Sales Comp 201 090426 0041

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Sales Comp 201

Application of the principles of

sales compensation plan design in tricky situations

Donya B. Rose

Managing Principal, The Cygnal Group, Inc.

2

You’ve got the basics, including…

• Understanding the roles for which you are designing

• Building an appropriate pay structure (total comp, pay

mix, and leverage)

• Using the right incentive measures and weights

3

But your leaders are saying…

“These commission rates were fine when we set them, but we

just paid Sam $50k for something he did three years ago, and

now he’s coasting…”

“I hardly know what our market will do next month – how can I

set a reasonable quota for the whole year?”

“We believe in simple plans, but it’s not enough to make the

sales goal – we need some focus on product mix as well. How

do we put that into the plans without separate quotas for each

product?”

4

But your leaders are saying…

“It takes a village to close some of our deals, but we simply

cannot afford to double-comp – how do we reward teaming

and collaboration without overpaying?”

“Sales are declining, and sales comp is declining a bit too, but

profits are declining faster. How do I adjust comp to fix it?”

“We only control the comp plans, not the quotas that come

from corporate – and they have been unattainable the last few

years. How do we keep our sales people motivated?”

5

“These commission rates were fine when we set them, but we

just paid Sam $50k for something he did three years ago, and

now he’s coasting…”

This typically happens with

– Commission-based deal level plans

– High prominence sales roles

– Expectations that sales remains involved through

implementation, or throughout an annuity

relationship

– Significant risk that actual deal value may be

different from value apparent at signing

– Significant time between signing and cash

Your plan has a tail

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Comp Design Principle: Cost of Sale vs. Cost of Labor

Commission Incentive

FormBonus Incentive Form

Mechanics A “piece of the action” is

delivered for selling – usually

communicated as a percent of

revenue or margin sold

The target incentive for the role is

earned for meeting the sales goal

set for each individual seller

Pay philosophy Cost of Sales: The sale has an

economic value to the company,

and we will pay a portion of our

profits for successful selling effort

Cost of labor: The sales job has a

market value, and we will pay a

targeted compensation level for

meeting sales goals

Appropriate

for . . .

Earlier stage companies, or

new product/service

introductions

Equal selling opportunity

across all assigned territories

Goal setting challenges

New account hunting roles

More mature companies/

markets

Strong brands, well-supported

sales organizations

Significant differences in

selling opportunity among

sellers

Solid goal setting processes

Retention/penetration roles


7



Introduction Growth Maturity

Time

Reve

nu

e

Cost of Sales philosophy is typical

Sales person “owns” the customer

(territory/account changes may be difficult)

Sales person may be heavily involved in

servicing and delivery

Sales person prominence in the selling process

is high

“Best” sales people are well-known in the

industry, very aggressive, and entrepreneurial

Cost of Labor philosophy is typical

Company “owns” the customer

Separate departments are in place for lead

generation, sales, fulfillment, collection

Sales person typically part of a larger selling

“team”

“Best” sales people are good at matching

customer needs to company offerings, great at

follow-through and relationship management, and

solid team players inside the company

8

Comp Design Principle: Payout Timing

Payment should be…

Made when the sales person has achieved a significant milestone

Made when the value to the company of the deal is known

Completed at the point at which the sales person should typically disengage and move on to the next sale

Subject to charge-back in case of unexpected reductions in the value of the deal to the company (non-collection, serious delays, volume shortfalls, etc.)


9

Comp Design Principle: Predictable Compensation, amount

and timing

Compensation plans are most motivating when…

They are linked in a straightforward way to measures that are clear and understandable to the sales person

They are paid as close to the sales person’s main success as practical

Payments are accurate and supported by clear and concise reporting


How many plans can you administer, report and pay

concurrently and accurately for any one person?

10

Benefits Risks

•Promise of substantial future

payouts can help keep reps

involved with deals, and help with

retention

•Reps are spending time on old

deals, not new ones

•Would you rather retain reps who

think they have great deals in their

future (than those who want to be

paid for past deals)?


What are your options?

A: Live with it

11



B: Taper or shorten the tail

How Benefits Risks

•Decrease the rate paid for later

years to keep the focus on this

year OR reduce the length of

time over which the rep

continues to be comped

•For all future deals, OR

retroactively

• Increase the first year or up-

front payment

•Pay better

aligned with

effort

•More risk this

year based on

this year’s results

•New deals may

become so

attractive that

relationships

aren’t maintained

(increased churn)

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C: Amputate

How Benefits Risks

•Pay all compensation

for a deal within a year

of closing

• Increase rates to keep

reps whole

•Buy-out of “old tails”

may be necessary

(usually at a discount)

•Clear focus on new

business

•Compensation is much

easier to administer (one,

or at most two plans

being maintained)

•Better ability to realign

territories, redirect reps

•After-care may

suffer if there are

implementation

or retention risks

for customers

•Reps may feel

freer to leave the

company

13

“I hardly know what our market will do next month – how can

I set a reasonable quota for the whole year?”

This can be due to

– Unstable markets

– Unpredictable competitive activity

– New product or service launches

– Product defects or recalls

– General economic uncertainty

Your crystal ball is broken

14


Commission Incentive

FormBonus Incentive Form

Mechanics A “piece of the action” is

delivered for selling – usually

communicated as a percent of

revenue or margin sold

The target incentive for the role is

earned for meeting the sales goal

set for each individual seller

Pay philosophy Cost of Sales: The sale has an

economic value to the company,

and we will pay a portion of our

profits for successful selling effort

Cost of labor: The sales job has a

market value, and we will pay a

targeted compensation level for

meeting sales goals

Appropriate

for . . .

Earlier stage companies, or

new product/service

introductions

Equal selling opportunity

across all assigned territories

Goal setting challenges

New account hunting roles

More mature companies/

markets

Strong brands, well-supported

sales organizations

Significant differences in

selling opportunity among

sellers

Solid goal setting processes

Retention/penetration roles


15

Comp Design Vocabulary: Performance levels


Productivity

LevelDefinition

Excellence 90th percentile performance (only the top 10% of your sales

people do this well or better)

Target The expected level of productivity for the on-target (not a

problem, not a star) performer

Threshold The level of productivity below which an employee’s

contribution is unacceptable for the long run

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Comp Design Principle:

Curve shape anticipates goal setting accuracy


The payout curve (blue) shows a typical performance distribution for individual contributor territory sales

people with good goal setting accuracy

Motivational traction from the compensation plan begins when the sales person sees that s/he is “in the

money” (at or above the first acceleration point = 70%)

The accelerated slope between target (100%) and excellence (130%) keeps the motivation high for over-

target performance

Deceleration over excellence recognizes the likelihood that performance beyond this level, while desirable, is

likely the result of a bad goal and/or a windfall, and perhaps at a lower level of profitability

0%

50%

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450%

0.00%

2.00%

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0% 50% 100% 150% 200%

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yo

ut

% T

arg

et

Inc

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tive

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rce

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of

Sa

les

Pe

op

le

Actual Sales % Goal

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0%

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Actual Sales % Goal

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Actual Sales % Goal

Comp Design Principle:

Curve shape anticipates goal setting accuracy, continued


As confidence in quotas decreases the curve flattens

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Actual Sales % Goal

Typical Quota Accuracy

Quotas Questionable

Quotas Inaccurate

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A: Flatten your curve

How Benefits Risks

Lower the stakes on quota

attainment

•Reduce deceleration below

quota

•Reduce acceleration above

quota

•Reduce or eliminate any quota

attainment bonuses

•Differentiate less

right at the point

of quota

attainment

•Acknowledge

uncertainty and

maintain

credibility

•Quota attainment

becomes less

important to reps

•Overpayment for

under-

performance


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B: Shorten the measurement period

How Benefits Risks

•Move from an annual

quota to quarterly

quotas (or even

monthly?)

•Announce the quota for

the coming

measurement period as

firm

•Announce quotas for

later measurement

periods as tentative, or

don’t announce yet

•Ability to adjust as market

conditions become

clearer

•Better overall quota

accuracy for the year

•Ability to continue to have

“quota teeth” in the comp

plans

•The quota setting

work has to

happen more

times per year

•The reps may

suspect you’re

going to see to it

that they can’t

over-achieve


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C: Adjust quotas during the year

How Benefits Risks

•Deploy your best quotas at the

beginning of the year

• If, as the year unfolds, it

becomes clear that quotas are

unattainable, adjust them

down

• IF you announce at the outset

of the year your intention to

review and consider a reset,

provide criteria for when it

would be considered

•A clear plan from

the start

•Some security for

the reps that a

reset will be

considered if

expectations

become clearly

unattainable

•The debate is

just postponed

•Reps may put a

lot of energy into

making their

case for reduced

quotas


21

“We believe in simple plans, but it’s not enough to make the

sales goal – we need some focus on product mix as well. How

do we put that into the plans without separate quotas for

each product?”

Mix is important when

– Different product deliver

different margins

– Production capacity needs to be fully utilized

– Volume commitments to suppliers are

important

– Product focused business units are

accountable for their results

Mix matters

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Comp Design Principle: Measure selection

Mix matters

Good measures are. . .

– Aligned with key accountabilities of the role

– Directly influenced by the sales person in the role

– Track-able based on existing systems (or systems that

can be created)

– Three or fewer in number

– Measured at the level at which results are generated

(individual, small team, division, etc.)

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What might be proposed

Mix matters

Incentive

Opportunity=

High Margin

Product

Sales Quota

Based

Incentive

+

Lower Margin

Product

Sales Quota

Based

Incentive

+

Important

New Product

Sales Quota

Based

Incentive

+

Regional

Profitability

Quota Based

Incentive

Weights at

Target

50% 20% 10% 20%

Incentive Opportunity =Total Sales Quota Based

Incentive+

Regional Profitability

Quota Based Incentive

Weights at Target 80% 20%

From this

To this

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What’s wrong with this?

Mix matters

Incentive

Opportunity=

High Margin

Product

Sales Quota

Based

Incentive

+

Lower Margin

Product

Sales Quota

Based

Incentive

+

Important

New Product

Sales Quota

Based

Incentive

+

Regional

Profitability

Quota Based

Incentive

Weights at

Target

50% 20% 10% 20%

– Too many measures

– Measure with < 20% weight

– Inaccurate quotas (the finer you cut them, the lower

your accuracy)

– For some sales roles: contrary to solution selling

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One approach: Product breadth multiplier

Mix matters

Incentive

Opportunity=

Total Sales

Quota Based

Incentive

xProduct Breadth

Multiplier+

Regional

Profitability

Quota Based

Incentive

Weights at Target ------------ 80% ------------ 20%

( )

Product Quota

Attainment

Multiplier on Total

Sales Quota Based

Incentive

All three >= 95% 1.1

All three >= 85% 1.0

At least 1 < 85% 0.9

Modify ranges and

rules depending on

how exactly quotas

should be attained

Modify multipliers

to change degree

of emphasis on

product breadth

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C: Solve it with product focused sales roles

How Benefits Risks

•Assign product overlay

specialists to support sales

people in selling the most

challenging, complex or

new products

•Rep quotas should increase

in anticipation of their

increased productivity from

this support

•Help sales people

learn and

succeed with the

more difficult

products

•Keep all the

comp plans

simple

•May be cost-

prohibitive in smaller

organizations

•May disadvantage

some product lines

based on quality of

overlay reps

Mix matters

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“It takes a village to close some of our deals, but we simply

cannot afford to double-comp – how do we reward teaming

and collaboration without overpaying?”

This may be an issue when…

– Product or technical specialists are

vital in defining requirements or configuring

the deal

– Decision makers are in different parts of the

organization/world (corporate, divisional)

– Channel partners are involved

It takes a village

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Comp Design Principle: Use of team measures

Mechanics

For a team incentive, a measure is defined for the entire team, and all members share

equally in the reward generated by the team’s performance

Appropriate when . . .

– Team membership is well-defined

– The team is small enough that each person feels s/he can make a meaningful

difference in team results

– Team results can be measured reliably

– Members of the team depend on each other to sell

Not appropriate when . . .

– Team members are linked only by reporting relationships (not shared effort on

shared accounts or opportunities)

– The only real reason is to share the upside (“pooled lottery ticket”)

Note that team measures may be combined with individual measures when team members

back each other up, as in many Inside Sales teams.

It takes a village

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A: Layered quota/ layered credit

How Benefits Risks

Each participant in a

sale receives full quota

and full credit for the

sale (or “their” piece, e.g.

Product Specialists take

only their product slice)

•Strong

encouragement for

participation of

multiple sellers in an

opportunity

•Clear message

regarding

expectations

communicated via

quotas

•Difficult to model

selling costs in

relation to sales

productivity by

product or sales team

•Special care must be

taken to ensure the

team size is

appropriate for the

opportunity

It takes a village

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B: Finder’s fee

How Benefits Risks

Bonus paid for leads

turned over to another

seller resulting in closed

deals over a specified

size

•Easy to model,

communicate and pay

•No downside for

bringing in another

seller

•Can motivate

behavior to sell

products not needed

by the customer

•Difficult to predict

selling costs

It takes a village

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C: Credit splits

How Benefits Risks

Credit for all sales

is divided among

participating team

members, with total

credit adding to

100% of actual sale

value

•Easy to model and

anticipate selling costs

in relation to results

•Opportunities will tend

to be handled by the

smallest effective team

•Disincentive to team

with others due to

anticipated reduction in

sales credit

•Expectations regarding

degree of teaming are

not communicated via

quotas

It takes a village

32

“Sales are declining, and sales comp is declining a bit too, but

profits are declining faster. How do I adjust comp to fix it?”


– The business is maturing and

the offering is becoming more of a

commodity

– Product with very different margins may

relieve the same quota

– Challenging quotas and market conditions

are combined with sales person control over

discounting

Shrinking profit

33

Comp Design Principle: Choose the right measure

Type of Measure Use when . . .

Volume Sales people have little to no control over pricing

Different products and customers with the same volume have similar

value to the company

Revenue Sales people have little control over pricing

Different products and customers deliver similar profitability as a

percent of sales

Profit Sales people influence profitability via product mix and/or pricing

The company is comfortable with sales people knowing at least relative

profitability of products

Profit can be measured reliably at the sales person level

Market share Market dynamics affect all providers in the market similarly so that the

size of the market is not the direct result of effective selling

Market share can be measured reliably and frequently

Some of the common measures in sales compensation plans

Shrinking profit

34

Comp Design Principle: The lower your margins, the more

likely you should be goaling in margin dollars, continued

Shrinking profit

0%

20%

40%

60%

80%

100%

35


A: Make profit a minor plan component

How Benefits Risks

•Carve out 20% - 30% of the target

incentive and assign a profit goal

•Assign it at the level at which it can

be reliably measured (sales rep,

region, business unit)

•Provide helpful reporting so reps

understand how they influence

profitability

•Limit upside for over-goal

performance on primary component

unless the profit goal is achieved

•Begins the

process of

focusing reps

on profit

•Requires good

profit

performance

before

leveraged pay

is delivered

•May still

allow reps to

ignore

profitability

and remain

comfortable

Shrinking profit

36


B: Move the primary measure to profitability

How Benefits Risks

Set sales

goals and

measure

results in

terms of

profit

(usually

gross

margin)

•Aligns sales compensation

directly with value created

for the company

•Requires sales people to

focus on the ways they

influence profitability

•Sales people may try to

manage the cost side of the

profit equation

•Sales people know a great

deal about the operating

model, which might be

shared outside the

company

•Sales capacity may be

squandered in arguments

about profit calculations

Shrinking profit

37


C: Use a profitability proxy

How Benefits Risks

• Create a new sales

crediting “currency”

that increases credit

for more profitable

sales (and reduces

credit for less

popular sales)

• Restate history in the

new currency to help

with the transition

and goal setting

• It is not required that sales

people know the cost of

products, or even that they

know the new currency is

profit-based

• Sales people will focus on

the sales that provide the

most credit and comp,

aligning them with the

business goals

• Sales credit will not match

any income statement

value, and so cannot be

validated easily at an

aggregate level

• The initial measurement

period will be a bit

disoriented due to the new

currency

• Can feel more complex to

sales people than straight

sales (top line) measure

Shrinking profit

38

“We only control the comp plans, not the quotas that come

from corporate – and they have been unattainable the last few

years. How do we keep our sales people motivated?”


– “Corporate” mandates a goal,

and requires that it be fully

deployed to the sales team

– Sales leaders have a belief that

higher quotas create more sales

– The compensation levels required to attract

talent aren’t “affordable” for the true

productivity expected

Unattainable quotas

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Comp Design Principle: Lessons from behavioral science

Unattainable quotas

Incentives and rewards will be most effective when…

Used for the benefit of the employee(not just to create benefits for

the employer)

Focused on challenging activities (not on activities that employee

salready like to do)

Tied to specific reasonable, objective, and attainable standards of

performance

Accompanied by celebration of significant successes by the

organization

Reward systems that are discretionary, subjective, or based on pleasing the people in

charge are often seen as unfair and coercive. What is “good” today may not be good

enough to earn a reward tomorrow.

*Judy Cameron and David Pierce, Rewards and Intrinsic Motivation, c 2002

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One Idea: Shift the curve to pay the target incentive < 100%

0%

50%

100%

150%

200%

250%

300%

350%

0% 50% 100% 150% 200%

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Actual Sales % Goal

Most People >= Quota

Most People >= 90% Quota

Unattainable quotas

41


A: Shift the payout curve

How Benefits Risks

•Rearrange tiers in

the payout table so

that market

competitive pay is

delivered at the

expected

performance level

•Continue to publish

performance against

quota

•Allows full deployment

of mandated quota

•Delivers market

competitive pay to most

people

•May over-pay for the

sales function vs.

business model

assumptions

•More challenging to

design, document

rationale, and explain

forecasted comp

costs

Unattainable quotas

42


B: Adjust the target incentive

How Benefits Risks

•Reduce the official

target incentive to

the level the

business feels is

affordable for

expected median

performance

•Use best practice

curve shape

(accelerate at new

reduced quota)

•Achievable quotas

provide realistic basis

for assessing

performance

•Most people earn the

target incentive

•Plan design and

modeling are simplified

•Sales leaders may be

hesitant to

communicate the

reduced target incentive

•Management may balk

at deploying less than

the full quota and/or

adding sales staff to

supply adequate

coverage

Unattainable quotas

43


C: Switch to a commission

How Benefits Risks

• Devise commission rate that

deliver market competitive

pay at expected productivity

• Communicate the plans

using commission tables

without quotas (tiers defined

by YTD sales, for example)

• The plan designs can

be somewhat

independent of quotas

• Some sales leaders

feel a quota provides a

“stopping place” and

that no-quota plans

create more sales

• Modeling the cost of

comp under different

scenarios can be

complex

• Quota-less plans may

be disorienting to sale

people and sales

leaders

Unattainable quotas

44

About The Cygnal Group

The Cygnal Group is a consulting firm specializing in sales compensation plan design. We are based in Chapel Hill, NC and serve clients headquartered all over the U.S., and even some in Europe. Our practice spans large and small companies, public and private, global and locally focused.

Clients include very large companies (e.g., Home Depot, Comcast), mid-sized companies (e.g., Valassis, Misys, Thomson), game changers (e.g., Red Hat, Sensus Metering), and smaller companies (e.g., GXS, Prometric), and even some companies hiring their first sales person (e.g., Meritech, Magnet Street).

Donya Rose is the Managing Partner of The Cygnal Group. She speaks regularly to audiences of Business, Sales, and HR leaders, and has contributed to numerous articles on the subject of compensating the sales force. Prior to founding The Cygnal Group, Ms. Rose was a consultant in the Sales Rewards practice at Towers Perrin.

Learn more about our services, and read our sales comp blog at

www.cygnalgroup.com

Contact us at

[email protected]

929-933-2290

Sales Comp 201 090426 0041

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Transcript of Sales Comp 201 090426 0041