By Beth Carroll, The Cygnal Group

The six steps in incentive plan design are:

1. Define your business objectives & sales strategy
2. Define your selling roles and determine incentive plan eligibility
3. Establish total compensation,  pay mix & leverage for each role
4. Determine the appropriate performance measures & weights
5. Develop the plan mechanics, including optimum pay frequency, and
6. Develop a thorough and comprehensive implementation plan.

We covered steps 1-3 in last months’ article, so if you missed last month’s article, make sure you go back and read it first, then come back to this article.

4.  Determine the appropriate performance measures & weights:  One of the best moments I have with any client is the “ah ha” moment when they realize they can do far more with an incentive plan than they ever realized — when they realize that it’s not a question of mutually exclusive choices, but of crafting a system that incorporates different parts of their business strategy.  The first taste of this comes with the selection of performance measures.  A performance measure must be objective, relevant, controllable, and measurable.  The best measures are often found on your income statement or in your business plan or sales strategy.  Common performance measures in logistics are:  gross margin dollars (net revenue), revenue, line-haul, operating income, gross margin percentage, number of new customers, number of loads, safety, on-time percentage, driver retention, closed leads, renewed contracts, and customer satisfaction.

The Design Team’s task is to consider for each role which are the best performance measures for that role.  The answer should be different for hunters vs farmers, and for managers vs line staff.  You want to start by casting a wide net and thinking about all the potential measures for each role. Some will not work because you can’t measure them (customer satisfaction often falls into this category), others will not work because they are not controllable by the individual and may need to be pushed up to higher levels of management (operating income is a good example, as it may be fine for a branch manager, but probably not for a broker). 

The second step is to consider scope.  Scope is the level of measurement selected, such as individual, team, region, or company.  When you combine scope with performance measure, you have created your first plan element.  Once you have tentative list of elements,  you need to assign weights to them.  The weights must add to 100%.  For example, if your broker role has a target incentive of $20,000, you might use 3 elements  weighted as follows:  individual gross margin 50%, individual new customers acquired 30%, region gross margin 20%.  A broker would earn $10,000 for individual gross margin at target performance, $6,000 for new customers, and $4,000 for region gross margin.  What if you’d also really like to include gross margin percentage and on-time percentage, but they aren’t important enough to assign a full piece of the incentive plan to?  You can use these types of measures as qualifiers (a minimum requirement for payout under another element) or modifiers (a way to increase or decrease payout under another element), but be careful not to over-complicate the plan.  The KISS rule most definitely applies to sales compensation design.  Try to limit your weighted elements to no more than 4, with no more than 1 modifier or qualifier on the most important elements, and no less than 20% weight per element.

5.  Develop the plan mechanics, including optimum pay frequency.  Once you have your elements selected and weighted, you need to figure out how you are going to calculate pay (mechanics) and how often you are going to deliver pay (frequency).  There are two fundamental approaches to calculating incentive compensation, and the terms used to describe them are widely misused and misunderstood.  They are “commission” and “goal-based bonus.”  When you are talking about a sophisticated incentive plan design, these terms mean something very specific.  A commission is a way to deliver incentive pay that pays a piece of the action, such as a % of gross margin or % of revenue.  Commission-based plans pay based on volume alone – those who sell more make more.  The other end of the spectrum is a goal-based bonus based plan, which pays for goal attainment.  A goal-based bonus is not subjective or arbitrary, but instead is tied to attainment of a pre-defined goal.  (We strongly discourage the use subjective bonuses, by the way).  If Sally has annual volume of $500,000 and Joe has annual volume of $250,000, then under a commission-based plan Sally will make 2x a much as Joe.  However, many managers will understand that perhaps Sally has 2x the volume because she has been given house accounts or contracted business, or something that makes it unfair for her to earn 2x as much as Joe (who may be working his fanny off building a new line of business or breaking into new lanes).  In this case a goal-based bonus plan would level the playing field.  Under a goal-based plan, Sally would earn the same amount at 100% of her assigned goal as Joe would earn at 100% of his assigned goal.  Yes, if you were to calculate the rate (pay divided by volume), they would have different payout rates, but by structuring the plan this way you are acknowledging that some business is harder to get than others, and paying accordingly.  You can also combine the two approaches and use a goal-based commission, whereby the rate paid below goal is less than the rate paid above goal. A good rule of thumb is that a commission approach will work if everyone is starting from the same place and has the same opportunity (this doesn’t mean a commission is the right approach, just that it is a reasonable alternative to consider).  If there are inherent differences in assigned accounts, in ability, or in support, then you might want to consider integrating a goal-based bonus approach.

One of the nice things about using multiple elements in a plan design, is each element can have a different pay frequency.  In the example above, you may choose to pay the first element monthly, the second element quarterly, and the third element annually.  The main considerations for pay frequency are alignment with business cycle and amount of pay delivered.  If the annual target for an element is $1,200 then you probably don’t want to pay monthly as the amount after tax would hardly be enough to go out to dinner.  You want to be sure the check received will be meaningful.

6.  Develop a thorough and comprehensive implementation plan.  You don’t want to go through all the trouble of developing a great incentive plan only to have no  one understand it, so be sure to allow plenty of time to communicate (over and over) the new plan design.  These steps show a typical communication plan:

1.  High level power point presentation to the managers (review their plan first, and then explain their staff’s plan)

2.  High level communication to the staff as a group (one off communications only lead to misinformation).  Ask them questions and have them reiterate key parts of the plan back to you. 

3.  Provide plan documents (see my article in the March Logistics Journal for more info on plan docs), so they have the full legal wording necessary to understand and abide by the plan rules.  Give them a chance to ask questions in a one-on-one setting.

4.  Give them quota or goal sheets which show how much pay is earned at different levels of performance.

5.  Track their performance throughout the pay period, there should be no surprises.

6.  Give them individual performance reports to go along with their incentive checks so they understand exactly why their pay was what it was.

These steps for plan design are the outline, but it is only a starter map, as the combinations of elements and mechanical design choices are truly limitless, which is what makes designing plans so much fun and why there is truly no correct answer to the question “what is the right plan design for a broker in the 3PL industry.” The only right answer is the one that is right for you.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com For a free 20 minute consultation about your specific compensation challenges, submit a request at www.cygnalgroup.com/logistics.  Beth will respond on a first come basis to the first 10 inquiries.

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

By Beth Carroll, The Cygnal Group

I often tell my clients that the good news about incentives is they work…but the bad news about incentives is…you guessed it, they work. What this means is you need to be very careful how you design your incentive plan or you just might end up dealing with some unexpected consequences, and possibly paying out more than you intended, or worse, getting no measurable return (or negative return!) for dollars you are spending.

There are many books written on the topic of sales compensation and most of them are long, technical, and have examples that are not especially relevant to the logistics industry. In this two part article you will learn the basics necessary for developing well-thought out incentive plans for logistics companies. There are six high level task categories for incentive design, and they should be tackled in this order (it is easy to get the cart before the horse, and start talking about pay frequency or commission versus bonus BEFORE you’ve even established your business objectives, but this can lead to confusion and yelling among the design team members, so it’s best if you just take it one step at a time):

1. Define your business objectives & sales strategy
2. Define your selling roles and determine incentive plan eligibility
3. Establish total compensation, pay mix & leverage for each role
4. Determine the appropriate performance measures & weights
5. Develop the plan mechanics, including optimum pay frequency, and
6. Develop a thorough and comprehensive implementation plan.

I will discuss the first three in this article. Steps 4 through 6 will be in next months’ Logistics Journal.

1. Define your business objectives and sales strategy. You don’t start off on a trip with no idea where you are headed, nor should you develop an incentive plan without an idea of what you want it to accomplish. An incentive plan is a powerful tool that should accomplish far more than simply delivering pay to your people. Spend some time with your leadership group developing a clear business plan, with defined objectives, and then figure out the appropriate sales strategy to help you accomplish these objectives. For some logistics companies this may be targeting large contracted business relationships, whereas for others is may be maximizing volume on low margin commodity freight. The sales strategy for these two extremes is of course, quite different, and would require a different skill set (and incentive plan) for the types of reps going after the business.

2. Define your selling roles and determine incentive plan eligibility. Once you have your sales strategy defined, you need to determine what roles will best support this strategy. What are the characteristics of these roles – are they primarily hunters or farmers? Are they selling transactionally where they are providing a low cost solution to a customer who wants minimal hassles or are they selling consultatively where they are crafting a custom solution to suit a particular business need? The transactional hunter has a very different profile (typical van freight broker) than the consultative farmer (the account manager for a multi-million dollar outsourced logistics contract) and they should not have the same incentive plan. You may have a large game hunter who finds the multi-million dollar account but who then hands it to the account manager to grow and develop. These also are different roles. One of the most frustrating things for sales people is to not have a clear understanding of what their role is and what is expected of them, so this is an absolutely crucial step in the process of developing incentive plans. As for eligibility, a common mistake in logistics companies is to attempt to develop incentive plans for everyone in the organization. Customized incentive plans are a powerful tool that must be carefully managed. They take money, time, and effort to get them right. I’ve seen too many companies burn too much of each in an attempt to develop and calculate customized incentives for all of their people. Customized incentives should be used only for roles that have a direct and measurable impact on business results. If you find yourself trying to pay someone for accomplishment of something that really doesn’t impact the bottom line – stop! If you find yourself trying to pay someone for something they have no direct impact on or which is not measurable – stop! Customized incentives should be used for these types of roles in logistics: broker, assistant broker, dispatcher, load coordinator, driver or carrier manager, sales or branch or terminal manager, team leader, operations manager, outside and inside sales rep, and account manager. Generally, with few exceptions, other roles should be on a corporate plan which payouts out annually based on overall company results.

3. Establish total compensation, pay mix and leverage for each role. Here’s where the TIA survey comes in very handy. By matching your defined roles to the roles in the survey, you can determine how much (salary plus incentives) you should be paying at 100 percent performance. Some companies establish a philosophy of market 50th for base salary, but market 75th for total compensation. This strategy would help attract and retain top performers. Your business objectives should help inform your compensation philosophy. Pay mix is the amount of pay coming from salary, and the amount of pay coming from incentives as a percent of total compensation. A 50/50 pay mix means equal amounts come from salary as from incentives. For most farmer-type roles, the pay mix should be skewed more toward base salary (70/30 or 80/20, for example), whereas most hunter-type roles should be skewed more toward incentives (40/60 or 50/50, for example). While role plays an important part in this decision, so does company philosophy. Some companies are by nature more aggressive than others, while some are more team oriented. More aggressive means more emphasis on incentive pay. More team oriented means more emphasis on base salary.

Leverage is the amount of upside. It’s what happens when someone does a really good job. Typically you want there to be more upside the more pay is at risk. As a general rule of thumb, plans with 80/20 pay mixes have 2.0 leverage (2 times the target incentive is earned for a really good job), whereas 50/50 pay mix plans may have 3.0 leverage (3x the target incentive is earned for a really good job). These are not hard and fast rules, but guidelines. What’s most important is relativity within your company. If your 80/20 plans have 1.5 time leverage, then maybe your 50/50 plans will only be 2.5 times. Lack of leverage is the NUMBER ONE mistake being made by logistics companies. If you use a straight commission, by definition there is no leverage. Someone must double their volume to double their pay. This is next to impossible. Likewise, any quota bonus plan that pays 101 percent of incentive at 101 percent performance is doing the exact same thing, and it’s incorrect. The ratio should increase above 100 percent performance to 1.5, 2.0 or greater multiples, so that for example, 103 percent of incentive is paid out at 101 percent of performance. But be careful – you can’t continue this forever. You will need to decelerate the payout curve at some point above goal or you could end up paying out far more in incentives than you ever intended.

Next month we’ll tackle the more technical aspects of plan design: selecting performance measures and giving them weights, developing mechanics (commission versus quota bonus, tiers or linear, quota-based commission, etc.) and setting payout frequencies (monthly, quarterly, annually – and how these can be different for different parts of the plan) and developing a thorough implementation plan so your people understand their plan and can make positive changes to better your results and their pay.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

by Beth Carroll, The Cygnal Group

The joke goes that the majority of incentive plans are drawn up by the company president and sales director hastily over cocktails and written on a napkin.  While most incentive compensation plans have a bit more thought put into them than this, there is a kernel of true beneath the folk-lore, and the place this is most often evident is in the plan document — the piece of paper which is given to the employees to explain how they are going to be paid.

The risks of having poorly documented incentive compensation plans range from your employees not understanding the plan and, therefore, not being motivated by it (leaving your sales director scratching his head as to the lack of results, and possibly his lack of job!), to legal battles with former employees who are claiming they are owed back incentive pay due to vague, inaccurate, or misleading wording in the plan document.

At a minimum, a well-written plan document must have the following components:

1. Plan Overview: This part describes the plan objectives, tells who is eligible, gives the time frame the plan will be effective, tells what the target incentive amount is at 100 percent performance, and lays out the various elements of the plan, their weights, their pay frequency and calculation timing, and their performance period.
2. Element Details: This section thoroughly explains each plan element or component, and details the method used to calculate results (e.g., “Gross Margin is calculated by subtracting the cost of purchased transportation services from the customer payment excluding adjustments for discounts and fuel surcharges”).  Wording must be precise to prevent misunderstanding.  Include commission rates, commission tables, bonus payout tables, or any other information that will enable employees to quickly and easily calculate their incentive payments.  Be sure to also document any qualifiers that must be met before pay will be earned (e.g., “minimum gross margin percent must be 10 percent to earn incentives under this measure”). If modifiers are part of the plan, include them in the plan document at this point as well (e.g., “if your on-time  percent falls below acceptable levels, your incentive for the performance period will be reduced by 50 percent”).  Include information about any quotas that will be used to determine pay, and provide a calculation example so the employees can follow it step-by-step.
3. Plan Policies and Practices: This is the very important legal disclaimer section that is often completely omitted.  Things to include in this section are policies about payment when an employee transfers, is on leave, or is terminated.  Preparing this plan document section will force you to think about how you would handle incentive payouts in each of these cases before they happen which could save you a lot of money after they happen.  Also be clear about when incentives are earned. Are they earned when a load ships, is delivered, is invoiced, or is when it is paid?  If an employee terminates and a load that shipped while the employee was active is paid after termination, will that employee still be entitled to a commission on that load?  Check with your lawyer on this, as local laws governing commissions vary.

Also include disclaimers that the incentive plan is not a guarantee of employment, that management has the right to modify the plan at any time and for any reason, with or without notice, and that management may adjust sales credit and/or payout in its sole discretion to preserve fairness to the company and the employee.

Credit splitting and adjustments must be clearly outlined either here or under the pertinent Element Details section.  If you have not documented your policies in these two areas, now is an excellent time.  Consider the situation if two parties work the same load, handle the same customer, cover for each other when one is on vacation or out to lunch, etc.  Also, what happens if there is a major adjustment after you’ve already paid the incentive? What about bad-debt write-offs?  Is there a cut-off point beyond which a load will no-longer be eligible for incentives (e.g., must be paid within 60, 90, 120 days)?  The list goes on.

If there is any possibility of collusion or kick-backs, either between your staff and customers or carriers, or among your staff, be sure to include a clause that such behavior will result in immediate termination.  Include a confidentiality clause, and a funding clause that allows management the right to suspend payment on the plan if overall business conditions are unfavorable (although we recommend using this clause as a last resort only; if it is invoked for reasons other than impending insolvency, then you have a disincentive plan rather than an incentive plan).

Finally, review the whole Plan Policies and Practices section to be sure your intentions are accurately and unambiguously stated; if you do not state your intentions clearly, your ex-employee will likely make an interpretation in his/her favor, and this could land you in court.

Once your plan document accurately reflects your intentions to the best of your ability, have it reviewed by your legal counsel. It will be seen in many jurisdictions as a contract, and is worthy of a legal review. While your lawyer’s contribution is important, you may want to consider reminding him or her that this is supposed to be a motivating and exciting document, understandable by the eligible employee, and confining the “legalese” to the final section to the extent possible.

The thought required to develop each of these sections will result in better plan designs, will prevent costly challenges, and will help ensure your employees understand how they will be paid under the plan. A well-written plan document will help ensure your well-designed plans focus sales effort on the results your business needs.

For a free plan document template to get you started, go to www.cygnalgroup.com/logistics and provide your name and email address in the contact box and we will email you a template within 1 business day.

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

By Donya Rose, The Cygnal Group

“You get what you pay for.” If you pay for behaviors, you’re very likely to get them; if you pay for results, you will improve the chances of getting the needed results significantly.

To be more specific, your company will be best served if the measures in your sales compensation plans are directly linked to the company’s income statement. The most common measures of this type are sales and gross margin on either revenue or bookings. Other measures that correlate highly with generating profit for the company are volume and cost management type measures.

The necessity for focusing variable pay in sales compensation plans on “hard” financial measures comes from the following key principles of incentive design, which, taken together, all but require it:

1. Pay at risk: Pay at risk means that sales people who do not earn the target incentive will not be paid their market value. For example, a typical sales person may earn in base pay only 60% of what she would likely have earned elsewhere doing similar work. This element of risk is one of the keys to maximizing the motivational value of the incentive plan.
2. Upside: In addition to at-risk pay, most sales compensation plans also offer “upside” or over-market pay to those who exceed expectations. Without the upside, it would not be sensible for a sales person to seek or accept at-risk pay. Just as when investing, people choose a “risky” stock only if there’s a real chance that it could outperform the more conservative stocks for an exciting upside. Similarly, sales people who are willing to “bet on” their own ability to be successful seek and accept risk in their compensation plan in exchange for the opportunity to earn above their market value if they can outperform expectations. For our example sales person with 60% of her market value delivered as base pay, 40% is delivered in the incentive at target, and if she achieves top performance (90th percentile performance), she could double that 40% so she is earning 140% of her market value.
3. Self-funding: In most companies, the budget for the sales team is based on the compensation at target per person. The affordability of that budget is determined based on the annual operating plan for the business, which includes some expectations about the productivity of the sales team (how much they will sell, of what kind of product/services, at what pricing/profitability). It is important to the health of the business that sales compensation costs move in alignment with profitability so that any over-budget payment made to the sales team is funded out of over-plan profits generated by their productivity. In this way, any upside paid to the sales people is clearly “worth it” to the company.

A More Straightforward Approach
A behavior-based sales compensation plan risks inviting manipulation and does not align with the results-based necessities of running a business. In a company with a variable pay plan for sales people in which 50% of the target incentive was a traditional commission on sales and 50% was in a bonus paid at year-end based on behaviors, total compensation was very steady for each sales person over several years in spite of significant fluctuations in performance against quota. Sales leaders were adjusting the behavior-based bonus to offset the sales commissions, paying those with high commissions a lower bonus, and those with low commission earnings a higher bonus.

When asked about this clear pattern in the payouts, sales leaders said, “He didn’t need a big bonus last year since he did so well with his commissions.” And for a different sales person with low commissions and a high bonus the explanation would be, “She worked really hard but the sales just weren’t there, so we’re recognizing all that hard work in her bonus.”

The inclination of many sales managers is to use flexible behavior-based compensation plans or manipulate the objectives or the evaluations to generate the payout they feel is needed. While these sales managers may have been trying to retain the talent they had in place, the design of the compensation plans was not serving the sales people, their leaders or the business well. If it was possible to have an underperforming year and still be a “keeper,” and still possible to have a terrific year but not be worthy of significant upside in the total variable pay delivered, then the pay mix for the role was inappropriately incentive-rich.

To correct this problem, the company moved more of the compensation into the base pay, eliminated the behavior-based bonus, added slightly to the commission at target, and adjusted the payout curve shape to recognize the difficulty in setting accurate quotas. With these changes in place, the results-based incentive plan generated payouts that were generally seen as fair by sales leaders and sales people. The new plans also helped to improve the focus on quota accuracy by the sales leaders, and resulted in a higher percentage of sales people meeting and exceeding quota.

Sales results are why we hire and manage a salesforce, and rewarding sales people for results is the most effective way to ensure that the company’s investment in the sales organization yields the expected return.

By Beth Carroll, The Cygnal Group

Incentive plan measures must be both objective and quantifiable, such as “Total revenue sold in the performance month,” or “Number of new customers with more than $10,000 in margin.” Conversely, performance plan measures can be subjective and qualitative, such as a person’s cooperative, leadership or communication skills. Because so many elements differentiate a successful sales representative from an unsuccessful one, it is critical to create two sets of performance measures: one for the incentive plan and one for the performance management plan.

Performance management is sometimes viewed as a vehicle for delivering salary increases and, therefore, not applicable in a sales environment that doesn’t offer base salaries. This automatic dismissal of performance management might be premature, however. Even if salespeople are on a 100% variable pay plan, a performance review system could be used to provide a foundation for promotions or retention programs, especially in tough economic times.

One challenge of linking sales incentive pay to qualitative “performance” measures may be that a top-performing sales person as measured by your sales incentive plan would not score highly on a subjective performance review. Often, top salespeople are not inclined to be team players. Company leadership will need to determine how important the more subjective qualities are for the long-term health of the organization and focus the performance plan accordingly. If a poorly reviewed sales person continues to receive high incentive payouts and internal accolades, the performance review system is ineffective.

Solve this problem by linking the performance review process and the sales incentive plan through one of two common methods. The first is to rethink your base salary strategy for your salesforce.

If your reps are currently 100% variable, consider adding a small salary in lieu of a draw (the odds are high that your draw is actually acting like a salary anyway, especially if it is non-recoverable). Also, consider making the salary adjustable based on merit. Then, you can really put some teeth into your incentive program by making your target incentive pay a percentage of the base salary. In this way, annual salary increases also will increase the amount of pay earned under the incentive plan. Conversely, a sales person who is not scoring well in the performance review process will see his or her incentive pay stagnate. A word of caution on this approach, however: if salary increases are given primarily for tenure and not merit, it is common to find seasoned salespeople earning a higher incentive payment at below target performance than a new salesperson with a lower base salary who achieves over-target performance.

A second method for linking sales incentives with performance management is to make performance review scores a modifier to one or more elements of the sales incentive plan, with the effect of increasing or decreasing the amount of pay earned under one of the incentive plan measures. For example, the following table could serve as an annual performance review modifier for an illustrative $10,000 calculated year-end payout:

It is almost always necessary to make this linkage on a part of the incentive plan that is paid annually, as very few companies find it practical to conduct performance reviews more frequently. If the majority of pay is delivered on a monthly basis, then an alternative to an annual modifier would be to put in a “hurdle” or qualifier that is tied to a recent performance assessment. Most companies only use this for extreme circumstances, such as when an individual is under a short-term “warning.” The qualifier could have the effect of reducing the amount of incentive pay earned until the warning status has been removed.

Successful companies do not rely on their sales incentive plans alone to drive the required business results. Strong managers and a solid performance review system are the keys to balancing the immediate productivity imperative with the long-term importance of building a sales team that reliably produces results.

By Beth Carroll, The Cygnal Group

“I just don’t understand why we aren’t seeing higher growth! The incentive plan should be highly motivational (it’s 100% variable, after all) and I want everyone to make a ton of money under the plan, but it seems like some of the reps are content where they are.” – Mike Fouts, President, CRST Logistics

The words may be slightly different, but the theme is the same from presidents to front-line sales managers – “why aren’t we getting more growth from our salesforce?”

When faced with this problem, Mike Fouts believed that in large part the lack of growth was due to something amiss in the compensation plan. What Cygnal Group and CRST have learned over the past six months highlights the truism told by every sales compensation consultant to every client – compensation can only go so far. There will always be factors to consider and address when seeking to improve growth. Role clarity is one of the most important factors (and unfortunately, most often neglected) that should be resolved prior to developing a new compensation plan.

The most crucial task for successfully driving growth in any organization is to provide role clarity to the sales reps. This goes far beyond what is typically found in an HR job description and must really address the nature of the selling role. Without accurate knowledge of both parts of the equation: how management wants the salesforce to sell and how the salesforce is actually selling, it will be impossible to design an effective compensation plan.

A rep’s perception of the company’s sales strategy and business objectives is never 100% aligned with that of the management team. Nor is their role, as executed, exactly what management thinks it is, whether it is the amount of time spent with clients versus on administrative tasks (it is always much higher on administrative tasks than expected) or time spent cold calling versus revisiting existing accounts (it is almost always less time spent cold calling than expected). Reaching out to the salesforce through surveys, interviews or focus groups can help identify the gaps so steps can be taken to close them.

Once the gaps have been identified, it falls on management to determine how best to change the reps’ behavior, and then communicate this vision to the reps. Surprisingly few companies actually take the time for this exercise. Listed below are some sample questions that will increase role clarity for both the sales reps and the management team. When reviewing each question, remember the objective is not to simply answer the question and move on, but to have a robust dialog (from different organizational perspectives including sales, finance, human resources and marketing) out of which will come a clear role profile.

1. Is the product being sold as a single product or a bundled solution?
2. How complex is the product being sold? What specialized skills or training are needed to sell the product?
3. How long is the typical sales cycle? Are there key milestones along the way that are tracked by the organization?
4. Who is the primary buyer – is it a single person or a group or team?
5. What is the customer perception of the seller? Is he/she a service provider or a trusted advisor?
6. What will be the customer’s primary decision factor: price or value?
7. What is the typical deal size? (Define this in a relative sense within the organization rather than in any absolute sense, as what is a large deal for one company may be a blip to another.)
8. Where should most revenue come from — new or existing customers? Where does it come from now?
9. Should the rep try to make the most from each deal, or instead focus on building long-term, highly profitable (and stable) customer relationships?
10. How much involvement should the rep have after the sale? What type of involvement (service, installation, collections, complaint handling, billing, etc.)?
11. How many active customers or prospects should an average rep have? How many do they actually have? What’s the reason for any difference?
12. How much time should the reps spend cold calling? How much time do they actually spend cold calling?

Many organizations believe that to have full role clarity, each sales rep must have a unique role and must be compensated uniquely as well. This results in an over-abundance of roles and compensation plans. There is a point of diminishing returns when trying to sub-divide roles into the most precise functions, and one of the keys to successful compensation plan design is understanding when you have reached that point.

Once the roles have been defined, grouping them by selling method can be helpful in understanding when compensation plans can be similar and when they must be different.  The most common distinction used between selling roles is “Hunter vs. Farmer.” Combining a hunter and farmer generally gives you a farmer when organizations typically need more hunters, but there are times when it simply is not practical to have separate roles covering the same territory. In this case, a hybrid role is a practical necessity, but it is even more crucial to go through the 12 questions above and answer each from both hunter and farmer perspectives. The answers will likely be different, and the rep needs to be clear about which hat he/she is wearing and when.  Likewise, the compensation plan developed will need to reflect the proper proportion and put the right emphasis on each role.

By Donya Rose, The Cygnal Group

“What part of ‘the deal’ with your company really drives your focus and keeps you working hard?” Do you know how your sales people would answer this question? If your sales compensation plan is working, it is likely to be at the top of the list, but you might also find that sales people value:

• Recognition programs
• Award trips
• Leadership and sales skill-development opportunities
• Promotion potential
• Points-based/merchandise rewards.

Whether your focus is purely on designing the cash-based sales compensation plan or broader motivation and rewards, it is important to know what your sales people value and what your reward systems drive them to do.

When designing a reward program, consider the following questions:

Are we primarily trying to support our core sales goals with added motivation, or are we focusing on different objectives not in the core sales compensation measures?

Many recognition programs reward people for achieving or surpassing their annual goal. Most sales compensation plans do the same, providing handsome rewards for those who exceed productivity expectations. An alternative approach would be to focus a non-cash reward program on a new product launch, regional profitability, growth over the prior year or large account penetration while the core sales compensation plan and cash rewards maintain the focus on top-line quota attainment.

How many of our sales people do we expect to participate in the non-cash reward?

Posh trips and top recognition make the best stories, but they are often so costly on a per-winner basis that the number of participants must be managed carefully.  A leading media and marketing services company selects up to 10% of sales people as top achievers each year, along with select performers from other functional areas. This enables them to put on a memorable event for those who have performed exceptionally during the year. Similarly, a global software company has just finished documenting their new recognition plan in which they expect 5% of the sales staff to participate.

Companies that intend to be more inclusive, with a higher percentage of sales people “winning,” may offer a more modest trip, a points-based reward or a stronger emphasis on recognition than a costly event or prize. However, the broader reach of such programs can affect more people and do more to improve results. On the other hand, in many salesforces more than half the sales come from the top 20%; in those companies an approach that strongly motivates the top 20% can significantly enhance overall results.

Is our trip mostly a reward or is it mostly a development event?

In the case of reward trips, companies differ significantly in how they expect winners to spend their time during the trip. Some companies choose to offer a trip that is primarily a reward trip, with a few meetings included to recognize the winners and share the company vision. For others, the trip is about leadership development, building relationships across geographic regions and getting to know third-party partners and their offerings better. For these companies, the trip is a working meeting that provides an important opportunity for top sales people to get to know top company leadership, have their voices heard and be noticed in anticipation of future leadership opportunities.

Will anyone outside of the salesforce be eligible to participate in non-cash rewards?

For reward programs with a strong recognition component, functional areas that contribute to the success of the sales team are often included as well. In some cases, the reward program is company-wide and sales people who demonstrate top performance receive recognition alongside others in other functional areas. In other companies, the reward program may be sales-focused with awards to non-sales employees based on nomination from the sales team for excellent support of the sales effort.

Donya B. Rose, Managing Principal, The Cygnal Group
Marieke A. Pieterman, Sales Compensation Consultant, The Cygnal Group

If you are responsible for compensation policy and planning for your company, the current economic situation may present you with an unprecedented opportunity to contribute to your company’s success. Across the human resources department there will be opportunities to support the company’s senior management team with reviews, analysis, and re-evaluation of the organization’s staffing levels, compensation packages, and benefit programs.

Specifically within the compensation area, companies are reviewing merit pay increases or salary freezes, reducing bonus payouts or eliminating them entirely, adjusting sales compensation payout levels, and perhaps even reducing the amount of stock option distributions. Every aspect of “the deal” between employer and employee is being evaluated and is fair game for review and negotiation. Those working to perform such analysis will benefit from careful preparation and documentation of their work.

We have compiled a few tips, all of which are good practices in any economy, but which are especially critical in today’s environment.

• Use cell notes to document planning assumptions. These will help 3 / 6 / 9 months to a year from now when it becomes necessary to re-trace steps and assumptions to figure out which scenarios were presented, based on what assumptions, which ones were approved, which ones were not approved, and which ones were identified for revisions.
• Use parameters rather than hard-coded values. For example, if the organization is considering reducing the incentive payouts with an “across the board factor of X%,” be sure to set up “X%” as a parameter in the spreadsheet, then have all formulas that need to “know” that value refer to the single cell in which it is entered. Examples of value to set up as parameters are those that define to what level you might decrease incentive payouts, reduce the merit budget, or cut headcount. These can be easily set up in a single field, with formulas referring to that field; this facilitates quick changes even during a meeting so that various scenarios can be evaluated dynamically without wasting precious time.
• Assume the role of “secretary” of the project team and document religiously. Keep a journal / log of conference calls and meetings. Document and date conference calls and meetings, noting who was present on the call, the options that were presented, and the final decisions that were made and who were the final decision makers. This will become critical in the midst of “corporate amnesia” when many look to Human Resources to be that unbiased “collective memory” for the organization during these difficult decisions. It will also help when developing the employee communication piece around these topics, helping to identifying the reasons why decisions were made and other alternatives were rejected.
• Find out the business need behind the data or analysis request. Ask questions and restate until the “question behind the question” becomes clear. Then ask a better question and answer that one as well. From the vantage point of human resources, the entire organization is visible, along with data and insights that offer a more “holistic” perspective and could potentially offer a more systemic analysis and solution to the current problem.
• Avoid a sense of dismay. We are embarking on unmarked territory in many cases, and big changes are afoot. Break big challenges into manageable tasks and stay focused on execution. Organizations across the globe are making difficult decisions in areas that they have never had to face before in their careers. Embrace the challenge during these tough economic times –no one knows for sure what’s next.

What we have before us is nothing less than an opportunity for greatness – so be ready. This could be the moment that proves the true value of the human resources function.

There are few topics in any small business that cause as much angst as employee compensation. While employees try to extract as much money as possible from an employer, every business owner seeks to pay employees a fair, competitive wage that also offers a motivating incentive.

More than just pay plans, employers need to develop a compensation strategy, especially when it comes to rewarding the people who generate income for the dealership.

Do they have control?
Employees can’t be expected to have a significant part of their pay at risk over things they can’t control, said Donya Rose, a partner with Cygnal Group and a specialist in helping companies create effective selling functions. “Salespeople must be paid on what they do personally to contribute to profitability,” she said.

Rose cautions employers that setting annual goals — and corresponding pay — too high risks demotivating employees. How fired up will an employee be in June if he thinks he has no chance to achieve annual volume numbers that must be reached before a bonus can be earned?

If something outside their control prevents them from making what they thought they would, salespeople are likely to just hang out at the dealership collecting their base pay or draw until next year, when the numbers are reset.

In some cases, a mid-year correction may be appropriate. “It’s rare for this to happen and employers must establish criteria in advance as to why it would be done,” said Rose.

Last year’s gas price crunch is a good example of that type of trigger. If sales drop unexpectedly, dealers will have more sales capacity than they need and layoffs may be necessary. “But, for people you decide are keepers, it’s important to share the pain with them, and for them to recognize you’re doing it so they stay with you.”

Affordability vs. market value
Employers must be mindful of market considerations or they risk losing the market value of a job. “Like it or not, all employers operate in a labor market and managers need to have a sense of the market value,” said Rose. “To keep good people, you need to consistently show them a path to get to their market value.”

Pay plans should be structured so some employees occasionally make 20 percent over the market value for their job, depending upon guaranteed income levels and the amount at risk. For example, if market value for a sales position is $50,000 and he gets a $25,000 draw, then 50 percent of his pay is at risk.

“For a 50-50 payment, it would be appropriate for a star performer to make two times the target compensation, or $100,000,” said Rose. “Other employees need to see that it’s possible for someone to make a lot even if they have a significant amount at risk.”

It’s just like picking stocks, Rose explained. People who select riskier stocks expect their investment to occasionally pay off with a huge return. People who don’t like risk are generally more comfortable in the bond market.

Pay for results, not activity
The ideal compensation plan is built on a foundation of key accountabilities, said Rose. It must be clear to employees what they are expected to do. But activity isn’t nearly as important as results.

“Ideally, a compensation plan measures directly into the income statement. You look at revenue, gross profit, contribution and other maps in a way that people understand. You measure based on activities, but pay on results.”

Basically, activities are things that are helpful tools for managing sales people. They’re the things good salespeople should do anyway to get better results. However, activity may not materialize into bottom-line results.

“If you pay for activity, you’ll get activities,” said Rose. “Some dealers may feel salespeople aren’t generating enough quotes, so they’ll pay salespeople to increase the number of quotes they generate. Sure, they can create quotes, but does that activity result in closed contracts and increased revenue? That’s what the pay should be based upon.”

Productivity should exceed compensation
A consistent mistake Rose said dealers make is they don’t realize that while compensation should go up over time, productivity should go up faster. The dealership invested a great deal of money on building market awareness, branding and creating a system to sell more each year — for which they need to earn a return on that investment.

For example, if a salesperson generates $500,000 annually and earns $40,000 in Year 1, by Year 10 he should make $80,000 to $120,000 but sell several million in product.

“When I get called into small- or mid-size companies, it’s usually because the owner discovered someone is making two times more than everyone else in the company,” she explained. “The business has changed, the dealership is well established in the market and there is a steady stream of customers coming in. They have the right stock on the lot and they’ve trained their salespeople to be productive. Yet, the sellers are still making money as if the dealership had 10 RVs on the lot and they had to convince customers to take a risk and buy from the dealership.”

The problem, Rose said, is that salespeople adopt the attitude that they are bringing in the money and should be compensated correspondingly.

But, the owner knows very well he could hire two salespeople who could be just as productive as the highly paid person,” she explained. “The uncomfortable message is that such a move would be better for the company. It’s better for the dealership to have two $1 million performers than one $2 million seller.”

Dealers don’t want only a few high-performing people, she explained. Otherwise the business’ ability to maintain a revenue stream is fully dependent upon one or two people. That makes the business worth less, Rose said.

“It’s contrary to what you would think would be true. If a dealership has a sales machine on staff, the business actually has less value to a potential buyer,” she explained. “If the sales volume was distributed among several good salespeople, instead of invested in one or two superstars, a potential buyer could see that he could reproduce the dealership’s level of success without risking that key performers would leave and start a competitive dealership.”

Sales leadership
Dealers need to invest less in sales management and more in sales leadership. When a sales manager, team leader or even the owner himself “manages” sales, he makes sure proven procedures and processes are followed. A sales leader, on the other hand, motivates others and develops a sales machine with momentum of its own. He treats a sales team like he is pruning a bush, hiring and firing people and encouraging them to round out skills.

“Study after study shows the one thing that stands out most between an okay and a terrific sales force is the first-level sales leadership,” said Rose. “It’s a mistake to think that comp plans alone will manage salespeople.”

Rose strongly argues against requiring sales managers to sell, too. A selling sales manager has a tendency to cherry pick the best opportunities, which means they end up competing with their own staff for compensation.

“A sales leader makes sure leads go where they aresupposed to go,” said Rose. “It’s a rare person with a servant’s heart who can hand over a great sales lead to a deserving underling. It’s also a rare business owner who understands the need to hire not just any sales manager, but a sales leader who can sniff out good salespeople in ways owners can’t. He will ensure the right people are in place.”

Once sales leadership is in place, dealers become less reliant on the “magic” salespeople who command ultra-high salaries and basically hold the business hostage.

Who needs incentive pay?
Financial incentives are effective only with people or small teams that directly affect the bottom line in a clear way. For example, an accounts payable clerk who ensures bills are paid on time makes a big difference in cash flow.

“A dealer can take a peanut butter approach, smearing incentive pay like a thin film over the entire organization,” said Rose. “But to be effective, employees must feel they have some control over the amount they receive.”

Compensation is more than something given as payment for a service provided, it’s a strategy that when properly implemented can transform an okay dealership into a superstore staffed by superstars.

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