What s Your Sales Comp ROI?

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1 What s Your Sales Comp ROI? Getting the Right Financial Impact from Your Plan The Sales Leadership Forum Reports Insights for Members of The Sales Leadership Forum

2 Dear Members of The Sales Leadership Forum: This report on Sales Compensation ROI provides our members with exclusive insights on this topic from our sessions and research. The Sales Leadership Forum is a sales leadership community and sales effectiveness advisory organization that provides its members with exclusive access to senior sales and marketing executives in leading growth companies, actionable research, and best practice consulting. We work with our academic partners from leading business schools and our board of advisors from member companies to provide services that directly address member needs to increase sales productivity and profitable revenue growth. The Sales Leadership Forum provides the following services to member companies: Senior Executive Community. Community and sessions with senior executives in sales, sales operations, human resources, marketing and general management from leading companies across industries. Forum sessions bring executives together for memberdriven discussions on hot topics, access to best practices and advisors, and relationship building. Sessions are held both in-person and via live web. Sales Compensation Community. Community and sessions that include sales, sales operations, human resources and compensation experts. Sessions focus on the in-depth exploration of important issues in sales compensation. Sales Operations Community. Community and sessions that include sales, sales operations, human resources, and compensation executives and experts. Sessions focus on in-depth exploration of important issues in sales operations. Field Sales Management Community. Community and sessions that include senior executives and field sales. Sessions focus on in-depth exploration of important issues in sales management. Executive Coaching for Management. Sales effectiveness coaching from our leadership team who is experienced in working with organizations across industries in areas that include sales strategy, growth planning, performance management, sales channel management, sales organization design and development, sales productivity improvement, and incentive compensation. Fast Cycle Research. Focused research and surveys on topics of interest to members, or issues for which they need quick input. Match Making. Connections within the member group to confidentially gain information and facilitate discussions on hot questions from members. The Sales Leadership Forum 2

3 Consulting and Advisory Services. Project-based consulting services in areas that include sales strategy, market coverage, job design, sales operations management, sales productivity improvement, sales compensation and quotas. This report on a Sales Compensation ROI is based on a discussion with a panel of experts as well as research from The Sales Leadership Forum and SalesGlobe. We hope you find this information valuable. For additional perspectives and answers to questions, please visit or contact us at (770) The Sales Leadership Forum 3

4 Introduction and a View from The Sales Leadership Forum Return on investment is a topic that invariably arises when discussing sales compensation. Executives in sales, sales operations and especially finance want answers to three questions: 1. How much is the sales compensation plan going to cost us? 2. Is this a good investment of our money? 3. What should we expect back? In order to answer these questions, we must first evaluate how the sales compensation plan is designed. Sales compensation design follows a predictable process. We begin by defining sales roles and clearly articulating the sales strategy, and from that foundation we build out the components for the plan, including answers to these fundamental questions: What kind of pay are we going to deliver to a particular job to be market competitive? How are we going to develop that pay mix in terms of the base salary and incentive ratio at target? (The pay mix will vary by the sales process and the sales strategy.) How much upside should somebody earn for top performance? How much downside should they earn for lower performance? What types of measures should we put in the plan to connect performance and pay? Should we measure revenue, profitability, etc.? How do we build an effective plan without overloading it? How do we keep the message simple, and stick to the rule of three or fewer measures, with no measure less than 10% weight of target incentive? Once we ve answered these questions around sales roles and strategy, we can look at the mechanics of the plan. All too often people jump to the mechanics of the plan first, before defining the roles and strategies. Calculators come out, and people start adjusting commission rates. But that s actually several steps into the process, when we start talking about the specifications to connect those pieces together. It s also important to look at quota setting and objectives, as well as governance how we operate and evaluate the plan on an ongoing basis. Looking at sales compensation as the sum of all of these elements, we can see several hot buttons in terms of what might drive ROI: The Sales Leadership Forum 5

5 The amount that we re going to pay in the market. The pay mix: the amount that we re going to pay in fixed versus variable costs. Some CFOs debate how much money they actually want to commit versus tie to performance. Another common debate between CFOs and sales is why we can t put more pay at risk and have less fixed pay. The upside and threshold. How much are we going to pay our top people and how little are we going to pay our bottom people? Do we employ the Reverse Robin Hood Theory, which takes from the underperformers to pay the over performers? The mechanics. Accelerators are a driver of costs and ROI. How we set our objectives and goals, relative to target pay, and how we allocate those goals out to the organization. What we expect back is a big driver of ROI. In our work with companies, we also hear several common challenges. 1. What return should we expect from the sales compensation investment, and how should we look at that return? Is it a flat dollar return, or a flat dollar amount that we pay? 2. What strategic changes are driving our investment? This is a challenge for companies that have had some changes in the organization and are pursuing new strategies that require them to make additional investments. 3. What are the right metrics to use for ROI? 4. How long should we wait to actually see an ROI? How you measure ROI on a job that s producing zero revenue if it s a multiyear sales process, but we know they re doing the right thing? How do we justify that from a financial perspective? 5. How do we get everybody to speak the same language? This is one of the trickier questions. It s a multifunctional problem, involving sales, HR, sales operations, and finance working together for a return on the sales compensation plan. The Sales Leadership Forum 6

6 Imperatives from The Sales Leadership Forum When determining the ROI you can expect from your own sales compensation plan, we recommend considering several drivers around ROI, and some ways to disaggregate the important questions. 1. Determine your strategy and the business objectives you are trying to achieve. Understanding, for example, that we want to grow a certain product group or we want to develop a certain market may change the way we look at ROI. We may be willing to invest a bit more to develop this market than we would on average or in our traditional markets. Isolate and evaluate ROI uniquely for that market. 2. Define how the sales compensation plan can help drive that strategy, and where its limits are. The sales compensation plan doesn t control everything. If we were going to sell a strategic product we know that the sales compensation plan can motivate people to sell it, but there are other factors such as availability of that product, targeting the right markets, the right sales messages, having the skill in the sales organization to do that, and having the right sales processes. A lot of other factors will play into whether we can actually accomplish that objective, in addition to the sales compensation plan. When we attribute success to the sales compensation plan because it helped us achieve certain objectives, often we have to understand that sales comp was just one piece of it. 3. Determine who you will pay. We might look at ROI a little bit differently this way as well. We might consider certain sales groups that were able to help us achieve that growth objective, versus the whole population. We can then look at the ROI on them. 4. Decide how much to spend. We recently worked with a media company that traditionally sold TV advertising, and they wanted to increase their cross selling of online The Sales Leadership Forum 7

7 advertising. That s a sales strategy; that s an objective. What could the plan do? They wanted the plan to help them get a 10% average attach rate to their core product. Their television advertising will have a 10% attach rate of online advertising. They stated what they wanted to happen; next they examined who would do it and who would bring in the return on their investment. They looked at the TV sales organization. They would be selling that online inventory cross-platform. So now they knew who they were going after. What were they going to pay? They expected an incremental spend of about 15% of the first year s contracted program revenue. So this company basically took that idea and converted it into a statement. We find it very useful to move any focus away from the number, much like in quota setting. Take the focus and the argument away from the number and break down the components driving that number; then, the conversation is simply a lot more productive. In This Report This report features a panel discussion with a team of experienced sales executives, facilitated by Mark Donnolo. The discussion covers the collective experiences of these executives on evaluating the return on sales compensation. Our panel includes: Ralph Chauvin, Vice President of Sales, Perfetti Van Melle USA Rob Madden, Senior Manager, U.S. Sales Operations, Merial Roger Maloch, Former CFO, Fidelity National and Aderant Holdings Larry Sledge, COO, MB Operations We hope the findings in this report provide valuable insight for your business. If you have questions or require assistance in addressing these topics or other sales effectiveness challenges in your organization, please contact us at or (770) The Sales Leadership Forum 8

8 What s Your Sales Comp ROI? Expert Panel Discussion Ralph Chauvin VP of Sales, Perfetti Van Melle USA Rob Madden Senior Manager, U.S. Sales Operations, Merial Roger Maloch Former CFO, Fidelity National and Aderant Holdings Larry Sledge COO, MB Operations MARK DONNOLO: Welcome everybody, thanks for joining us today. We re going to have a really interesting conversation about a question that invariably comes up when you re involved in sales compensation design: What return can I expect for my investment? We have four executives with great experience in both sales and senior finance roles, which we think are really important to bring to the conversation. These are folks who know a lot about numbers and finance and how to measure a return, and also have had a lot of exposure to sales compensation. Today we ll look at how the sales compensation plan is designed from a financial perspective and how we look at ROI. We ll get into some specific issues around ROI as well, such as how to deal with paying top performers and looking at ROI by product groups or certain strategies. I d like to have the panelists introduce themselves. RALPH CHAUVIN: I work for Perfetti Van Melle. Perfetti sells branded confectionary products all around the world. In the U.S. some of the more famous brands would be Mentos Mints, Mentos Chewing Gums and Air Heads. We re based out of Erlanger, Kentucky, which is just outside of Cincinnati. I ve been in sales for seven years, and prior to that I was CFO for Perfetti Van Melle North America. Prior to that I was CFO for a division of Diagio in the Netherlands. So I am a chartered accountant who moved to sales seven years ago, and when I moved to sales I literally revamped the sales comp plan for Perfetti Van Melle. So I do have some experience with both sales and also the financial side, so hopefully I can help some of you with some of your challenges. ROB MADDEN: Merial is an animal health sales company; Frontline, Frontline Plus and The Sales Leadership Forum 9

9 Heartguard are our flagship products. I spent about 14 years in sales, and I m coming up on my fourth year in finance which is a sales operations role that reports to the finance controller of the U.S. MARK DONNOLO: That s a unique situation and always a question for a lot of companies: where should sales operations report into? Your group is actually within finance. In a mix of companies, sales operations reports into finance or some sales operations groups report into sales. ROGER MALOCH: I ve spent over 20 years as CFO at technology-related companies. I was recently at Fidelity Information Services. At the time I was there it was about $1.5 billion in revenue; it s an outsourcer or service provider primarily to retail banks and to mortgage processors. We did a lot of mortgage processing and backend outsourcing for banks. Long term, five year plus, service contracts generally. And then I was at Aderant Holdings, which is a software company, an international provider of practice management solutions basically ERP for law firms. Actually I started out my career a long time ago as a sales consultant at a software company, so I have some exposure directly on the sales side. LARRY SLEDGE: I m chief operating officer of MB Operations, which is a holding company for a variety of small private equity groups making investments in the southeast and Texas. I was previously the CFO of Skyway Software, one of our portfolio companies that was in the software development tool space. And then prior to that I spent ten years at Radiant Communications which is a company that started at about $5 million a year in revenue very small local company and was fortunate enough to be in the right place during telecom deregulation. We grew that to be an almost $2 billion company in 2000 before we sold to WorldCom. Over those 10 years we had a wide variety of different types of sales plans that we implemented, tried, failed and moved on to something else. So I m happy to share my experiences. MARK DONNOLO: Thanks very much. We re going to hit four different areas here. We can start with describing the various roles in plan finance basically, which parts of the organization get involved in sales compensation design and the financial side of sales compensation? Then we ll talk about how we look at ROI. What s the right way to evaluate ROI? Is it looking at how much we spend in terms of absolute dollars? Or percentage? Or are there other angles to look at? We ll talk about some specific challenges, and then finally we ll end with some wisdom and advice. Topic One Plan Finance MARK DONNOLO: Our first topic is roles in plan finance. I want to start off broadly, about the sales compensation process overall, just to set the stage. Which groups or key titles are involved in that in your organization? ROB MADDEN: We obviously have human resources involved, myself in sales operations, we ve got finance in there. We The Sales Leadership Forum 10

10 Driving Sales Force Productivity in Competitive Markets Sales Strategy Sales Process and Coverage Sales Compensation Sales Leadership Development SalesGlobe provides management consulting, operational services, and leadership coaching to business to business sales organizations to increase their performance. We work with organizations dealing with challenging growth issues to develop actionable solutions that produce near-term results. The Sales Leadership Forum. We sponsor The Sales Leadership Forum, a leadership and advisory organization of senior sales executives. Our Board of Advisors includes executives from top companies and business schools. Services. We can help you drive profitable growth in your business through: Sales Productivity Improvement Programs. Implementing proven levers to increase revenue per rep in your organization. Sales Compensation and Incentive Design. Developing methods to motivate and drive performance with your sellers. Sales Organization and Sales Process Design. Creating the most effective roles and sales process for your strategy. Sales Coverage Strategy and Channel Management. Aligning the right channel mix and programs for your partners. Sales Leader Coaching and Development. Building capabilities from your first line sales managers and up the lynchpin to performance. Sales Operations Improvement and Management. Optimizing and operating the critical support roles for your organization. Major Deal Strategy. Coaching and planning with your account teams to close those hardto-win deals that are critical to your forecast and results. What Makes Us Effective? We apply years of experience from our team which has led and supported hundreds of sales effectiveness programs across industries. We focus on real improvements to achieve substantial ROI. Some typical results: Sales capacity and productivity increases of 20% or more, through improvements in sales coverage and sales process. Sales compensation payout improvements for top performers with overall return on expense of 10% to 20% or more with better alignment to business strategies. Sales growth increases of 10% to 15% through improved customer acquisition, penetration, and churn management. Clients. Our team works with major domestic and multi-national companies across industries including technology, manufacturing, business services, telecommunications, media, financial services, and healthcare. Team. We focus experts, with decades of experience, on your initiatives. Our team includes professionals who have operated organizations and who have consulted with numerous complex organizations on challenging sales effectiveness issues. The Sales Leadership Forum 30

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