SAleS COMPenSATiOn By Michael Vaccaro, Deloitte Consulting LLP

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1 The Magazine of WorldatWork How to Lead Your SAleS COMPenSATiOn By Michael Vaccaro, Deloitte Consulting LLP team to SucceSS Sales compensation practitioners can help their teams succeed by thinking clearly, strategically and creatively. The first half of 2011 proved to be an interesting and tricky time for sales compensation. There was a combination of shorter-term and longerterm influences that can make decision making difficult for this year and next. Getting tactical responses wrong at this stage of the economic recovery could hold back sales effectiveness and waste investment dollars for years to come. To navigate this tricky time, sales compensation practitioners must not stray from the fundamentals of good incentive design. But there also needs to be a layer of innovative thinking built into compensation designs that can enable sales to outperform the competition during the next five years WorldatWork. All Rights Reserved. For information about reprints/re-use, copyright@worldatwork.org august 2011 workspan 37

2 t H e recent recession and recovery pattern Have created a bust-and-boom in many companies SaLeS incentive payouts s Conflicting Signals Going into 2011, there was already a high level of dissatisfaction with sales compensation. For example, Deloitte s 2010 Strategic Sales Compensation Survey found that more than half of the surveyed sales leaders were not satisfied with their sales compensation programs the lowest level recorded since 2004 (see Figure 1). The recent recession and recovery pattern have created a bust-and-boom in many companies sales incentive payouts. Where 2009 generally saw lower incentive levels with its lower sales output, 2010 s market improvements created a near spike in incentive levels as many sales teams found themselves well above year-over-year sales targets. Some organizations wonder how much of the uptick in performance is attributable to the sales representatives versus the economy, and how to equitably pay the representatives for their contribution. They also wonder if the economy will be any more predictable this year and next. At the same time, longer-term trends in the sales world may be reasserting themselves as the new economic cycle gets under way. The evolution of many sales organizations from transactional to consultative selling, from direct sales to multichannel and teambased sales, and from simpler to more complex incentive designs appear to have put pressure back on sales organizations to keep up with the times. But is the new normal similar to the old normal from 2008? What s the right way to adapt? Many sales compensation practitioners are asking themselves what incentive plan should be put in place to help the sales team adopt a more nuanced customer strategy. It s easy to imagine a situation like the author s company encountered at one manufacturer, where the shorter- and longer-term influences raised and commingled those questions. The company had seen sales incentive costs rise by 40 percent during 2010 as representatives rode Figure 1 Levels of Satisfaction 80% 60% 40% 20% the recovery. At the same time, customers were asking for better support from the sales representatives, which implied investment in new skills training that would result in additional costs for the company. Company leadership took opposite positions; the finance departments worried about rising costs, while sales leadership talked about more investment in talent management to drive productivity. These conflicting signals made priorities 0% Salesforce productivity *Source: Deloitte s "2010 Strategic Sales Compensation Survey" Figure 2 Effective Plan Design Alignment with business direction to motivate the right behaviors Alignment with other salesforce organizational components Ability to measure and administer Sales compensation program Use of businessappropriate design principles and mechanics Is your sales compensation plan sound? Do your plan metrics help drive the company s strategy? Is your plan a good fit for your sales organization? Is your plan mechanically sound? Can you administer the plan with existing people, processes, data and technology? 38 workspan august 2011

3 and next steps unclear for the sales compensation team. What Could Go Wrong? Hidden Problems In today s environment, hidden problems in sales compensation could manifest themselves as a result of either the recession s aftereffects or the longer-term sales environment changes. Those problems include: Sales compensation might not be adjusted in sync with an evolving sales model. Shortterm success after the recession can mask the longer-term need to support new behaviors that are needed in the future. Effectively, sales pay begins to drive the team toward the wrong strategic place. Sales pay can become disconnected from performance. Overreaction to incorrect sales targets that did not correspond well to swings in the economy can mean that pay results continue to be distorted, and are largely determined by factors that may not be in the sales representative s control. Smart growth may not be adequately rewarded. According to the Deloitte survey, one of the most coveted changes for sales compensation is to make sure profitable growth is rewarded, as opposed to rewarding any volume the sales team generates. Sales leaders have often seen their sales teams bring in customers that are costly to serve or are poor business risks when incentives are only tied to volume. As competition gets more heated coming out of the recovery, companies will need their sales teams to make effective business decisions, and sales pay should not get in the way. A turnover spike could occur. According to the same survey, 40 percent of companies had not made any adjustments in their sales compensation to address retention during the recession. This could be problematic, as competitors may try to poach top sales performers in their drive to capitalize on the recovery. Execution of more complex sales approaches can be compromised if less talented sales performers are left to lead the effort. Changes might not be quickly executed. Even if the right tactical moves are identified, some organizations could find themselves limited or slowed by either their ability to change to or administer new sales incentives because of inadequate compensation applications or a shortage of staff after cuts from the recession. Four Fundamentals of Good Design In their efforts to take full advantage of the economic recovery and avoid significant pitfalls and constraints, august 2011 workspan 39

4 Figure 3 Can You Sell to Your Sales Team (Through Incentive Design)? What message am I marketing to the sales team? Who in the sales team needs to be interested? What innovative incentive design will catch their attention? How will they win? One avenue for innovation is a redesigned short-term promotion program. organizations should consider the following steps: 1 Align metrics with strategy. The performance metrics given to the sales team should drive behaviors that can help the organization s go-to-market strategy be successful. For example, instilling a strategic message to support smart growth might be supported in the incentive plan by counterbalancing a volume measure with a profitability measure, and could also be constructed so top performers incentive rewards will be markedly higher than rewards for the rest of the team. 2 Align compensation with overall sales strategy. The organization s strategic priorities should not be contradicted by other sales elements it has in place. For example, if future selling success depends on representatives and specialists working together efficiently, then removing impediments in the compensation plan that penalize representatives for spending time or sharing credit with the specialist can be important. 3 Maintain good compensation design. The sales compensation design should be structured so its metrics, targets, commissions, bonuses, eligibility rules and so on interact sensibly and with as little complexity as possible. For example, if performance against a year-over-year sales target drives pay results, then compensation plan elements, such as pay frequency, mix, weighting, thresholds or goal design, could counteract pay swings that may not reflect improved sales performance. 4 Keep administration manageable. A good sales compensation plan should not outrun supply lines by featuring elements that cannot be carefully measured with the data available or credited and calculated well by the existing compensation administration process/system. For example, if incentive plan changes are being contemplated, including the administrators or the right IT staff in the conversation early on and keeping the number of changes to a critical minimum can facilitate a quick turnaround. One manufacturer used each of these four steps (summarized in Figure 2 on page 38) to help sort out what was happening to its sales incentive plan and build an effective response. In doing so, it determined that longer-term relationships would be the core of its business going forward, and therefore redesigned its sales compensation to emphasize retained customers with growing shares of business. To align with that objective, the manufacturer redesigned sales roles to be more relationship-oriented and enabled credit to be shared. It also de-emphasized a beating last year motto by instituting a more precise goal-setting framework. And, it removed regional-based sales measures that the sales team could not directly influence, which also helped simplify the incentive plan. Save a Place for Innovation While the four fundamental steps may help companies navigate many of the sales compensation related pitfalls that lurk in the next few years, innovation can play a key role for the future. By adding an innovative touch in sales compensation say, recasting traditional incentive elements for a new purpose, or repackaging rewards in an unusual manner companies can catch their sales team s attention and reward it for making changes that can drive the business forward in the long term. One potential avenue for innovation is a redesigned short-term promotion program. Often promotions are used simply as one-off contests for the sales team, which actually can distract from the sales plan s primary objectives and therefore lessen productivity. An alternate approach is to use promotional funds to develop useful longer-term skills in the sales team. Installments can be sequenced to have skills build on one another. For example, one manufacturer created a product manager s friend to reward those representatives who successfully brought the company s product specialists in to meet customers, and so increased the odds for expanding the value of the relationship. Similarly, payout timing is a potential lever for more innovative use. Another company used accelerated payouts as a means to encourage 40 workspan august 2011

5 more profitable sales from their sales team. The company paid a higher proportion of earned incentive upfront, and deferred less to quarterend for representatives who lessened their use of discounts to close sales in the previous quarter. This created an interesting incentive for the sales team that was also self-funding, since the reward drew from the increased level of profitability. In effect, sales compensation administrators can add value by thinking like strategic marketers. Marketing professionals identify target audiences, craft appealing messages for those audiences and develop a compelling mixture of product/price/promotion/placement to support their messages. Adapting a similar mindset to sales compensation plan design (see Figure 3) can reinforce important sales objectives and make their achievement more likely. Conclusion There is a building arms race in the sales world, as almost every company tries to maximize its share of the recovery. It is important that the result is not a poorly designed compensation program, which can distract sales representatives, create misaligned incentives, increase the cost of sales compensation and fail to drive performance when needed. Sales compensation practitioners can help their teams succeed by not just being good administrators, but also by thinking clearly, strategically and creatively about the sales incentive levers they have. The results could set their companies apart. Michael Vaccaro is a specialist leader at Deloitte Consulting LLP in Princeton, N.J. He can be reached at mivaccaro@deloitte.com. Author s note This article contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this publication. resources plus For more information, books and education related to this topic, log on to and use any or all of these keywords: Sales compensation Sales compensation plan design Salesforce productivity. august 2011 workspan 41