Target Your Sales Compensation Plan For The New Economy
As we approach the new year, most companies are wondering not only how to grow their businesses in the current economy but also how to compensate and retain their sales talent who will help them get there. While we’ve watched corporate revenues and profits drop over the past twelve months, companies have been struggling to make their sales organizations more effective amid a difficult selling environment.
One of the big challenges has been keeping the sales organization engaged and selling while they’re earning little for their efforts. In terms of pay, the typical sales compensation plan has approximately 40% to 50% of pay at-risk, meaning reps earn only 50% to 60% of their normal compensation if they don’t reach their minimum performance targets. In a normal year, about 60% of the sales population performs at-quota or above, earning target or above target compensation for their results. Over the past twelve months, organizations on average have 42% of their reps at quota or above, leaving the majority of the sales organization underwater on pay.
This drop in performance and resulting pay has led to a mad scramble for levers to improve sales productivity, approaches to find other ways to motivate and retain the sales force, and methods to reduce quotas without bankrupting the business. We’ve found that the visionary executives are prevailing, as they see this period as an opportunity to re-calibrate their sales strategies and sales compensation programs. We see some common themes among these visionary leaders as they use their sales compensation programs to keep their organizations motivated.
Keep the Sales Organization Engaged. With reps below the earnings range in their compensation plans, a challenge for some organizations is keeping reps’ heads in the game and focused on the sales process. Some reps and sales managers we talk with have surrendered to the situation and are “waiting the storm out” until the economy improves. This probably isn’t the best approach for driving business in the near-term. Those who are winning the game are finding alternative methods to motivate the organization. For example, often seen as a frivolous perks, reward and recognition programs have become a tool to drive short-term performance despite overall lagging quota performance. As one executive in a major business services company put it, “We can move sales performance ahead incrementally, when reps may otherwise have given up on reaching their overall quotas. Our reps will kill for a t-shirt and recognition in front of their peers.”
Monetary and non-monetary rewards can be used for more specific performance targets, even if the overall growth objective is unattainable by the organization. Using this method, organizations may set goals such as winning the next ten closed deals for a team or booking an incremental million dollars of revenue by the end of the quarter. Non-monetary rewards are a powerful alternative in expense-constrained environments. They offer an intrinsic reward and “bragging rights” that won’t get rolled in to paying the electric bill like a small cash reward might. Most organizations find that non-monetary rewards are motivational and visible to the organization and draw upon reps’ desire to compete and win. These types of rewards can range from quality of life bonuses for the family, like home cleaning or meal services, to recognition visible to the rest of the sales organization such as car leases or car key lotteries that involve a number of potential winners.
Align to the Sales Strategy. At the core of a high-performance sales compensation program are a well-defined sales strategy, sales process, and sales roles. The coverage model refers to the combination sales resources such as field sales, telesales, and partners necessary to pursue the sales strategy. During the recent economic changes, most organizations have shifted their sales strategies to stay on top of customer needs and evolving sales opportunities. These changes may include improvements to the customer message or value proposition around return on investment or alterations in sales roles such as shifts to hunter or new customer acquisition roles.
Each sales role should be defined in terms of its critical success factors, role descriptions, and competencies. Confirm whether you base pay, salary and incentive mix, upside potential, and performance measures aligned with each job’s most important roles or whether these components reflect a job that has changed over time. Determine the correct relationships between these components based on each job’s role in the sales process, sales cycle, account type, product focus, sales strategy, and management responsibility. A fresh look at your sales strategy may reveal some glaring misalignments that can make a big difference in motivation.
Move the Mighty Middle. Take a look at the distribution of quota performance in your organization- the percentage attainment of quota at the rep level. Odds are you’ll see a large group of reps hovering just below quota. While many organizations invest their effort in developing the high performers, there are huge gains to be made by improving the performance of the mighty middle of the organization, meaning those performers between 80% and 99% of quota. Moving the performance of this group a few incremental percentage points can have a larger impact on the results of the business than even a dramatic percentage gain from the high performers. Shorter term performance targets and a look at the motivators in the plan can be used to coax this group along the incremental five percentage points of quota attainment that will deliver a much-needed impact on your business. For example, a high tech organization found that it was actually de-motivating its reps for selling one-time deals if they were below 90% of quota. The incremental pay was minimal compared to the effort and the rep would be assigned the annualized value of that quota for next year, making it more desirable to pass on the sale until next year. This was a lost opportunity for the business and the rep. A change in mechanics and associated policies made these opportunities much more attractive for the mighty middle and aligned their motivations more closely with the company.
Over Reward the Top Performers. A successful sales compensation plan should disproportionally reward the top performers. Make sure you’re rewarding the top performers at the expense of the low performers. While this may sound extreme, successful sales compensation plans drive a sales culture by rewarding those who deliver results. In terms of upside potential (the portion of target incentive pay available to your top performers) evaluate whether top reps are earning appropriately more than average performers. Top reps should have an opportunity to earn one to three times the incentive of an average performer. Using precious compensation dollars for performance below a minimum performance threshold depletes financial resources that could be put to better use in the organization and encourages low performers to hang around long after their time. If your most loyal reps are your lowest performers, you’re probably paying too much on the low end of the performance curve. Question whether your low performers paid too much, resulting in a misallocation of funds to non-producers and putting your top talent at risk of competitive poaching.
Know Your Desired ROI and Follow a Proven Process to Get It. Sales executive often question their return on investment in sales compensation. We often hear questions like, “How do I know what I’m getting back from our compensation plan?” or “What should we expect from the comp plan?” The answer to this ROI question lies in articulating the connection between your sales strategy and your sales compensation plan and the influence the plan can have over executing that strategy. Rather than describing ROI simply in terms of compensation expense versus sales results, look at it also in terms of attainment of stated product objectives, market objectives, and sales culture objectives. Key to creating these connections to ROI is following a proven process to evaluate and design the plan. Your sales compensation design process should flow from the strategic decisions around sales roles and the sales strategy to the required design which includes target pay levels, salary and target incentive mix, upside earning potential, performance measures, mechanics, and quotas. Evaluate your plan qualitatively and quantitatively in each of these areas to understand your gaps. Then design and refine the plan using the same components to model your financial returns in a strategic manner.
Examine your plan relative to today’s environment. Keep it motivational to reps and align it with the sales strategy. With shifting customer needs, sales messages, and sales strategies, applying a structured approach to evaluating the performance of your plan and implementing some creative ideas can re-engage reps and better target the plan to the current economy.
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