Double quota/double credit

Description: Each participant in a sale receives full quota and full credit for the sale (or “their” piece, e.g. Product Specialists take only their product slice)

Advantages:

• Strong encouragement for participation of multiple sellers in an opportunity
• Clear message regarding expectations communicated via quotas

Disadvantages:

• Difficult to model selling costs in relation to sales productivity
• Special care must be taken to ensure the team size is appropriate for the opportunity

Appropriate use:

• When it is possible to anticipate the requirement for participation of each team member in a certain class of selling opportunities
• When teaming is essential to the execution of the sales process

Credit splits

Description: Credit for all sales is divided among participating team members, with total credit adding to 100% of actual sale value

Advantages:

• Easy to model and anticipate selling costs in relation to results
• Opportunities will tend to be handled by the smallest effective team

Disadvantages:

• Disincentive to team with others due to anticipated reduction in sales credit
• Expectations regarding degree of teaming are not communicated via quotas

Appropriate use:

• When it is important to be able to assign a team to an opportunity “on the fly”
• When it is difficult to anticipate the teaming required, and therefore to set quota

There are ample variations on both of these types of incentive, including

• “Layered quota / layered credit” in which more than two people are involved in a sale (e.g., Account Manager, Product Specialist, and Channel Manager)
• Split credit with more than 100% of total sales being distributed (e.g., allow up to 200% credit, but with no more than 100% going to any one person/role)

Most complex sale requiring involvement of multiple sales people in most deals benefit from some form of shared sales credit. The appropriate form will depend on the intended coverage model and key accountabilities of each sales role. While the CFO will be concerned about “double paying” when several people receive sales credit and compensation for one sale, these concerns are generally allayed through rigorous modeling of the total cost of the selling function as it relates to overall sales productivity.

Advantages of relative ranking payout systems include:

• The dispersion in variable pay is known in advance, designed, intentional, and totally controlled.
• The total cost of variable pay for the organization can be budgeted with confidence – regardless of overall results, the total payout is unchanged.

Disadvantages, however, are significant:

• The payout doesn’t vary with overall business results – total pay delivered in a “bad” year is the same as that delivered in a “blowout” year.
• The sales people end up competing with their peers in a very real sense – “The only way for me to ‘win’ is for you to ‘lose.’” This is the reality of a relative ranking plan, and can undermine a sense of collaboration and shared success.

Relative ranking plans work best for sales forces in which collaboration is not a key requirement for success, the sales force is large enough that sufficient dispersion in pay can be created in the designed payout distribution, the sales role has limited influence on overall results (customers are buying from the company more than from each sales person, and the sales person has more influence over awareness than over the final buying decision – think of pharmaceutical sales reps).

For most sales roles, the more direct tie between performance and payout, independent of the performance of peers, provides the better combination of motivation for the sales people and alignment between sales results and the cost of compensation.

New business sales jobs focus primarily on acquiring new accounts.  The incentive plan rewards for new revenue or profit margin brought to the company.  In contrast, account managers often are assigned a book of business that includes several new business sellers’ territories. Their focus is on retaining and growing established accounts (so new business sellers can continue to bring in new customers).

The territory manager we will discuss is a hybrid of the two with the expectation to not only acquire new customers but also retain these customers (and grow revenue or profit margin). The compensation plan that results is often is a hybrid of the hunter and farmer plans’ key components that may let the territory manager decide whether hunting or farming will maximize the incentive pay regardless of sales management’s preference for a more balanced approach.

An alternative approach that has been more successful in achieving sales management’s objective is to measure performance and pay incentive pay based on net new business revenue or profit margin.  This approach communicates to territory managers that any lost business must be offset by new customer acquisition or selling additional products or services to current customers.

The key is that the net new business goal is set based on historical territory performance plus the desired growth.  The goal will not usually be as great as for a direct seller since the lost business goal for account managers is an offset to the growth.  In addition, there is often real work involved in servicing and maintaining the established book at historical levels before any growth is achieved. However, the net new business goal should always be a positive number – new business exceed anticipated losses to keep the territory manager focused on growing the business by at least the overall percent the company is expecting revenue or profit margin to grow.

When goal setting is a challenge for this job and results may be volatile, and effective compensation arrangement may be a mix of bonus and commission.  For example a prorated bonus is paid for performance above threshold to excellence (e.g., 80% to 120%) then a commission is paid for above excellence performance (over 120% in this example).  This approach retains the needed linkage between pay and performance while ensuring that the additional incentive dollars are self-funded.

To focus some of the sales effort on more strategic results, flexible incentive components focused on Strategic Sales Objectives (SSOs, also known as MBOs, KPIs, KSOs) may be used. The goals for these objectives are generally communicated in sentences, not numbers. To get the best results, we would recommend:

• Put enough of the incentive opportunity against these objectives to make them meaningful to the salesperson, ideally in proportion to the amount of time people spend on them in the year. For example, a salesperson who is expected to spend 70% of their time closing deals this year and 30% of their time laying the groundwork to close longer-term opportunities in future years should have 70% of their incentive at target available through in-year results and 30% available for success with SSOs.
• Limit the number of objectives. These are supposed to provide focus, which means there should probably be five or fewer of them for a year.
• Focus the objectives on prospect action, not salesperson action. A good objective might be for a salesperson to obtain a commitment to a field trial, or a limited first order, or a visit by a prospect to a current customer. Avoid objectives which are salesperson activities, and focus on objectives which can only be achieved when the prospect objectively demonstrates deepening commitment to your company’s solution.
• Offer limited upside. A good guideline for motivating compensation design is “No risk without upside.” However, allowing salespeople to earn twice the target incentive for SSO type components is probably not a good idea. Ideally, the upside on these components is delivered when the deal is closed and the large check associated with the numbers comes in. Nonetheless, it may be appropriate to define some over performance criteria, and offer as much as 150% of the target amount to those who “over perform.”
• Monitor objectives and ratings across the organization to ensure consistency. Require some level of approval of the objectives before they are communicated to the salespeople, reviewing them to ensure that all sales managers are approximating “equal stretch” as they deploy these objectives. Then after the objectives are assessed and the payments are made, check to make sure that the payout distribution seems sensible for the amount of progress that has actually been made by the sales team.

Strategic Sales Objectives are hard to do well. They take significant organizational discipline, and require thoughtful review to ensure they are being used appropriately. In long sales cycle businesses they can be vital, but recognize that doing them well is a significant investment for sales leadership and for those administering the plans.

We’ll leave a lot of that to your other advisors and focus here on the compensation piece with the basic steps you need to complete to arrive at the right comp plan for your new hire:

1. Your first step is to determine a reasonable level of total compensation for a sales person in your business — in the U. S., that’s what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person will sell in that first year — the cost needs to be associated with a reasonable return. You’ll get better at that as time goes by, but you’ll have to start with some kind of working assumption based on others in your industry, leadership’s experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
2. Next you need to decide how the risk will be shared — how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even non-existent. 30% to 50% of the target total compensation is a good starting place. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
3. Since you know the target total cash and the base, you can subtract to determine the incentive at target. Your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There’s more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date). But many early stage companies do fine with a straight commission paid monthly – a single rate based on the incentive at target divided by the productivity expectation (e.g., x% of revenue, y% of margin, $z/unit).
4. Your last design step is to check the plan’s appropriateness across a broad range of possible levels of productivity, and be sure you’re comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company’s owner.
5. Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person’s manager and the sales person. Here, you should probably ask for a review by your legal counsel.
6. And finally, determine how you will administer the plan – where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.

Then after you’ve been living with the plan for a few months or quarters, have a look again to see if it’s meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don’t adjust during the plan year unless you’ve got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.

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.

Large sales organizations need structure. Local businesses need to focus their sales team on local priorities. How can these apparently conflicting needs be balanced? No talking on this one, but some good ideas!

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