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With fall on the horizon, it is time to think about your company’s sales compensation plans for 2021. This will likely prove to be a more challenging prospect than past years due to the historical events of 2020.

Indeed, the Conference Board has estimated that Gross Domestic Product will contract by 7% for the full year 2020. And according to the WorldatWork’s 2020 Sales Compensation Programs & Practices Report, only 30% of participating businesses say that half of their organization’s sales teams will hit quota in 2020.

Photo courtesy of Pixabay

Most of us recognize that the nation’s economic woes will not go away easily or quickly and that we are living with a much higher degree of uncertainty and risk. In this environment, your sales compensation planning requires thoughtful consideration to motivate and retain your top salespeople. Here are several important steps you can take:

1) Establish a Sales Incentive Design Team

Include representatives from sales management, marketing, finance, and human resources. All members have significant interests in a successful sales organization. Sales management is, of course, responsible for implementing the program and reporting back on what they learn in the field. Marketing brings the linkage between corporate strategy and sales strategy.

Finance is concerned about the cost of sales compensation and return on investment, calculating as a percentage of revenue over time. The finance department also will evaluate the numbers of sales personnel related to quota attainment. Human resources will contribute to the design of the plans reward system so that the sales positions are motivated. They will also want to match hiring with role requirements.

2) Align Sales Incentives with the Company’s Business Strategy

Your sales compensation plan does not exist in a vacuum. It needs to be closely aligned with an organization’s business and marketing strategies and goals. Also, the plan must address both internal and external forces impacting the sales job and selling practices.

3) Calibrate the Plans to the Various Sales Roles

A common practice for many companies is to set the same percentage of base salary as the target performance for all jobs involved in the sales process. This is a mistake.

Instead, carefully analyze the role each sales position has in the overall sales process. Both impact and influence on the final customer decision must be considered. This analysis then becomes the input to determining the right pay mix for each job.

Photo courtesy of Pixabay

4) De-Risk Plan Design

In a high-risk business climate, it makes sense to reduce the risk and leverage in incentives. This means less upside and downside and less incremental payout per unit of incremental performance. You can achieve this by implementing:

  • Flatter payout curves, and
  • Lower maximum and minimum payouts. For example, adjust target payout ranges of between 50% and 200% to between 25% and 150%.

5) Set Fewer Goals

The WorldatWork’s Compensation survey finds that organizations are simplifying their incentive plans. On average, organizations are using up to three performance measures. Those using just one performance measure increased by 71%. Other strategic performance metrics are also more in play, such as penetration of existing accounts, acquisition of new accounts, and building account relationships. Since the pandemic has made customer relationships more complex, the need for more frequent communication and feedback with customers is more important than ever before.

6) Automate Sales Compensation Processes

A surprising number of organizations still manually conduct Sales Performance Management (SPM), 32% according to the WorldatWork survey. Of course, the use of third-party SPM greatly enhances accuracy and is time saving. In addition, using third-party Customer Relationship Management (CRM) helps you to organize sales activities and communicate more easily with your sales team, a practice employed by 45% of survey respondents.

Sales Management in Tough Times

In today’s challenging economic environment, sales managers who help their teams develop alternative ways to approach and build relationships with their customers and prospects will be more successful. Invest in training and mentoring programs to develop leadership skills, behavioral competencies, and organizational awareness.

About Lappley & Associates

Lappley & Associates is a management consulting firm advising manufacturers, service companies, utilities and non-profits about how to get the maximum return from their compensation programs and deliver on their organizations’ strategic vision.

Services include: Reward Strategy Development; Executive Compensation; Incentive Compensation; Salesforce Compensation; Base Salary Structures; and Market Pricing.

Contact Us

To discuss your sales compensation concerns, contact Tim Weizer at tjweizer@gmail.com or (312) 479-6411 or Neil Lappley at nlappley@lappley.com or (847) 921-2812.

A lot has been written about the interests, attitudes, and behaviors of Millennials (those born between 1981 and 1996). Among the facts that have been reported, primarily by the Gallup organization, these stand out:

  • Millennials will account for 50 percent of the US workforce by the year 2020.
  • Only 50 percent plan to be with their current company one year from now.
  • Only 29 percent are engaged at work.
  • At the 2016 Sales Compensation Conference, research done by Michael Ahearne, a professor at the University of Houston, suggests that Millennial salespeople are more interested in a leveraged compensation plan than their traditional peers

Based on our research and experience, we believe the following should guide the treatment of Millennials:

  • Millennials want to grow in a job that fits them.
  • They enjoy more periodic feedback than other generations.
  • They have a firm desire to be considered for a “fast track” promotion if their performance warrants.
  • Millennial salespeople want to be rewarded for their results.

All of this signals the importance of rethinking how to recognize and reward superior performance of an increasing population of Millennials in the sales organization.

So, what are some of the ways to consider?

Possible Approaches

Following are four possible approaches. Understandably, careful analysis will need to be undertaken to ensure any new approach or program can be aligned with a company’s overall culture and reward strategies.

  1. Career Pathing. To better retain Millennials offer individual career growth paths that spell out how a salesperson of any age can advance in the organization. According to reports, Credit Suisse, the international financial services company, did just that and believes that its 1% increase in retention can save $75 to $100 million a year.
  2. Outstanding Achievement Award. For all salespeople who clearly demonstrate stellar achievement, for example candidates for “The President’s Club”, offer them a new, end-of-year special bonus that can be used to support their outside-work deep interest. Examples could be a local community group (Boys & Girls Club) or the local alumni chapter of the college they attended.
  3. Enhanced Engagement Opportunities. To better engage Millennial salespeople, offer all employees some new or enhanced opportunities to participate with company executives. One example is providing structured networking with senior company executives (Sales VP, CFO, CMO, VP Operations, VP HR). Video chats, such as an “Ask the CEO” forum, might also be considered.
  4. More leverage in the Compensation Plan. Move, for example, from an 80/20 compensation plan for sales people to a 70/30 plan.

Survey Your Salesforce

Not sure your Sales Compensation Plan or talent management programs need a major change to accommodate Millennial salespeople?

Consider evaluating where you stand today by conducting a Salesforce Survey with the entire salesforce asking for the recipient’s age category and opinions on a number of topics, e.g., career pathing, training, current compensation pros and cons, and incentive leverage. The survey results can offer a baseline snapshot of today’s situation. From there, discussions can be started to lay a forward path.

If you would like to discuss this topic or your other salesforce compensation needs further, please contact Tim Weizer at tim@salescne.com or 312-479-6411 or Neil at nlappley@lappley.com. Also feel free to share this article with anyone who might be interested.

In his 2015 book Misbehaving, Nobel Prize-winning economist Richard Thaler addresses the concept of loss aversion and its impact on decision making. “Roughly speaking,” he asserts, “losing something makes you twice as miserable as gaining the same thing makes you happy.” For this reason, given the choice, people tend to put more energy into reducing losses than actively pursuing gains. In a sense, he says, “Loss aversion operates as a kind of cognitive nudge,” the inversion of no pain, no gain.

Humans Aren’t Rational

A professor at the University of Chicago Booth School of Business, Thaler won the Nobel Prize in Economic Sciences for his groundbreaking work in behavioral economics. Among his greatest contributions: challenging the notion that we are always rational beings and pioneering the idea that often we act in ways inconsistent with economic theory. In the spirit of transparency, I am also an alumnus of the Booth School.

So, why does loss aversion matter to salesforce compensation?

Consider a recent story in The Wall Street Journal reporting on a new compensation plan for Bank of America’s Merrill Lynch unit. Critics of the plan argue instead of rewarding brokerages for growth, the plan punishes them if sales targets aren’t meant.

The plan emphasizes cross-selling of Bank of America’s retail-bank products, rewarding brokers with more new clients and referrals to other parts of the bank. So, while revenue growth still matters, asset and liability growth matters more for broker compensation.

If minimum sales targets are not met, the average broker generating $1 million in revenue could lose up to $10,000 from their monthly paycheck, a 2% drop in pay. Conversely, brokers meeting the new targets will receive an increase in pay.

Bank of America executives say the new compensation plan is designed to boost shareholder value and retain Merrill Lynch’s top performers for the long term.

Carrot or stick: What works best?

The Merrill Lynch example illustrates an important issue every VP of Sales confronts: what works better to motivate more sales people to equal or exceed their assigned sales quota? Do penalties or rewards spur the most asset growth? How do companies move the performance distribution of salespeople to the right of the status quo?

The loss aversion principle offers food for thought. Let’s say, for example, that the salesforce incentive plan has four components. One of them is product mix with a weighting of 25% and an on-target payout of $X. The salesperson is paid the $X upfront when the year’s plan is communicated. At the end of the year, if the product mix quota was not achieved at 100%, then the $X would be clawed back.

Under this scenario, there will certainly be individual winners and losers after a major change in compensation structure like the one Merrill Lynch has made. That’s why a good deal of time and attention should be paid to developing and communicating any new sales compensation plan.

Sum and substance

Are you considering changes or new incentives for your salesforce compensation plan? Often change is advisable when a new corporate strategy is being implemented or to attract and retain the right kinds of sales people. Experimentation and adjustments that align with changing market forces is beneficial.

If you would like to discuss this topic or your other salesforce compensation needs further, please contact Tim Weizer at tim@salescne.com or 312-479-6411 or Neil at nlappley@lappley.com. Also, feel free to share this article with anyone who might be interested.

It’s Review and Planning Time

In this issue of the Salesforce Alert newsletter, my colleague, Tim Weizer, presents some key questions that need to be answered in reviewing a salesforce incentive plan.

The Sales compensation review and planning season is upon us. The focus on sales compensation is understandable as selling is, by far, the most expensive part of strategy implementation for most companies.  Five times the expenditures on all media advertising; 20 times larger than the money spent on all online marketing and advertising in 2013.

Here are some questions to ask.  Focusing on these areas can help determine whether you have areas of concern.

#1.  IS THE BIG PICTURE CORRECT?

In today’s fast paced world, quality often is not given enough emphasis over a quick answer.  A holistic approach is needed to ensure that proper time and thought are given to plan design and any potential unintended consequences. As one CEO remarked that the company took its time to ensure “…we didn’t have sales compensation becoming disconnected from the overall financial result of the business.”  The CEO wanted to ensure that the company was paying for the right strategic results.

The basic premise is that a sales compensation plan does not exist in a vacuum.  It needs to be closely aligned with the company’s business and marketing strategies and goals.  Also, the plan must address both internal and external forces impacting the sales job and selling process.

#2. ARE THE PLANS PROPERLY CALIBRATED TO THE VARIOUS SALES ROLES?

Setting the same percentage of base salary as the incentive for target performance for all sales positions is often evidenced in plans.  This may be a serious mistake.

Careful sales job analysis should be undertaken to properly reflect each position’s impact and influence on a sale.  This analysis then becomes an important part of determining the right pay mix per sales role in your company

#3.  DOES THE CFO HAVE CONCERNS?

When the design allows too many sales reps to max out on incentive earnings, the CFO may be anxious about the inherent risk in the plan’s design or to “pushing” fourth quarter sales into the first quarter of next year.   While 60 percent of the salesforce should achieve quota or above, a recent survey stated that only 4 percent, on average, maxed out.  If your result is significantly higher, then multiple analyses should be conducted to determine the reasons (e.g., Quota and territory design analyses).

#4.  IS THE PLAN UNBALANCED WITH TOO MANY MEASURES?

While communicating management’s goals to the field, too many measures or objectives result in the measures receiving little or no attention.  Four should be the maximum number of incentive measures.  This statement is backed up by a Hay Group survey of 700 companies that reported 85 percent of respondents had 4 or fewer incentive measures. Also, any single incentive measure or objective accounting for less than 15 percent of the targeted incentive opportunity is simply wasted. A good idea would be to review the actual percentage of your salesforce that achieved 100 percent or more of quota per measure.

#5.  ARE THE PLANS TOO RISKY?

To quickly increase sales, a company may decide to provide a higher leverage of incentive to total cash or an uncapped incentive opportunity versus the past design.  This action may produce significant risks in terms of cost control, uneven production scheduling, or even upset key customers due to delivery issues.

#6. WILL ASC 606 IMPACT THE PLANS?

New Revenue Recognition Standard requirements go into effect on December 15, 2017 for public companies and the end of 2018 for private companies.  Companies in industries such as Aerospace and Defense, Automotive, and Engineering and Construction are likely to be impacted given their use of long-term contracts. Take a moment now to ask your CFO if ASC 606 impacts your sales compensation plans.  If so, find out what data the CFO needs from you to address this topic. Also, investigate if the timing of incentive payments may need to be adjusted.

To learn more or discuss your sales compensation concerns, please contact Tim Weizer at tim@salescne.com or Neil Lappley at nlappley@lappley.com.