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.

1. Relevant – the incentive program should be tied to meaningful business results. Define what matters to your business, what are your objectives for the year (improved customer service, increased revenue from new customers, better margins from existing customers, improved operating profit, etc.) and link your bonus to those objectives.

2. Controllable – to the extent possible, drive the measures as close to the individual’s line of sight as possible. If the overall objective is improved operating profit, think about how each person can impact that measure and tie a portion of the plan to the specific results they can deliver that help achieve this goal. For Accounting, that might be an A/R balance target of $0 > 90 days. For Sales, it might be improved top line growth which provides more revenue to work with to cover expenses. For HR it might be better recruiting performance with less turnover.

3. Measurable – if you can’t measure it, you can’t pay for it. Also, you need to be able to automate your measurements as much as possible or you will drive yourself crazy with the added administrative burden of calculating bonuses. For many roles, you will only need to calculate a bonus at most quarterly (for some annually is just fine). For Sales roles you will find yourself calculating pay more often, probably using more complex calculations, which is why sales compensation is a specialized compensation function and consulting discipline.

4. Objective – you need to avoid subjective payouts at all costs. These are demoralizing and risk legal challenges. Pool approaches, though common in small companies, are often based on a subjective allocation (“we’ll see how much extra we made and then share that with the staff”), but this does not provide anyone with a goal or ability to take control of their potential payout. Instead, any bonus under this type of approach ends up being just additional pay with zero motivational value.

Another caution for small companies is to not base their employee bonus on final operating profit (after management/ownership has taken out their disbursements) as this creates a conflict of interest and lack of control in the outcome for employees, as the more the owners take in disbursements the smaller the profit to use for employee bonuses. The employee bonus amount should be determined prior to owner disbursement and budgeted for as a fixed cost rather than just a “sharing of the profits” at the end of the year.

Generally small companies start from the wrong end of the equation when thinking about bonuses. They ask “what do we have left over” rather than thinking about “what do we need to pay to get good talent, and how can we divide that pay up between salary and bonus for the maximum motivation.” Obviously the economics need to work out either way, and the second approach requires more management involvement in controlling staffing costs, but the bonus targets should be built into the budget, allowing for upside if company and individual goals are exceeded.

The right system can have a dramatic effect on productivity and morale, because people will know what is expected of them and what they can do to change the outcome, plus it creates a map for the company showing how everyone fits together to achieve his/her own piece of the puzzle that will lead to the company’s overall success…provided the 4 watch-words above are adhered to in the design. A program that uses measures that are irrelevant to the business, uncontrollable by the employee, not measureable, and not objective would of course have a profoundly negative effect!

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 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.