Sales Incentive Design Best Practices Part 2

Transcription

1 Download handouts (PDF) : or info@mdm.com Sales Incentive Design Best Practices Part 2 October 4, 2012 Mike Emerson and Mike Marks Indian River Consulting Group event sponsor

2 Sales Incentive Design Best Practices 2 Mike Marks Indian River Consulting Group Steve Deist Indian River Consulting Group Mike Emerson Indian River Consulting Group Tom Gale Modern Distribution Management

3 The Big Picture Is About Market Access Definition: How well are your investments in sales and marketing resources aligned with the actual opportunities for growth in your marketplace? The old success formula for owner-operators was: We react quickly to threats and opportunities and we compete with great service and excellent people Back then best practices in sales incentive design was all about the formula and the program But, what happens when, in the mind of the customer, everyone is good enough and your sales reps negotiate with you on behalf of their customers? The new success formula is now: Get really clear on your competitive sweet spot and then concentrate your resources there New best practices are around defining your sweet spot, getting your reps to do what you want them to do, and rewarding them for it 3

4 It s all About Alignment There is no best program There is no silver bullet or best sales comp program 4 Source: What s Your Plan?, NAW, 2003 Incentive programs are not a surrogate for management

5 It s all About Alignment But, there is a best process Ensure clarity exists on Strategy (which GP$s are more important than others?) Cost objectives (decrease costs as % of GP; what conditions can cost be higher?) Shortcomings with the existing program(s) and level of urgency 5 Team of 3-5 including senior sales leadership and finance Sales rep inclusion is beneficial for insight and buy-in; not team members Two to three years of monthly wage and performance data Fixed and variable earnings Sales and gross profit with strategic areas broken out Answer key structural questions Don t take shortcuts on modeling or communication

6 Absolute vs. Relative Performance Measuring performance in absolute versus relative terms is the first critical design question Is shooting 85 a good round of golf? 6 Sales management and budgeting competency are the key determinants as to whether relative performance metrics are viable Are we willing and able to base pay on goals? Making this determination early in the process eliminates a lot of dead ends

7 Absolute vs. Relative Illustration 7 Absolute performance Territory size drives incentive pay Goals not used (e.g. rate x GP$s = commission) Relative performance Performance to goals drives incentive pay Territory size not directly tied to pay Allows for risk/reward flexibility because the incentive formula origin Could be $200,000 or $2,000,000 GP$s The shape of the payout line answers the second key design question: How much skin in the game should reps have?

8 Pros and Cons Absolute Programs Pros: Easy to understand and administer Keeps wage expense variable Cons: Using unique commission rates will create exposure from mix-shift Existing product mix will vary by territory, so using different rates will immediately create winners and losers Paying a higher commission rate on growth may drive growth but will likely increase costs (below goal not paid at lower rate) Flexibility to change territories limited because total dollars in a territory drive pay (annuities) Relative Programs Pros: Keeps the goal posts moving Provides flexibility in establishing upside benefits and downside risks Accommodates differences in existing product, customer and market share mix Facilitates changing account assignments and eases implementation of new selling roles or structure Less financial exposure when all payouts tied to total GP$s Cons: Burden of setting targets Perception of participants (fairness) 8

9 Relative Option Commission Multiplier One approach is to establish a GP$ goal with a base commission rate below goal Once the sales/gp$ goal has been reached, commission rate above goal is based on meeting secondary goals Secondary factors and respective goals set for each sales rep individually Another variation is to have separate rates starting at $1 with achievement of secondary goals increasing rate One goal is achievement of overall GP$ goal Two secondary goals further the opportunity Pay still largely driven by territory size but goals impact pay and upside/downside increased Old program 12% of GP commission 9

10 Relative Option Bonus and Commission Uses target compensation approach where compensation target is set for each sales rep Target based on historical earnings (last year, best or average of last 2 years) Typically correlated with territory size; but doesn t have to be 10 A portion of target pay is established as salary with the remainder structured as a bonus Amount set aside for bonus typically ranges from 20% to 40% Bonus based on achievement of an overall GP$ goal or a combination of factors Commission paid above the overall GP$ goal (rate can vary based on secondary factor achievement) % of salary bonus below goal with commission above goal makes for equal risk/reward among big and small territories (percent vs. dollars)

11 Bonus and Commission Example Current Avg. $1M GP (last 2 yrs.) Avg. $120k W2 at 12% commission New structure GP$ target set at $1.1M (10% increase) Strategic GP$ goal set at $250K (focused subset) Salary set at $79K (60% of $1.1M * 12%) Bonus target set at $53K (40% of $1.1M * 12%) Above goal commission rate is 14% Scenarios Basically income neutral when both GP$ and strategic product goals achieved Risk is greater (lower income) when neither goals achieved Bonus Matrix 11 At $990K GP (90% of goal) old program would have paid $119K; new program pays between $95K and $121K based on secondary factor Reward is greater when both goals achieved due to higher commission rate

12 Modeling Sales compensation program changes are disruptive It is imperative to avoid unexpected results Credibility lost can not be recaptured Company or individual costs can be very destructive Proper modeling of scenarios is essential Revenues and revenue components up and down Results from rep subsets (e.g. high volume grow and low volume shrink) Product or customer mix shift Other key considerations How losing or gaining a major customer or vendor will be handled What about next year? To bridge or not to bridge? Performance and payment timing 12

13 Performance and Payment Timing Two important considerations with goal-based program Performance measurement interval (monthly, quarterly, annually) The smaller the window the more urgency The larger the window the less variability Whether time periods will stand alone or be cumulative 13 A common compromise is to measure monthly and reconcile quarterly using YTD values

14 Communication Prior to rollout Ensure all data sources tested and providing accurate, credible data Introduce program to sales management organization and identify any what about this and what about that issues 14 Rollout Individual sessions with each sales rep Excel tool to model scenarios populated with rep specific data On-going The objective of any incentive program is to communicate and reward for desired results, therefore participant awareness is very important

15 Thank You! Any questions? More resources on sales compensation design: event sponsor 15