This also gets at the fundamental question of whether or not a higher goal actually causes a higher level of productivity. We put mechanics into the compensation plan to give people the extra motivational traction to get up to and beyond the quota, generally in the form of acceleration over quota. If your actual performance expectation is 80% of the quotas you have deployed, then you should have some kind of acceleration at that point, and the acceleration that you have at 100% of quota is out of reach for most (and therefore not very motivating).

Moreover, when you start stating your official productivity expectation as being beyond what you really expect, and stating your target compensation as being more than you actually intend to pay, you start having to keep two sets of books – what you said (the official quota and target comp) and what you meant (what you actually expect people to produce, and what you intend to pay them when they do that). And your salespeople will start to think you don’t understand your own business model and are disingenuous when you tell them what you expect of them and how much you intend to pay them.

It’s also helpful to remember that salespeople (and most people, but especially salespeople) really care about being “winners.” Intentionally setting them up to mostly not meet the officially stated expectation makes morale challenging, and may drive away solid contributors who need both a reasonable income and validation that their contribution is acceptable or better. It’s hard for many people to keep going in a challenging job when the systems in place consistently tell them they aren’t quite good enough.

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.

This is a topic on which sales leaders and finance people have strong opinions. While I’ll discuss some of the nuances around the topic below, my bottom line is that most people should achieve or exceed quota.

To be more specific, more than half of the people should hit or exceed their goal. This would be clear evidence of a “achievable quotas.” While it may be difficult to tell at the start of the measurement period whether or not assigned quotas are truly achievable, it is not at all difficult to tell by the end of the measurement period — if most people achieved the quotas, then they were achievable; if not, then they weren’t.

Why do attainable quotas matter?

1. Motivation. Most people, and even more sales people, want to be “successful.” The quota is the performance standard. People who don’t get there are underperforming, and people who get to quota are performing well, and people who exceed their quota are over performing. The opportunity to be successful, and to be seen as successful, and to enjoy the fruits of success (good variable pay) — these are powerful motivators. Quotas which are out of reach for most people create at least as much frustration as motivation.
2. Management credibility. Attainable quotas are a sign that the company and sales leaders understand their market, their value proposition, and their selling model. Territories are balanced, sales resources are appropriately deployed, and a reliable selling system is in place so that the relationship between sales capacity and sales results is a stable. Sales people like to be part of such a system, customers like to be served by such a system, investors like to invest in such a system. Attainable quotas are a clear sign that this sort of value-creating selling process is in place.
3. Delivering market-competitive pay. Most companies intend to pay their sales people at a level which is competitive for the market. If the combination of base pay plus the incentive that target (at quota) is set so that it will deliver market-competitive pay, then if most of the sales organization does not achieve their quotas you will have most of the sales organization not earning market-competitive pay. Some companies mitigate this risk communicating above-market pay in anticipation of under-performance versus quotas, hoping to actually deliver market-competitive pay median performer. However, you can imagine how assumption-filled the analysis is which connects expected total compensation to market values.
4. Budgeting and performance prediction. For the purpose of predicting the performance of the sales organization and the cost of their compensation, the most straight-forward approach would be based on assuming that average quota attainment is 100% of quota average target incentive earned is a bit more (usually 5% to 12% depending on the amount of acceleration in the comp plan). Trying to predict total sales productivity and the cost of compensation in a business in which quotas are generally not attained can become an exercise guessing, gamesmanship, and frustration for all involved.

This is all about quota — what about the rest of the performance distribution?

If the objective is to maximize the motivational value of the comp plans, the ideal performance distribution is:

• Not more than 5% of the sales people “out of the money” (earning no variable pay), and the these people should generally not be “keepers”
• About 40% of the sales people earning some variable pay, but less than the target amount
• About 45% of the sales people earning more than the target amount, but less than the fully leveraged upside (fully leveraged upside is generally 2 to 3 times the target incentive)
• About 10% of the sales people earning the fully leveraged upside or more.

1. A performance standard (some say quota, others say productivity expectation or goal) and
2. A good tracking and reporting system (have to keep up with it if we’re going to pay on it).

And I honestly think you could get a lot of traction just by doing those two things well. Add in the reward and you’ve definitely covered a lot of the triggers that help maintain focus and motivation.

A reward system can go awry if the rewards (and risks) are so great that people get a little too “creative” in meeting or exceeding their goals, or if they are so small as to seem to undervalue the contribution they are meant to reward. The first case (inappropriately large incentives) is much of the root cause of the current backlash against incentive pay, in my view.

Interesting idea, and we do have a client that is violently opposed to quotas as providing a “stopping place.” I suspect it may be a case of bad comp design + a flawed quota setting process. If there’s a big payout AT quota, then yes – it’s a stopping place. But if the reward for getting to quota is the opportunity to earn at an accelerated rate, then no rational sales person would hold back at that point, unless…

…unless the goal setting system will result in a much larger (and harder to attain) quota the next year as the “reward” for over-achievement. And that, in my experience, is the real reason for the quota becoming a “stopping place.”

So I’d say that attainable and fair quotas set using a process that does not punish success with added risk the next year, combined with correct comp design, will yield the best return on the cost of comp for the company in most cases.

1. Used for the benefit of the employee (not just to create benefits for the employer)
2. Focused on challenging activities (not on activities that employee sales people already like to do)
3. Tied to specific reasonable, objective, and attainable standards of performance
4. Accompanied by celebration of significant successes by the organization.

In addition they note that, “Reward systems that are discretionary, subjective, or based on pleasing the people in charge are often seen as unfair and coercive. What is ‘good’ today may not be good enough to earn a reward tomorrow.”

There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.

1. They may take more time and effort on the part of the sales person, so should pay more as a percent of sales to make them worth that time investment
2. They may pull sales people out of a comfort zone, and so should be more attractive to help them focus on new behaviors
3. They may be more difficult from a goal/quota setting point of view, with little/no history to use as a basis, and so goals/productivity expectations may have serious accuracy challenges compared to the base business.

Here are the typical comp mechanics to recognize these challenges:

Characteristic of the sale: Takes more effort

Comp mechanics: Pay a slightly higher rate – 15% to 50% more than base business is about right, depending on the degree of difficulty

If the “more effort” is only a startup challenge, make it clear that in the future it will revert to a lower rate – so they have every incentive to get these sales going quickly (for new products); if it will always take more effort, the rate should probably not revert (new customers)

Characteristic of the sale: New / out of comfort zone

Comp mechanics: Pay a higher rate on the new stuff and a lower rate on the old stuff – to provide “carrots” and “sticks” – so ignoring the new stuff would mean less earnings than last year for the same results as last year; and meeting expectations on both old and new would result in slightly higher earnings

Again, make it clear that rates will not stay this high on the new stuff forever, so it will be in the sales person’s best interest to get a fast start

Characteristic of the sale: Difficult to set goals

Comp mechanics: Pay on the new stuff (products/customers) from first dollar, without a lot of dramatic acceleration or bonuses around quota/productivity expectation. If you know your goals are rough, don’t make attainment of them a high-stakes event for the company or the sales person. In fact, a straight commission (at an attractive rate) without any acceleration is a reasonable arrangement in the first year.

Question

In the non-commercial radio world, there is a role that is referred to as underwriting staff. They go out and solicit contributions from businesses for a mention on the air. It is basically sales in the non-profit broadcasting business. One station’s staff has always been salaried and now they are thinking of going to a commission structure.

Answer

My advice is to offer some variable pay, but move slowly. My guess is that you want a collaborative non-profit approach by your “underwriting staff,” not an aggressive sales-y approach. Their degree of aggressiveness and their level of effort may go up as you offer them incentives; but your ability to control them and their tendency to work collaboratively with their team and the rest of the company may go down. You also need to assume that you have people already in the role who chose it because they liked the reliable low-risk pay environment. Too much at-risk, and you could scare them away – which is OK if that’s what you want to do, and if you have the ability to re-fill those positions quickly.

So, that said, I would suggest that you move to a fixed dollar payout opportunity at target – same value for all of them – we’ll call that their bonus. Then set a goal in “underwriting” that they have to achieve to get it. Start paying some variable pay around 70% of goal (since it’s the first time you’ve set these goals), and offer 150% of the target at around 130% of goal. The payout should probably not be funded by reducing base salaries in the first year you do this, as that could also be scary. If you are already paying below market, you may have room to offer a bonus by paying a little more in total and putting the entire annual increase into the bonus. Even $5,000 in the first year will start to get things going and capture their attention. $10,000 would be better. And over the long run you are probably headed towards a pay mix that is about 60% to 70% base and 40% to 30% at-risk.