We have two sales VPs with remarkably different team revenue quotas.  One at $12MM/yr, the other at $20MM.  To date we have targeted the same variable comp for each in part because it was competitive but also necessary to recruit the one with the $12MM quota . Should the VP with the higher quota have a higher target incentive?

Answer

When it comes to sales leadership roles, there is oftentimes dramatic variability in quota sizes without significant variability in compensation levels. While it may take more effort and skill to manage a larger quota, it’s also the case that in sales leadership lower quotas are often associated with market development and team construction requirements, which may actually take skills and initiative not required in the ongoing management of a well-penetrated region. One useful “test” here is to ask if the people were switched, would the quota change. Consider these questions:

• If Mr. $20M were to be assigned Ms. $12M’s team, would the $12M go up?
• Is Ms. $12M capable of doing Mr. $20M’s job?
• Does one of these jobs take more Skill, Experience, Leadership ability (SEL) than the other?
• Are these two people in different levels of leadership, or are there just different expectations based on what is expected from their sales team’s specific assignment?

If it’s the assignment, then there’s a strong argument to keep the target incentive the same. If it’s different levels of leadership, then both base and target incentive should likely be higher for Mr. $20M.

Regardless of your answers above, I would caution you against proceeding with any kind of commission concept for a sales leader. If you step away from market-based comp, you’re on a path to serious comp excess if/when the business scales. I could tell you stories of VPs of Sales earning $1.2M at target in $1B divisions of $15B companies that should know better. Then when they inevitably have to unwind it because market comp is $500k or so, it’s a real disaster for the sales leader, the sales team and the business.

Conclusion

Increase base to recognize superior persistent attributes IN the same job. Increase the base pay range, base pay and target incentive to recognize a higher level of the leader job. But stay away from any kind of % of sales concept for sales leaders.

Join Donya Rose for two lively sessions

Solving Sales Comp’s Hardest Puzzles

You’ve got the basics — the right roles, pay structure, measures and mechanics — but your team still debates a few things every year. We’ll tackle paying for: collaborative selling, “elephant hunting,” annuity business, profitable sales, multiple products, unpredictable markets, unattainable quotas and anything else you bring to the session. Benefit from the collective experience of your fellow attendees, facilitated by a seasoned consultant who has seen hundreds of plans. Leave with a list of great ideas plus names and faces for fascinating follow-up throughout the next few days.

Incentives in a Recurring Revenue Business: Server Software, Data Services and Trash Collection

While most companies are eager to learn from their direct competitors and others in their business, the lessons that can be transferred across industries based on commonalities in the business model are many. In this panel discussion, representatives of three very different businesses with a lot in common will share their challenges and solutions, focusing on the concepts and creative ideas that session attendees are most likely to put to good use. Audience members will have time to join the discussion, raise challenges they have faced and ask panelists to comment on their current vexing problems.

Panelists:

• Arman Assa, Director, Global Operations, Red Hat
• Alan Fried, CSCP, Sr Manager, Sales Compensation, Comcast Cable
• Syd McDonald, SVP Sales, Valet Waste

For more information and to register

http://www.worldatwork.org/waw/salescompspotlight/

Register soon – this conference sells out!

And if you’re coming, drop Donya a note – she’d love to connect.

Why attend

Is your sales compensation cost appropriate for your business? Is each of your sales teams/channels adding value? What about your top performers vs. your under-performers? Where is the money going, and what is the business getting for that sales comp spend? Understanding the structure of your compensation spend is vital to ensuring the sales function is creating value for the business.

Overview

There’s a lot of discussion of “CCOS” these days (Compensation Cost of Sales). It’s a very important metric, but very difficult to compare from one company to the next, even within the same industry. Early stage companies tend to have a higher sales comp cost % revenue; higher margin businesses tend to be willing to pay more for the next sale; complex sales organizations with specialized channels tend to have a lower sales comp cost % revenue once the channels are optimized, but higher early in the deployment of the channel strategy.

So, what analysis can shed light on these differences, how do you look at comparisons, and once you have your baseline established, what can you do to manage down your sales compensation cost?

Topics included

• Correct measurement of the cost of the sales team vs. productivity – what’s in the numerator and what’s in the denominator?
• Specific analyses to be completed, illustrated by a case example
  • Follow the money, by incentive measure and sales team
  • Understand the cost of the sales force by performance level (what do top performers cost vs. bottom performers)
  • Understand the cost by channel (e.g., inside, field sales, national accounts team)
  • Trending aggregate cost of comp over time
• Typical patterns in CCOS
• Best ways to improve CCOS
• Common misconceptions about CCOS
• What to expect as the business matures

Who should attend

• HR Generalists supporting sales teams
• HR Managers
• Compensation Managers
• Sales Leaders
• Business Owners

Your instructor

Donya Rose is the founder of The Cygnal Group, and its Managing Principal. Sales Compensation Design is her exclusive focus.

How to sign up

TrainHR charges a fee of $145 for 1 attendee, with the option to get a group together and attend even more affordably. Click through for more information or to register.

If you want more information and might be able to register at this point, here’s the conference site: http://www.worldatwork.org/waw/philadelphia2013/attendee/index.jsp

And if you know you’ll be there and would like to meet, drop me a note and we’ll find time to connect (donya.rose@cygnalgroup.com).

Finally, if your really care mostly about sales compensation (like I do) then you really do have to go to the Sales Compensation Spotlight Conference September 9 – 11 in Chicago. You know we’ll be there, speaking and sponsoring! (http://www.worldatwork.org/waw/salescompspotlight/html/index.jsp)

- Donya

Our plan document is clear that no payment is due an employee who is not active at the time the payment is made. We pay quarterly, and will have a reduction  in force before the next payout it due. Do we pay the terminated employees?

Answer

It’s important to think carefully about the message you’re sending to your other sales people, other employees, investors, and prospective future sales people. A couple of case examples:

1. If the sales person did a great job and their territory imploded and just no longer needs coverage (customer merged with another, competitor moved headquarters there), and if the payment due is modest, then I’d say pay it.
2. If the sales person is the beneficiary of a dramatic windfall and has had attitude problems and is not a great favorite of their peers, then perhaps you don’t pay (or pay a significantly reduced amount).

If the company is in big trouble, then it would be inappropriate to pay employees handsome commissions that might not be necessary if it further risks your ability to survive, continue to provide employment for those remaining, and support your customer base. On the other hand, if the company can afford the payments and the good will seems worth it, then you should probably pay. Your remaining sales people will watch this carefully, and those with other options will be thinking about those options. How you treat this departing cadre could have a real effect on who you manage to retain into the likely difficult coming months and years.

Also keep in mind the fact that your only choices aren’t to pay or not to pay. You could pay a reduced amount (e.g., 50%) to the terminated employees; you could create a sliding scale based on tenure and pay the full amount to those in the role for 5 years or more, 75% to those with 2- 4 years of service in the role, 50% to those with 1 year of service in the role, and nothing to those in the role less than a year (for example). If you need a policy to be consistent across a number of people, consider making a list of all the affected people and making a quick note of what seems fair to each, then “zoom out” and see if you can see a pattern that you could turn into a policy.

And finally consult your legal counsel. There are laws that govern this in several jurisdictions, so you may or may not have as much choice as you’d like, depending on how your plan document is written and what laws apply.

Has your company encountered this challenge? How did you handle it?

Do you have examples of contests that have created good value for your business?

Accuracy is an important measures of quota quality, measured in standard deviation for the statistically trained, or just % of people within a reasonable band around quota (e.g. +/- 20%).

Distribution shape

Another important measure is the shape of the distribution – is it a normal-type curve balanced around 100%, or is there a systematic skew to it? Bi-modal distributions may indicate quota setting issues for a particular category of sales person (new hires, small quotas, etc.). A typical dysfunctional quota distribution is left-skewed with a long right tail indicative of most people under-performing vs. quota offset by a few over-performing outliers, a very expensive way to deliver compensation in a plan with any meaningful acceleration over quota.

Credibility and sales force motivation

Motivation and sales force credibility are most likely only measurable via an opinion survey or poll of the sales team. If sales people understand how their quotas are set, and believe they are generally achievable and equally challenging across the sales team, they will be motivating and help create maximum sales productivity and predictability. If any of these sales force perceptions is unfavorable, it will tend to undermine the value of the quotas to the organization.

How does your team measure quota quality?

In order for the plan to take effect, it must be signed by the employer, and the employer must provide a signed copy to the employee. In addition, the employee must sign an acknowledgement of receipt of the plan. Of course, the employee has the option to refuse to sign the new plan, in which case the employer can terminate employment, stop paying any commission, or continue employment under the old agreement. Employer and employee signatures can be electronic. Although not specified in the code, it is recommended that electronic signatures comply with California’s Uniform Electronic Transaction Act (UETA).

Although the code does not specify penalties for noncompliance, legal experts see the terms as favorable for plaintiff lawyers. It is possible that failing to abide by the code could be subject to the penalties specified in California’s Private Attorneys General Act (PAGA). Those fines are $100 per employee per pay period for the initial violation, and $200 per employee per pay period for subsequent violations. In addition, the court could place the burden on the employer to prove the terms of the contract, otherwise it will presume the employee’s commission calculations are correct.

The commission plan document should answer the following questions:

• When does the plan expire? If no specific date is given, it is recommended that you include language stating that the contract does not expire unless expressly advised by the employer.
• To whom does the plan apply?
• How is the commission calculated?
• How and when is the commission classified as being earned? You should define the time of earning as late in the sales cycle as possible, in order to allow for ample time to calculate and disburse the payment.
• When is the commission to be paid? It is recommended to follow California’s Labor Code Section 204, which states that wages earned between the 1^st and 15^th of the month must be paid between the 16^th and 26^th of that month. Wages earned between the 16^th and last day of the month must be paid between the 1^st and 10^th of the following month.
• Are any amounts paid considered advances until certain conditions are satisfied (i.e. implementation for a software sale)? If so, it should be clear that you are recovering an advance on future earnings, not a commission that has already been earned. The circumstances under which  advances can be recovered should be detailed in the document.
• What happens to unpaid commissions when employment is terminated? Labor code sections 201-203 could apply, which state that earned wages must be paid on the last day of employment for an involuntary termination or for a voluntary resignation with more than 72 hours’ notice. For a voluntary resignation with less than 72 hours’ notice, earned wages must be paid within 72 hours of the last day of employment.
• Does the employee forfeit any commission upon termination? It is recommended that the document distinguish between voluntary and involuntary termination. For voluntary resignations, it is likely that the provisions of the plan are enforceable. For involuntary terminations, the provisions of the plan could be more problematic, especially if it could be perceived that the employer  terminated employment in order to avoid paying commissions. Either way, it should not be classified as a “forfeiture”. Instead, legal experts recommend stating that continued employment is a condition to earning the incentive pay.

We at The Cygnal Group are experts in sales compensation plan design; we are not attorneys. We recommend that you consult legal counsel to ensure your sales compensation plans comply with California Labor Code §2751 and all other applicable laws.

Primary Source: “Preparing for California’s New Sales Compensation Law”; a WorldatWork webinar presented by David Cichelli of the Alexander Group and Anne Brafford of Morgan, Lewis & Bockius LLP; September 12, 2012. The webinar can be found here and is available to members and nonmembers of WorldatWork.

A well-written sales compensation plan document clearly defines when the commission* is officially “earned,” and this may or may not be at the same time that it is paid. Many companies will pay some or all of the commission for a sale following the booking of the order, but reserve the right to reverse sales credit and payment if the order is cancelled, the product is returned, or the sales value is not collected from the customer within a certain timeframe.

Typical “triggers” for payment include:

• Booking/Order: The customer has agreed to purchase a specific product or service at a specific time for a specific price with specific terms, all documented in writing (e.g., booking)
• Shipment/Work completed: The product is shipped from the warehouse, or the service is delivered and accepted by the customer
• Revenue: Revenue for the sale is recognized in the company’s account in system (which may be triggered by shipment or service delivery as well)
• Cash: Some or all of the payment for the sale is received.

In the case where some or all of the commission is withheld until the company receives payment from the customer, some states (Illinois and Maryland) are beginning to adopt what is called “substantial procurement” doctrine, recognizing the right of sales people to be paid commission for booking a sale, even if their plan document states that payment is not earned or made until cash is received.

Despite this clearly defined “trigger” for earning and payment in the plan document, former employees in Illinois and Maryland can now argue otherwise. Their argument is rooted in the significant investment of time and effort on their part culminating in the successful close of the sale. They argue that a booked order “substantially procured” the commission because they (1) were able to convince the customer to agree to the sale, (2) processed the order, and (3) knew the company was prepared to ship or deliver the product or service to the customer.

In today’s economy, with companies struggling to maintain their cash flow, sales reps are not typically in the business of securing payment, leaving this task to their friends in accounts receivable.

Bottom line: In at least two states in the US, your sales people have the right to their commission payment if they obtained the order, regardless of the wording of your sales compensation plan document. Thus far, the practical implications have extended only to terminated employees. Watch for similar actions in other states, and for sales people making the claim that payments may not be withheld until cash is received if their job is done once the order is obtained.

For more details see the article on the SHRM web site by Joan Deschenaux (SHRM Senior Legal Editor), visible only to SHRM members.

*To date, this issue has arisen only with true commission plans (communicating compensation as a percent of the value of what is sold). However, the principles apply and the issue may shortly arise with other forms of sales compensation including quota-based incentives or bonus-type plans.