By Beth Carroll and Brenda Maldonado, The Cygnal Group

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Many sales leaders and CFOs believe paying company sales representatives as if they were agents (100 percent variable pay) strengthens alignment between a company’s objectives and sales representatives’ focus and results; however, the absence of a base salary often has an adverse effect with significant unintended consequences: Lack of Control, Complacency, and Limited Flexibility.

Consequence #1: Lack of Control
Sales representatives who are on 100 percent variable pay plans (often called 100 percent commission plans) see themselves as masters of their own destiny. In their minds, they are taking all of the risk and therefore should be able to decide how they work, when they work, where they work, which offerings they emphasize and which types of prospects or customers receive most of their attention. The problem with this philosophy is that the sales representatives’ preferences may be at odds with the interests of the business. The ensuing conflict of interest undermines a company’s ability to present a consistent message to the market, execute an important strategy, or even ensure sales methods and processes comply with ethical standards and local laws. Industries in which sales representatives have the worst reputations for misleading customers (used-car dealerships, mortgage brokers, and time-share sales come quickly to mind) are industries in which 100 percent variable pay plans are common and sales representatives are willing to do “whatever it takes” for the next sale.

One might counter that insurance is also an area where sales representatives (agents, in this case) are on 100 percent variable compensation, and yet their image is not as negative. There is a key difference: insurance agents work to build a long-term portfolio of satisfied customers. For the sales reps mentioned above, repeat business is not their goal. This does not mean, however, that the prevalence of 100 percent variable pay arrangements in industries that focus on managing repeat business exist without consequences. These sales roles often suffer from Consequence #2: Complacency.

Consequence #2: Complacency (The Phantom Base Salary Effect)
Sales representatives who are on 100 percent variable pay plans but have considerable recurring business develop what is known as an annuity, or “phantom base salary”. This model is extremely attractive to sales representatives because they know if they work hard for a few years, the resulting annuity stream will allow them to collect a comfortable paycheck with comparatively little additional effort. When a sales representative can predict on January 1, with some measure of accuracy, what his/her pay will be for that year, a phantom base salary has been created. The annuity stream undermines the sales representative’s drive to continually acquire new business. Admittedly, there are some sales representatives who will always be driven to acquire new business in order to build up an ever larger annuity, however, many will reach a plateau where their annuity stream supplies enough income, and the extra work is not worth it. Managers in these organizations often find themselves frustrated with sales representatives who are comfortable at a level of sales and earnings below what is needed for the health of the business. At this point, management typically considers ways to change the compensation arrangement, only to realize they are caught in Consequence #3: Limited Flexibility.

Consequence #3: Limited Flexibility
As a solution to complacency, or for other reasons, management may decide it needs to reassign territories or accounts, split territories, or focus some representatives on a targeted customer type. In the case of 100 percent variable commission-based plans, these actions are viewed by sales representatives unfavorably as if management were suggesting they swap families. Customers are viewed as the “property” of the sales representative who landed them, and often will join a competitor and take their customers with them in response to changes.

Another challenge occurs when a sales representative leaves the company and his/her accounts must be reassigned. This situation creates a quandary for management: sales reps who are assigned these accounts need to be compensated for the additional work (they have no fixed compensation after all, and it cannot be expected that they will do it out of the goodness of their heart), but most will agree that compensation for assigned accounts should be lower than compensation for acquired accounts. In these situations, management may develop complex workarounds, such as “house account” rates or territory/account-buyout deals. These side deals can become cumbersome to manage and may open the door for claims of inequity.

What’s the solution?
A 50/50(1) pay mix (50 percent of the target total compensation comes from salary and 50 percent comes from incentive) is considered by many sales compensation design experts to be the tipping point in terms of balance between control and motivation. At 50 percent of target total compensation, the salary gives the business a reasonable claim to control behavior and manage account and territory assignments. The 50 percent of target total compensation that is at risk (variable pay) is generally sufficient to motivate continued growth. Once the pay mix tips beyond 50/50 and more comes from incentive (at target performance) than from salary, focus and control for the company will not be much different from a 100 percent variable pay plan. With at least 50 percent of the target total compensation coming from salary, management can design the mechanics of the variable pay portion so as to truly reward performance.

When shifting from a 0/100 pay mix to a 50/50 pay mix, the incentive portion can become truly variable in ways that were not possible when it was the sole source of income. At a 50/50 pay mix, a threshold may be introduced below which no incentive pay is earned. Economically (and psychologically) once this downside is introduced into the plans, the leverage on the upside can be increased so representatives who exceed expectations make even more. The world of a flat commission rate can morph into escalating rates, goal-based rates, or goal-based linear incentives – all of which provide far greater motivation to meet and exceed expectations.

Even though 50/50 is an important tipping point, it is not the case that all sales representatives should have a 50/50 pay mix. Pay mix should be a function of the selling role and should reflect the degree of influence a sales representative has in making the sale. The more directly responsible the rep is for closing a sale, the more variable the pay mix should be at target. Typically, hunter roles in start-up businesses or new product launches will have the most variable pay mixes.

Those who would likely have less pay at risk as a percent of total compensation include account manager responsible for expansion selling with existing customers, or sales representatives who sell on teams with technical engineers, pricing specialists and other support resources. All of these tend to have less pay at risk because the sale is driven by a numerous factors, in addition to the skill, initiative and creativity of the individual seller. These roles tend to skew more toward a 70/30 pay mix or even an 80/20 pay mix in some circumstances.

Companies often miss the opportunity to direct sales representative behavior through annual performance reviews and salary increases. Without a salary, any conversations you may have around more subjective measures of performance such as teamwork, completion of administrative tasks, or other necessities will have no teeth. Having at least 50 percent of the target total compensation in the salary gives management an additional lever to provide direction and differentiate performance along dimensions other than just the numbers.

The best sales compensation plans have balance – balance between financial and strategic performance measures, balance between short-term and longer-term results, balance between individual and team performance, and balance between fixed and variable compensation. The right balance for each of these dimensions depends on the business strategy, the company culture, and the type of selling role. For these reasons, a sales compensation plan that has no fixed pay component is rarely the right answer; it lacks a necessary ingredient that allows management to guide behavior, create greater motivation by making the variable pay truly variable, and manage account assignments based on what is best for the company and the customers.

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(1) When stating pay mix, the first number given is the salary portion, the second is the incentive portion, and both must add to 100 percent.

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WorkSpan Magazine, February, 2011 - Learn how to prevent last-minute derailment of your sales compensation design effort, and make sure your plan designs reflect the top priorities of your most influential stakeholders.

by Beth Carroll and Donya Rose

An important step in many sales compensation design projects is the executive review. At this meeting the plan designs that you and your design team have worked so hard to develop during the past several months will finally be presented to the senior leadership team (sometimes called the steering committee or the executive committee). Ideally, the executives will ask a few pointed questions, conclude that you and your team have done a great job, and approve the plans as recommended. But sometimes an influential executive will challenge the fundamentals of the design or, even worse, the need to change the compensation plans at all, and the work of the design team seems to vaporize right there in the room.

There are several strategies you can use to prevent last-minute derailment of the design effort, and to make sure your plan designs reflect the top priorities of your most in

fluential stakeholders. Part of the solution lies in having the design team understand the top business priorities and ensuring that the plans support them, and part of the solution lies in helping executives understand the principles and practicalities of what the organization can and should measure.

Strategy 1 | Build Consensus

The first strategy is to build consensus around the need for change among the leadership group at the outset of the project. Gain its insights into the company’s market strategy and the ways in which the salesforce must contribute to its execution. Executives are often not aware of the details of the current sales compensation plan, but they may have opinions about how it’s influencing sales representative behavior. Gather their opinions without trying to correct any misconceptions at the time, focusing on the needed business results and not the plan mechanics.

During this process, it may be helpful to present to the executives a scenario as follows: “Imagine that we got this sales compensation plan exactly right for next year, that it was documented clearly and communicated so that everyone involved totally understood it. It was administered so that payments were accurate and on time, and the reporting clearly showed the relationship between sales results and compensation. Then we got to the end of the year and you concluded, ‘That sales compensation plan did exactly what we needed.’” Then ask them, “How do you know?” You need to find out what their definition of “success” is and if it is primarily behavioral, business results-oriented, or a bit of both. Some executives may want to tell you what the commission rate should be, or whether a hurdle is needed, but try to focus them on providing clarity about the needed results at this point.

Be aware of the different perspectives that will be held by the various senior leaders, and be ready to ask questions that target their area of concern. The CFO will be focused largely on the overall cost of compensation as it relates to sales, and whether the company is getting the appropriate return for what is likely a very large investment. The head of marketing or product development may believe that the salesforce is not adequately presenting the products in the best light, selling across the product lines in the right proportions, or focusing on the right customer set.

The HR leader may be concerned about the culture of the company and its image in the marketplace as an employer of choice for top salespeople. The top sales manager may be concerned about mounting turnover and lack of motivation among the representatives, or challenges with attracting top talent to join the salesforce. Gather all these perspectives and then begin to build your case for change by looking for root causes of the issues they have raised. This will become your “burning platform” that will help convince the organization that it is time to change the compensation plan.

Strategy 2 | Use Built-In Checkpoints

Second, as you move throughout the design process, be sure you have built-in checkpoints along the way so executives are kept apprised of the direction the design team is taking. You do not want them surprised by any substantive changes you might recommend. If you think there is a point of controversy, or if the team

is stuck and cannot make a decision, call a meeting of the executives to include them in the process. If you cannot pull together a full meeting, spend a few minutes with each executive, updating the issue and hearing resulting opinions.

One of the key roles for the project leader is to be a change agent, and this involves many conversations outside of design team meetings. It’s important to be sure that all perspectives are being represented, especially those of stakeholders who are not in the meetings, or who may be hesitant to speak up during the meetings.

Strategy 3 | Offer a Concise Presentation

Third, and finally, when you present the recommended plan designs, senior leadership team members should see what they are expecting to see. By this time you have already thoroughly established with them the business case for change, the design philosophy and key design features. Therefore, keep your presentation brief and at a high level, with key sections including:

• The process used to develop the plans. Give credit to those involved, and show the thoroughness of the analysis and how many points of view were included. Present all information on one slide.
• Business objectives for the effort. List objectives on one slide.
• Key changes year over year. List changes on one or two slides.
• The basic structure of the plan. The structure could be illustrated using your most highly populated individual contributor sales role. Present the information on one to three slides.
• The modeling results in terms of the cost of compensation. List the results on one slide. Scenarios to include in aggregate modeling: 1) all at threshold, target and excellence (this provides your widest boundary set, but is not terribly realistic), 2) a bell curve distribution with the center of the curve over threshold, target and excellence, or points just above and below target. This provides a more realistic view of the actual costs of the new incentive plan. Data to use for incumbent modeling: Historical data is the best if you can get it, provided there wasn’t a serious economic shift (as in 2009) or some significant change in company strategy that renders the data invalid. If you can’t use historical data, then you can use the anticipated goals or targets for the upcoming year. Using goals is reasonable only if the goals are reasonable.
• Sample communication materials to be used in the rollout of the plans. Attractively group a few key screenshots of presentation pages on one slide and the rollout schedule on another slide. This way leaders will know when they can expect to begin hearing scuttlebutt about the new plans (sales compensation changes are rarely quiet events in an organization). Your leaders need to be prepared with high-level answers to articulate the business case for the change, and the benefits the new plan designs will provide to the company and the salespeople.

Compensation Cost Issues

The senior leadership team is unlikely to want to get into detailed examples of exact calculations, but will want to understand the aggregate cost of compensation at different performance levels and how this will support the company’s business objectives (see Figure 1).

It is important that senior leaders understand how the cost of compensation should change over time, as a percentage of revenue or profit. While individual compensation levels may be increasing, sales productivity (revenue, units and/or margin) should be increasing at a faster rate, with the result that cost of compensation as a percent of revenue is decreasing over time. This doesn’t necessarily happen every year, as some years are intentional investment years and others are “harvesting” years in which the hard work of several prior years is realized. But during a multiyear period, the cost of compensation should continue to come down in successful businesses (see Figure 2).

Often there is confusion about the need to pay sales incentives for less than target performance, or when the overall company is not reaching its goals. Be prepared to talk about the psychology behind incentive compensation and the value driven to the bottom line when, for example, 40 percent of your sales representatives are motivated to move from 80 percent of quota to 90 percent of quota. Show examples of a few of the different payout curves in use and how they will drive the desired results (see Figure 3). It is often also useful to draw the distinction between over-and-above bonus compensation (like that often offered in broad-based employee pay incentive plans) and true at-risk pay needed to earn the market value of the job (like that usually offered as part of a sales compensation package).

Conclusion

The design team, the executives and other senior leaders will all be influential in selling the plans to the salesforce, who ultimately must be motivated by the plan for it to be successful. Enlisting the support of leadership early and often throughout the process will help ensure a smooth design process and a successful new plan year.

About the Authors

Beth Carroll is a principal with The Cygnal Group in Chicago. She can be reached at beth.carroll@cygnalgroup.com.
Donya Rose is a principal with The Cygnal Group in Chapel Hill, N.C. She can be reached at donya.rose@cygnalgroup.com.

Read the success story of a Cygnal Group client’s compensation plan makeover below.

by Elizabeth Wasserman

The sales staff at DealerTrack wasn’t sold on how they were being paid.

The Lake Success, New York, maker of software for auto dealers had done several acquisitions. Now management wanted the combined sales force to push a new product, an all-in-one management program that could replace stand-alone applications for inventory management, leasing and the like, to the company’s 17,000 auto-dealer customers.

But there was a hitch. Under DealerTrack’s sales-compensation plan, most of the 120 sales reps got credit for selling the stand-alone programs but not for handing off clients to colleagues who sold the full solution. To make matters worse, the recession had some sales reps struggling to meet yearly sales quotas.

“We had some morale and motivation issues,” says Karen Vacchio, compensation and benefits director at the $226 million company.

Recognizing the problem, DealerTrack overhauled the way sales reps were paid. Reps became eligible for higher commissions earlier in the year and got bonuses when their clients bought the all-in-one dealership package.

When DealerTrack redid its incentive structure, the company joined nearly two-thirds of U.S. businesses that changed the way they paid salespeople in 2009, according to a survey by WorldatWork, a human-resources trade group. In fact, 8 of 10 companies surveyed said they revise methods of calculating sales compensation every year.

The reason is clear: CFOs and finance departments use sales incentive pay to motivate staff to meet company goals, and in a competitive and volatile global economy, those goals change as quickly as the wind. “Change is part of the business landscape, whether it’s because of difficult circumstances in the last few years or because of prosperous circumstances. All businesses need to adapt,” says Jim Stoeckmann, WorldatWork’s senior practice leader for sales compensation.

Sales compensation plans commonly detail the ways reps will be paid, what their roles are, how performance is measured and how the company will handle pay disputes. The trick for finance executives is coming up with the right mix of salary, commission and other incentives to increase sales and keep costs low, but at the same time, ensure employees get a reliable paycheck, even during down times.

Using Incentives to Drive Behavior. When a sales compensation plan is out of whack it shows: Companies can’t attract and retain sales staff, reps are unmotivated, or sales compensation increases faster than revenue. Plans can sometimes be too rich. “If the top sales rep makes more than the CEO of the company there could be a problem,” says Beth Carroll, principal at the Cygnal Group, a sales compensation firm in Chicago and Chapel Hill, North Carolina.

To create a sales compensation plan that makes everyone happy, experts say companies need to:

Align rewards with business goals. To sell new products, set higher commission rates for those sales. Similarly, to land new customers, set commissions higher for new sales than on sales to existing clientele. “You don’t want to end up with a disconnect between what you’re rewarding people for and what the business is striving to achieve,” says Mark Flavin, global practice leader for sales effectiveness and rewards at Towers Watson, a professional services company.

Differentiate sales roles. The rep who lands major new accounts is the “big game hunter” because he or she directly influences sales, Flavin says. Other reps are “farmers” who maintain and up sell existing customers. Don’t pay hunters the same as farmers. “You want to define and segment your hunters from your farmers, because if you blend them together you just get more farmers,” says Carroll, the Cygnal Group compensation expert.

Set performance measures. Set relevant, controllable goals for sales staff, including goals for quotas, new accounts, revenue, new product sales or sales profitability. Compensation plans fail because performance measures don’t support a company’s overall business objectives or match a selling role, says J. Mark Davis, managing principal of the Valitus Group, Inc., a Tustin, California, sales consulting firm.

Use the profit motive to drive behavior. It’s a science to design payout formulas that motivate salespeople to work harder, find more prospects and close more. Some companies go overboard, putting salespeople either on straight salaries or straight commission. But according to a 2008 WorldatWork survey, the most common sales compensation formulas mix base salary with variable pay. Regardless of the breakdown, top sales reps should earn heftier paychecks than underperforming colleagues. “Feed the eagles and starve the pigeons,” Flavin says.

Designing a Plan to Meet Goals. Creating a sales compensation plan can be so contentious that sometimes companies bring in outside consultants to mediate.

That’s what happened at The Futures Company, where sales reps for the $40 million strategic marketing consultancy were waiting too long to collect commissions and the company wasn’t meeting strategic goals.

The U.K.-based firm hired Valitus Group’s Davis to figure out what to do. He interviewed managers, sales staff, and human-resources and finance staff, then worked with a team of stakeholders to develop a better compensation plan.

That plan, which took effect in January 2010, pays commissions to Futures Company sales staff more quickly, but also created new business goals. Under the old plan, reps were paid the same commission rate for their book of business whether they renewed annual subscriptions worth $700,000 or more than $1 million. Under the new plan, reps must achieve 70 percent of a targeted renewal base before earning a commission.

With the new plan in place, customer renewals increased in six months, making the $49,000 the company invested in the process money well spent. “In the past, the sales team took renewals for granted,” says Kevin Brown, CEO of the company’s North America business.

DealerTrack also sought outside help for its sales compensation troubles, hiring Cygnal Group for a redesign. The consultants created a plan that retained sales reps’ previous 40/60 split between base pay and a combination of commission and bonuses. But it replaced yearly performance periods with quarterly ones, allowing reps to hit higher commission rates earlier in the year.

To encourage teamwork, DealerTrack also divided its sales staff into generalists and specialists. Now generalists are assigned to geographic territories, with a portion of their pay coming from teamwork, and they collect bonuses if they refer to a specialist colleague to close a deal that helps the company reach overall goals.

“The whole idea is they get compensated in a way that encourages them to take some time to understand what the dealer needs,” says Ana Herrera, DealerTrack’s senior vice president of human resources, “even if it means they ultimately have to hand off the sale to a colleague.”

By Beth Carroll, The Cygnal Group

(Read Spotlight on a Sales Representative: A Sales Rep’s Perspective on How Sales Compensation Plans are Implemented and Communicated)

Communicating changing sales compensation plans is never easy. The salesforce will always start with the assumption that the new plan is going to take something away from them, and will be skeptical of anything the company tries to push as a “positive change.” It usually takes two payout cycles under a new plan for the reps to figure out what behaviors they need to change to maximize their pay under the plan, and this is the point at which your top performers will finally stop holding their breath about the new plan design (provided, of course, it is designed well and truly rewards top performance in a fair and equitable manner).

There are several strategies that can be used to help ease the change process for the salesforce.

• Include the reps in the assessment process by interviewing or surveying them before you begin the redesign effort. If you don’t have time to talk to every rep (and there are diminishing returns the more reps you talk to), be sure you select a few from each role who are new reps and a few who are tenured. You can typically avoid under performers UNLESS they were star performers under previous year plan designs. In this case, find out what has changed.

• Be sure you include sales management on the design team. However, do not under any circumstances include anyone as part of the design team who will be paid under or as a direct roll-up of plans being designed. It is impossible for anyone to be objective when it comes to his/her own pay.

• Once the plans are designed, hold a challenge team meeting with a few of the most vocal sales reps, team leaders and front-line managers who were not part of the design process. They should be told they are helping to craft the plan communications, which they are. However, they will also poke holes in the design (even if you tell them the design is set), and this may provide you with a chance to correct any problems you have missed. Also, your communication effort will be smoother because of this step.

• After the plans have been rolled out, you want to check in with your sales reps frequently to be sure they have understood the plans. Using an earnings calculator is a common way to help reps internalize the designs and plan their year to maximize their pay. This can be a simple Excel-based tool, or it can be an add-on module available from several of the EIM vendors.

When selecting the reps to participate in the process, you want top performers who are vocal and considered leaders by others. Often, you may find you have your most “difficult” sales professional included in this group, and there is usually a reason. A good sales rep never stops negotiating, and will therefore push at every opportunity to get the best deal he/she possibly can — especially from their compensation plan. The only time I truly worry about a plan design is when there are no complaints from the reps.

By Beth Carroll, The Cygnal Group

It’s fall again, the economy appears to have shifted toward the positive in many sectors, and companies are thinking about redesigning their sales compensation plans for 2011. In order to ensure the redesign process and resulting plans will provide a good return, businesses should address six key areas:

1. Planning
2. Involvement
3. Knowledge
4. Modeling
5. Communication
6. Administration.

Planning
Incentive design is a process, not an event. Whether this is your first design effort or you’ve done this more times than you can remember, you should not underestimate the time and effort the project will take, particularly given the recent economic upheavals. You also must allow time to carefully communicate any plan changes. Employees are nervous about adjustments to their compensation in the best of times, but they are especially skittish now. In a tumultuous year, even more time in the design process should be allotted to communication. Keep in mind if you are reading this in September, you may already be running a bit tight on time for a January effective date, although you can still accomplish what you need to if you move quickly but carefully.

Involvement
Too many people involved in a sales compensation design project can be unwieldy; too few can lead to a complete failure of the design if a critical viewpoint was not adequately represented.

Senior leaders must be visibly and vocally supportive, whether or not they are directly involved in the project. Sales leadership, finance, human resources, sales operations and IT must be represented on the design team at fairly high levels, as they are key constituents who have the best knowledge about the organization, the history, the systems, and what is and is not possible with incentives.

The design team should not include anyone whose compensation will be directly affected by the outcome of the process, but a representative sample of sales employees and managers should be interviewed to gain feedback and insights into sales jobs and processes, as well as what has and has not worked in prior compensation plans. Such inclusion will give them a sense of being heard, which can be critical in gaining acceptance once the plan is rolled out.

Knowledge
If there is controversy about the effectiveness of the current plan design, a survey of your salespeople may provide some needed insights to break a logjam. If there is concern regarding the amount being paid relative to market, a market pricing review can provide guidance about the need to raise or lower target pay levels. If management believes the goals that have been set should be attainable, a bell curve graph showing that 80 percent of employees were at 50 percent or less of goal might be what’s needed to show the disconnect between management’s belief and what is realistic. Spend time at the start of the project to build this fact base.

Modeling
Once you have developed your initial recommended plan design, you must model it under different performance scenarios. If you do not take the time to do this important step, you will find an unpleasant unintended consequence the following year; it’s only a matter of when.

What if you are at 80 percent of goal? What about 120 percent? Are the payouts still acceptable as a percentage of revenue or profit? What are the best measures of sales’ contribution to the company? What would you consider a successful outcome for an individual and the company, and based on the modeling, will this plan get you there? Are transition arrangements needed to move people in an orderly fashion into the new plans? All of these questions must be addressed for a successful outcome.

Communication
A simple incentive plan that is well-communicated and understood by the field can be far more effective than the most mathematically perfect design that no one understands. Senior leadership must take the lead in communicating the new plans. Managers should be told about their plans first, as their support is critical to the rest of the communication effort. Examples must be provided showing how different performance results will pay under the new plans.

Plan documents and quota-acknowledgement sheets should be provided in one-on-one meetings between the employee and his/her manager. This meeting should focus on employees’ goals and earnings expectations, their specific strengths and opportunities, and the best ways for them to win under the new plans. Excel-based earnings calculators can be powerful learning and motivational aids, but be careful employees are not so busy estimating their pay that they forget to actually do the work.

Administration
The last key area to address is administration of the plans. Payouts must be on time and accurate in order for salesforce members to trust the plan design and learn to modify their focus to improve their results. As part of the administration process, be sure that regular reports are provided to design team members, so they can assess the plan’s effectiveness as the year progresses, and to employees, so they understand the direct connection between their performance and their pay. It is also a good idea to include a “motivation” section that shows how much additional could have been earned if a hurdle or threshold had been cleared. Often, necessary design changes are only surfaced when it comes time to administer the plans, so test your administrative processes before you actually communicate the new plans to the field.

Conclusion
While there are many right answers for any sales compensation plan, there are perhaps even more wrong answers. A process that addresses each of these six areas will yield a right plan design that will create great value for the company, the salespeople and even your customers.

By Beth Carroll and Donya Rose

The economy appears to have taken a positive turn and many companies are starting to think about growth:  hiring more sales reps, launching a new product, or breaking into a new market segment.  One of the first questions that is raised when a company returns to growth mode, especially if there has been significant retrenching, is, “What should we do with our sales compensation plans?” Odds are high that the right focus for the recession is not going to be the best focus for the company’s growth phase. It may be time to take a hard look at your sales incentive plans.  There are some key indicators you can check to determine if it’s time to make a change, and if it is, if you can afford to wait until January 1 (or the start of your next fiscal year) to implement the new plans.

1. You scaled back (or perhaps eliminated) incentive compensation during the recession, and now you see that your people are not engaged fully to capitalize on sales opportunities.You need to act as quickly as possible to regain momentum and re-energize your sales staff. While this is not a situation that should be left in place until the start of the next fiscal year, a full redesign of the plans may not be the only alternative. First, consider SPIFFs, contests and recognition programs. Are there things that can be done that will quickly drive new sales and create increased enthusiasm in a cost-effective manner? Second, consider adding a small “bounty” type incentive that provides additional income tied directly to the performance you need most right now (e.g., new customer acquisition), but that limits your exposure if sales opportunity radically exceeds or falls short of your expectations. Third, if you can, consider a stub-year plan that will shift people in the direction you will want to go at the start of the next fiscal year. If you filled in an incentive gap by increasing base salaries, you can start to move them back down again. If your employees have been earning 60% of what they earned in better years, you can start to bring that number back up again by developing a more modest incentive program with less leverage than was appropriate in more stable market conditions. In addition, you should consider the culture that has been enforced (or created) by your sales compensation program. Should you add a team-based element to keep the focus on working togethe
2. You scaled back your expectations in terms of goals or volume production, and now you are starting to see payouts that are far higher than you expected. This is also a situation that has the potential for serious negative consequences on two fronts. First, your company’s financial performance could be adversely affected by overpayment in the incentive program. Second, your employees’ sense of their own value in the market place could be inflated beyond reasonable expectations. It is remarkable how quickly salespeople come to expect a higher level of earnings on an on-going basis once they have experienced it for a few months or quarters. It can be very hard for them to accept the adjustment that will inevitably be required. Quick action is needed to recalibrate expectations, supported by thorough modeling to make sure that pay levels return to appropriate levels without damage to morale, and while still providing significant upside earnings potential for true top performance.
3. You are finding it difficult to hire top talent, and the reason cited is the lack of a competitive compensation package. You can take a two-pronged approach on this and develop a plan for new hires that would be a lead-in to next year’s plan for the existing staff. Because many companies provide a guarantee for new hires, such an arrangement is possible for a few months before any significant discrepancies in the two versions of the incentive plan are felt. However, you will want to make the transition strategy clear for the incumbents so they know that at a specific future date they will be moved onto the new incentive plan as well. Many salespeople have become leery of 100% variable plans, as they’ve seen what can happen when they fail to cover their draw month after month. Even top salespeople in industries that are highly risk-tolerant may be more interested in finding programs with at least a modest base salary. A 40/60 to 60/40 pay mix is reasonably aggressive, and yet either option allows some degree of control from an employer/employee perspective while providing salespeople with a greater sense of security. Of course, the less variability in the plan, the less leverage on the upside, as this is a necessary trade-off. But it is one that can be designed to provide very attractive earnings opportunities to true top performers.

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.