenue.
Monday, September 28, 2009
What is considered "best practice" in how we would recognize and reward sales managers for covering open districts?
I think the question of appropriate arrangements for sales managers with open positions (/territories) needs to be handled differently in different situations:
For sales managers who are expected to keep their territories fully covered, maintaining a pipeline of candidates and connections, it makes sense to expect them to continue to produce sales out of an open territory, which would mean no quota adjustment, extra credit, etc. Their ability to meet their quota would almost certainly be impaired by an open territory, but then they haven't maintained a full staff - so some penalty is appropriate.
For sales managers who are not expected (or allowed) to hire staff to support an open territory, and who expect to fill the open position within a few months (3-12 perhaps), they could either cover the open territory using others from their team, or cover the open territory themselves.
If they cover the open territory using others from their team, then their team members should receive credit and compensation for the sales to the assigned opportunities (or zip codes) outside their territory, and the manager may or may not need to have a quota adjustment (depends on how long the condition is expected to persist).
If they cover the open territory themselves, then the manager could receive individual contributor type compensation for sales into that territory, but probably at a reduced rate (50% of that generally paid to individual contributors?), and perhaps a somewhat reduced total team quota (again depending on how long the no-hire situation is expected to continue).
For sales managers who are expected to downsize their staff until market conditions change (a year or more), reassigning territories among their team members to "absorb" the open territory is probably the right approach. The quota should be adjusted as needed to reflect the market conditions that led to this change and reasonable productivity expectations for the newly reduced team size.
For sales managers who are expected to keep their territories fully covered, maintaining a pipeline of candidates and connections, it makes sense to expect them to continue to produce sales out of an open territory, which would mean no quota adjustment, extra credit, etc. Their ability to meet their quota would almost certainly be impaired by an open territory, but then they haven't maintained a full staff - so some penalty is appropriate.
For sales managers who are not expected (or allowed) to hire staff to support an open territory, and who expect to fill the open position within a few months (3-12 perhaps), they could either cover the open territory using others from their team, or cover the open territory themselves.
If they cover the open territory using others from their team, then their team members should receive credit and compensation for the sales to the assigned opportunities (or zip codes) outside their territory, and the manager may or may not need to have a quota adjustment (depends on how long the condition is expected to persist).
If they cover the open territory themselves, then the manager could receive individual contributor type compensation for sales into that territory, but probably at a reduced rate (50% of that generally paid to individual contributors?), and perhaps a somewhat reduced total team quota (again depending on how long the no-hire situation is expected to continue).
For sales managers who are expected to downsize their staff until market conditions change (a year or more), reassigning territories among their team members to "absorb" the open territory is probably the right approach. The quota should be adjusted as needed to reflect the market conditions that led to this change and reasonable productivity expectations for the newly reduced team size.
Monday, September 07, 2009
Do sales incentives actually motivate people for the long run?
Regarding whether or not incentives actually help at all, the best piece I've read on the subject is Rewards and Intrinsic Motivation by Cameron and Pierce. It's dense and academic in tone, but I've read the whole thing and found that the key points relevant to sales compensation design from the book are the characteristics of effective rewards. According to Cameron's and Pierce's research, incentives and rewards are most effective when…
1) Used for the benefit of the employee (not just to create benefits for the employer)
2) Focused on challenging activities (not on activities that employee sales people already like to do)
3) Tied to specific reasonable, objective, and attainable standards of performance
4) Accompanied by celebration of significant successes by the organization.
In addition they note that, "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."
There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.
1) Used for the benefit of the employee (not just to create benefits for the employer)
2) Focused on challenging activities (not on activities that employee sales people already like to do)
3) Tied to specific reasonable, objective, and attainable standards of performance
4) Accompanied by celebration of significant successes by the organization.
In addition they note that, "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."
There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.
Monday, August 10, 2009
Are companies adjusting sales comp plans due to the slow economy?
From our experience, I would say that most companies are making some kind of adjustment due to the economy. If your expected total sales are down, you have several options that we've seen recently:
1. Reduce quotas and...
a. Hold commission rates constant (sales people would then earn less when they hit quota than they did when quotas were higher)
b. Raise commission rates (to keep sales people whole year over year)
2. Hold quotas constant, along with commission rates and...
a. Add earnings opportunities in the form of MBOs or SPIFFs to keep sales people whole and reward them for building for the future (training/preparation to sell complex products or improve selling skills, introductions to prospects who can't necessarily buy this year, but maybe next year,...)
b. Reduce the number of sales people so that fewer people cover larger territories and those remaining can actually have productivity and earnings levels similar to prior years (at a cost that is affordable to the company)
c. Make no changes and expect sales people to under-perform and under-earn, but be ready when the market comes back with sales people to serve your full market potential
Among our clients, we are mostly seeing 1.a. and 2.b. - with ample discussion of the other options.
1. Reduce quotas and...
a. Hold commission rates constant (sales people would then earn less when they hit quota than they did when quotas were higher)
b. Raise commission rates (to keep sales people whole year over year)
2. Hold quotas constant, along with commission rates and...
a. Add earnings opportunities in the form of MBOs or SPIFFs to keep sales people whole and reward them for building for the future (training/preparation to sell complex products or improve selling skills, introductions to prospects who can't necessarily buy this year, but maybe next year,...)
b. Reduce the number of sales people so that fewer people cover larger territories and those remaining can actually have productivity and earnings levels similar to prior years (at a cost that is affordable to the company)
c. Make no changes and expect sales people to under-perform and under-earn, but be ready when the market comes back with sales people to serve your full market potential
Among our clients, we are mostly seeing 1.a. and 2.b. - with ample discussion of the other options.
Monday, August 03, 2009
New Business vs. Account Management roles in Professional Services
In professional services, do you compensate differently in your sales plans for "new" business vs. maintaining an account to incent your best "prospectors" to develop new business? What are the best and worst elements of plans you have seen that do this?
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I'd say that your best course would depend on both the company strategy and the way you have defined your selling roles.
If your strategy is focused on penetration of existing accounts, then the sales you most value might be those in your current accounts (this tends to be true with mature companies who have some kind of relationship already with most of their key prospects).
For the majority of our clients, new business is very important. You'll have to be clear about what counts as "new" - a new "logo" (new company name...), a new buying entity (maybe a new division/location in an established customer could be counted as new), a new service offering (generally one that does not replace an older legacy service they have been buying). Generally "new" business (however you define it) takes more time and effort to win than renewal or penetration business, and for that reason you'll need to reward for it at a higher level in order to keep sales people focused on it.
Another approach successfully employed by companies with enough sales people to do this is to separate "Account Management" from "New Business Sales" so that different people/teams are responsible for those different selling activities. This may not be practical in a small sales force - but once a company achieves enough scale to operate this way it allows the focus of those who love the new business hunt to be where they do their best work, and those who love the longer-term relationships and more nurturing selling role can focus on managing and growing existing accounts. If you do end up splitting the role into Account Managers and New Business Hunters (sometimes called Sale Executives), you will probably want to have different pay plans for those two roles (e.g., quota bonus with a threshold and significant acceleration for over-quota performance for Account Managers; first dollar commission with lower quotas and less acceleration for New Business Sales).
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++
I'd say that your best course would depend on both the company strategy and the way you have defined your selling roles.
If your strategy is focused on penetration of existing accounts, then the sales you most value might be those in your current accounts (this tends to be true with mature companies who have some kind of relationship already with most of their key prospects).
For the majority of our clients, new business is very important. You'll have to be clear about what counts as "new" - a new "logo" (new company name...), a new buying entity (maybe a new division/location in an established customer could be counted as new), a new service offering (generally one that does not replace an older legacy service they have been buying). Generally "new" business (however you define it) takes more time and effort to win than renewal or penetration business, and for that reason you'll need to reward for it at a higher level in order to keep sales people focused on it.
Another approach successfully employed by companies with enough sales people to do this is to separate "Account Management" from "New Business Sales" so that different people/teams are responsible for those different selling activities. This may not be practical in a small sales force - but once a company achieves enough scale to operate this way it allows the focus of those who love the new business hunt to be where they do their best work, and those who love the longer-term relationships and more nurturing selling role can focus on managing and growing existing accounts. If you do end up splitting the role into Account Managers and New Business Hunters (sometimes called Sale Executives), you will probably want to have different pay plans for those two roles (e.g., quota bonus with a threshold and significant acceleration for over-quota performance for Account Managers; first dollar commission with lower quotas and less acceleration for New Business Sales).
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