Sales Compensation Effectiveness Best Practices & Trends

Sales Compensation Effectiveness Best Practices & Trends March 26, 2014 Shawn Rossi, Principal, Sales Performance Practice Leader

Today s discussion Key Context & Trends Sales Compensation Design Best Practices Appendix: Sales Compensation Effectiveness Assessment Best Practices Questions? MERCER 1

Key Context & Trends

Key trend sales compensation is a critical driver for the sales force Impact of Levers on Sales Productivity* (% of surveyed companies who ranked lever within top 4) Sales Strategy & Planning Quota/Goal Setting Sales Compensation Design Deal/Pipeline Management Sales Training Sales Productivity Analysis & Reporting Sales Process & Playbook Definition Sales Compensation Administration Territory Definition & Alignment Recruiting & On-boarding Field Communication Account Definition & Maintenance Sales Person Status Changes Sales Coverage/Role/ Channel Modeling Customer Segmentation Other 0% 8% 8% 8% 5% 14% 11% 24% 24% 22% 41% 41% 38% 32% 51% 73% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Companies MERCER * Source: Mercer s Sales Operations Trends Survey of Fortune 1000 companies. The results are from 78 responses. 3

Best practice: view sales compensation holistically Separating the Leaders Aligned, Simple Plans Clear, Timely Plan & Goal Communication Effective Program Fair, Attainable Goals Effective, Efficient Comp Admin Area Leaders Laggards Rated Area Effective or Very Effective* Design 75% 60% Quotas 73% 39% Communication 73% 61% Administration 70% 57% MERCER * Source: Mercer s Sales Compensation Practices Survey of Fortune 1000 companies. The results are from 91 responses. 4

Best practice is to connect the dots and align 1 2 3 Customer Segmentation & Targeting Sales & Channel Strategy Sales Process Definition & Alignment Cust. Seg. Retention Expansion Acquisition Tier 1 95% $100M $10M Tier 2 85% $75M $100M Tier 3 75% $25M $40M 4. Commitment Sales planning Targeting strategy Qualification (go/no-to decision), based on fit & plant capacity Expansion opportunity Deal strategy Pricing/ negotiation Sales Process 1. Interest 2. Belief 3. Engagement 4. Commitment Product Planning Prototyping and Trialing First order (PO signed) Win/loss review Targets 6 Quota Setting Build Reconcile Refine 5 Sales Compensation Design 4 Sales Organization & Role Design Senior Management Senior Management reviews with Sales Manager and makes adjustments based on trend line data and corporate expectations Individual Contributor: Directional Incentive Comp Recommendations For Sales Rep, Account Manager/Executive, National Account Manager EVP, Americas Mix & Upside Target pay mix 85/15 Sales Management Sales Manager rolls up Salespersons Account Plans to Sales Manager Level Sales Management determines how to achieve adjusted goals on a Salesperson basis Measures & Weigh ts Total Target Incentive (TI) Total Revenue = 70% of TI + New Accounts = 30% of TI Total revenue = all revenue generated both for home plant and other plants New accounts = number above $40K Remove plant EBI/operating budget modifier VP, Direct Sales VP, Channel Sales Salesperson Salesperson and Sales Manager review and agree on the Salesperson s Account Plans Salesperson combines data with customer insight to develop Account-level Planning for the year Sales Management strategizes with Salesperson on how to achieve goal on an Account basis TOTAL REVENUE NEW ACCOUNTS Payouts and tiers are Payout Type Bonus Payout Type Bonus illustrative and need to be Threshold 85% of Prior Year Re venue Threshold None cost modeled Attainment TI Payout New Accounts TI Payout Consider counting an 0% - 85% 0 1-2 $1,500 account >$100K to count as Mech anics more than 1 account 86% -90% 50% Bonus Payout 3-4 $5,000 & Links Bonus Payout 91% -97% 75% 5 8 $7,500 Hold upside pay for total revenue until annual goal is 98% - 100% 100% 9+ $1,500 per acct. achieved 101%+ +3% for each 1% Cap No Goals should be calibrated Cap No Payment Annually and set based upon an Paymen t Quarterly individual s market potential MERCER 11 Account Manager Director, Midmarket Director, Strategic Accounts Account Executive Director, Hardware Sales MERCER 5

Simplicity is also a critical best practice Maximize motivational impact by balancing simplicity and alignment Simple incentive plan (minimal metrics) Strong Management Processes Low Reliance on Incentive Plan High Reliance on Incentive Plan Weak Management Processes Complex incentive plan (multiple metrics) MERCER 6

Effective sales compensation comes from a sound process Assessment Design Implementation Assessment both qualitative and quantitative analysis Qualitative analysis includes: Interviewing key stakeholders to gather historical insight and to provide strategic direction for the future Understanding current sales compensation plans Reviewing relevant business documentation Quantitative analysis includes: External compensation benchmarking Reviewing pay and performance relationships Design involves the following key steps 1. Sales Compensation Philosophy 2. Determine Eligibility 3. Set Target TCC Levels 4. Choose Mix of Base and Incentive 5. Determine Measures & Weights 6. Design Plan Mechanics 7. Set Performance Objectives 8. Select Leverage Ratios 9. Set Payout Timing 10.Validate Plans and Make Refinements Implementation steps can vary based on the degree of change made to sales incentive programs. Some key activities: Confirm systems and administrative capabilities Prepare formal plan documents Draft communication materials Train managers on changes to the sales incentive plan Set meetings for managers to communicate changes one-on-one with direct reports MERCER 7

Sales Compensation Plan Design Best Practices

Key success criteria for effective sales compensation design A sales compensation plan should: Reinforce and drive behaviors that help meet management s overall business objectives Provide motivating, meaningful and cost-effective rewards to the right people for the right behavior and the right results Align with clearly articulated sales and sales management roles and accountabilities Align with other key sales management programs and practices and the desired culture of the sales effort Be appropriately simple so the plan can be clearly communicated, understood, reinforced, and administered Be managed properly to meet the changing needs of the business MERCER 9

Effective sales compensation depends upon role clarity and what good looks like in terms of results Focus Areas Key Responsibilities Geography Customer Segment Revenue Stream External Key Strategic SMB Sales Role Existing Existing Customer Customer Same Volume Current Product More Volume Current Product New Custome New Product Product/Solution Channel Sales Process New Product Internal HW Server SW CRM Services Maintenance Direct WW Sales Indirect Retain/Defend Identify Qualify Propose Close Implement Service Gr Workstation Security Implementation Account Mgmt Tech Sales Reseller MERCER 10

Design all key sales compensation components as a total solution Step 1: Sales Compensation Philosophy Step 2: Determine Eligibility Step 3: Set Target TCC Levels Step 4: Choose Mix of Base and Incentive Step 5: Determine Measures & Weights Step 6: Design Plan Mechanics Step 7: Set Performance Objectives Step 8: Select Leverage Ratios Step 9: Set Payout Timing Step 10: Validate Plans and Make Refinements MERCER 11

Establish philosophy & supporting global design guidelines Step 1: Sales Compensation Philosophy DESIGN PRINCIPLES PLAN DESIGN GUIDELINES Keep plans simple Pay for performance/ Differentiate pay Balance company results with pay Maximize line of sight Maximize motivation Maximum of 3 performance measures per plan, ideally 2 Maximum of 3 inflection points/levels in a payout curve/rate table Maximum of 2 gates in a plan Maximize pay at risk given the role s influence on sales results Performance measures have a minimum of 20% weight Soft cap at 300% of payout or large deal > 50% of goal and less than a margin threshold Limited Support Good Support Strongly Supports Pay upside of 3:1 (frontline) or 2:1 (overlay) at the excellence point of performance Limited support Good support Strongly supports MERCER 12

Ground total target cash compensation in key talent and role considerations Step 3: Set Target TCC Levels Supply of Talent Abundant Adequate Limited Scarce Expected Performance Low Average Stretch Exceptionally High Productivity Level Low Average Above Average Very High Employee Mobility Low Modest Some Hiring Away by Competitors Frequent Hiring Away by Competitors Staffing Excessive Adequate Light Extremely Lean Degree of Company Stability Rock Solid High Moderate Low (Shake Out) Below Market At Market Slightly Above Market Leading MERCER 13

Step 4: Choose Mix of Base and Incentive Determining pay mix DIMENSION Primary Job Focus Selling Cycle Sales Force Prominence Business Strategy Account Strategy Entry Barriers (Sales Skill Set) Management Control Product Life Cycle Complexity of Sale Performance Measures OVERALL Sales Short High Growth Acquire Low Loose Introduce Low Volume 100% 90% Base Salary and Incentive Mix Alternatives Scale 80% 70% 60% 50% 40% 30% 20% 10% Service Long Low Maintain Strengthen High Tight Mature High Product Mix OVERALL Incentive Base 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Full Commission Combination Full Salary MERCER 14

Step 4: Choose Mix of Base and Incentive Pay mix as a talent attraction and retention tool Uncapped $200K Uncapped Amount Earned $100K Uncapped 20 10 90 60 30 70 100 50 50 Mix Upside Legend Above target incentives Target incentives Base Salary March 31, 2014 MERCER 15

Role specific performance measures are critical Within span of control Step 5: Determine Measures & Weights Ability to consistently and materially influence Within line-of-sight and key result for the role Supports sales strategy and business objectives Consistent with role s design and key responsibilities Aligned Effective Performance Measures Comp ready Data can be accurately tracked Data is from a trusted source and available for timely payments To maximize motivation, no metric should have less than 15% of target pay weighted to it MERCER 16

Step 6: Design Plan Mechanics Commission vs. Bonus High Commission- Based Plans Number of Customers Salary/Bonus- Based Plans Low Short Sales Cycle Long MERCER 17

Step 7: Set Performance Objectives Accurate target setting is key to motivate the field and align with company success Target level equates to 100% of plan 30-40% of Sellers 60-70% of Sellers Number of Salespeople Bottom10% of Sellers Top10% of Sellers Threshold 100% Quota Performance Excellence Performance level requiring minimal effort set based on historical performance or fixed costs Excellence level allows 10% of sellers to earn upside, it is usually set using historical data MERCER 18

Payout curves should align pay and performance and motivate Step 8: Select Leverage Ratios Illustrative Payout as a % of Target 300% 250% 200% Payout Curve Leverage 150% The slope is accelerated above 100% Target (100%) to set the prize beyond the finish line and 50% reward for Payments 3/31/2014 outstanding begin once a threshold level 0% performance is achieved 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% % Goal Attainment A decelerated slope above (or cap) at Excellence can help to control excessive pay Sales Leader First Line Manager Sales Rep MERCER

Step 9: Set Payout Timing Pay frequency should be aligned to the other plan design elements Factors Target Incentive Pay Mix Number of Performance Measures Weighting of Performance Measures Effect on Payout Frequency The higher the Target Incentive, the more frequent the payout The more aggressive the Pay Mix, the more frequent the payout The greater the number of Performance Measures, the less frequent the payout The higher the weighting of the Performance Measure, the more frequent the payout Common payout frequencies are monthly, quarterly or annually and vary based on the factors above When selecting pay frequency, it is advisable to choose one that: Ensures proper cash flow to the salesperson Is significant enough to attract the attention of the salesperson Is as close as possible to the time of sale Is feasible to administer accurately and efficiently MERCER 20

Step 10: Validate Plans and Make Refinements Back test the designs against the principles 1 Maximum line of sight and influence on results that drive pay 2 Maximize motivation of plan but still balance ROI with compensation spend 3 There should be differentiations in compensation for specific products / product lines / product groupings and product mix 4 Better align total production and territory size with pay 5 6 Top performers should earn 3x the incentives of an average performer to provide better motivation and drive stronger pay differentiation There should be no caps on incentive payments, though there should be protections against windfalls Meets Principle s Objectives Partially Meets Principle s Objectives Fails to Meet Principle s Objectives MERCER 21

Appendix: Sales Compensation Effectiveness Assessment Best Practices

Assessment: understanding the current compensation plans Key red flags include: 1.Plans with high levels of uncapped upside 2.Performance levels with no threshold 3.Performance measures not based on quantifiable results 4.Highly frequent payments 5.Low weightings on performance measures Role Performance Measure Weighting Payout Mechanism Performance / Payout Level (as a % of Target) Threshold Target Excellence Component Detail Payout Frequency Sales Representative Individual Revenue 60% GroupRevenue 35% Formulaic Bonus Formulaic Bonus 80% / 50% 0% / 0% (no threshold) 2 100% / 100% 100% / 100% 1 120% / 500% 110% / 150% Payments are not capped (i.e., incentives above excellence level are paid at excellence rate) Payments capped at excellence Weekly 4 Monthly MBOs (Management by Objectives) 5% 5 Discrete Bonus Payment Completing a maximum of three objectives / Up to 150% of target 3 This payout is subject to the completion of objectives Annually MERCER

Competitive compensation analysis Example of competitive total target cash benchmarking Illustrative $160 Sales Representative n = 27 $200 Sales Manager n = 7 $150 $190 75 th %ile $140 75 th %ile $180 $130 Median $170 Median $120 $160 $110 75 th %ile $150 75 th %ile 25 th %ile $100 Median 25 th %ile $140 Median $90 $130 $80 25 th %ile $120 $70 $110 25 th %ile $60 In Thousands Base Salary Total Cash Compensation $100 In Thousands Base Salary Total Cash Compensation MERCER 24

Competitive compensation analysis The following pay mix exhibit shows how the mix of base and incentives (variable compensation) compares to market benchmarks 100% 80% 60% Average Employee Pay Mix Illustrative 20% 22% 20% 20% 40% 40% 41% 36% 61% 74% 40% 20% 60% 60% 59% 80% 78% 80% 80% 64% 39% 26% 0% Sales Person Recruiter Vice President of March 31, Recruiting 2014 Vice President of Sales EVP of Solutions 25 Base Incentive Market Base Market Incentive MERCER 25

Key effectiveness metric: performance distribution by role FY08 Goal Achievement FY09 Goal Achievement FY10 Goal Achievement MERCER Goal Achievement Source: Financial data obtained from Company (Dec 2010) 26

Key effectiveness metric: pay composition by role Incentive Pay Measure 1 Measure 2 Measure 3 Measure 4 MERCER Source: Financial data obtained from Company (Dec 2010) 27

Key effectiveness metric: pay for performance by key business objective 180% 160% 3YR Avg Goal Attainment 140% 120% 100% 80% 60% R 2 = 0.3251 40% 20% MERCER 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% % Audit (of Total Revenue Generated) Source: Financial data obtained from Company (Dec 2010) 28

Key effectiveness metric: pay differentiation Incentive Pay as a % of Median Payout Earner Position MERCER 29

Biography Shawn Rossi Principal, North America Practice Leader Sales & Marketing Performance Practice 678.427.8275 shawn.rossi@mercer.com MERCER Atlanta Shawn Rossi is a Principal and the North America Leader for Mercer s Sales Performance Practice. Based out of Atlanta, he leads engagements with clients to deliver straight forward, aligned, high impact sales effectiveness solutions. With over eighteen years experience, Shawn has expertise in a variety of industries including technology, distribution, retail, telecommunications, banking, media, insurance, and medical device companies; all with the goal of improving sales and marketing effectiveness. Shawn s engagement experiences specifically include working with leading global companies including Apple, Allstate, Bank of America, Microsoft, Halliburton, Aflac, Unisource, Oracle, IBM, United Healthcare, TBC, AT&T, T-Mobile, HP, Verizon, Superpages.com, Lexmark, Randstad, Ryder, NCR, Motorola, FedEx, St. Jude Medical, Smith & Nephew, Red Bull, Sysco, Johnson & Johnson, Ecolab, McKesson, Network Appliance, Samsung, Clear Channel and Vodafone. Mr. Rossi s key core competencies include: Sales Transformation (spurred by acquisitions, new product launches, going into new markets) Sales and Channel Strategy Sales Effectiveness Assessment & Dashboards Sales Organization and Role Design Sales Compensation Design & Administration Quota/Goal Setting Sales Process Definition/Re-engineering Sales Training & Enablement With over 30 widely published articles, speeches and webinars, Shawn is a recognized thought leader in the sales performance management space. He has had works published in WorldatWork, SHRM and other publications. Additionally, he has spoken at multiple conferences and via the web for World at Work, SPM Solution Provider User Conferences, and the Sales Management Association. Shawn holds an MS in Physics from Auburn University and graduated Cum Laude from Wake Forest University with a Bachelor of Arts degree in Physics. 30

Questions & THANK YOU! MERCER 31