SALES, SERVICE & CRM INCENTIVE COMPENSATION by Peter Djokovich, President & CEO, Strategix Performance, Inc. In the early 1980 s, responding to increasing competition, businesses began investing millions of dollars in the implementation of Sales Cultures. The key objective was to sell more, and transform the old-style order taker approach into a more proactive cross-seller focus. The performance management strategies were basic, and focused on tracking productivity-oriented sales ratios to increase the quantity of products sold per customer opportunity. New product referral and sales incentive approaches also emerged. In the short-term, sales improvements were often dramatic. But a lot has changed since then. The longer-term impacts of the Sales Culture, primarily on employee morale and customer relationship profitability, turned out to be quite negative. Industry association and independent analyses concluded that sales initiatives based on quantities and productivity ratios (the cross-sell ratio and sales per employee per day ) typically resulted in 50% to 90% of customer relationships being unprofitable. Some studies showed that 100% of profits were being generated by only 10% of total relationships. For profit focused businesses, the Sales Culture didn t work. Sales ratios motivated employee behaviors and results that were frequently counter-productive for both the customer and the enterprise. For banks, this included breaking up single large accounts into multiple smaller accounts to inflate quantities, and account churning. Sales ratio also had little relevance to net-growth driven business strategies, little correlation with service quality and customer satisfaction, and provided a profoundly unpopular and inequitable basis for sales-based employee incentive programs. Sales ratios may have played an early role in the Sales Culture s emergence, but their limitations drove the development of a new generation of more business-relevant performance management solutions. Today, progressive business enterprises are opting for more realistic measures of sales values: not the quantity of products sold, but the value contribution to the organization of products sold and retained over time. Even more important for naturally customer-focused businesses, value-based product sales goals and incentives have been made a sub-element of a broader, more strategic focus on Service and Relationship Profitability: what many now call Customer Relationship Management (CRM). Since the mid-90 s, CRM has replaced the Sales Culture as the priority of marketing, sales, and service initiatives, and related employee incentive plans. Yet, even though CRM is a native priority for virtually all businesses, only a few are really making it work. Those that are, have learned that competitive advantage in sales and service does not come from processes, products, or CRM software. Competitive advantage comes from their workforce: while technologies enable business processes, and business processes enable employees, employees do the work and achieve the success. The field-proven reality of CRM is that it is the company s employees, not the company, that actually have the relationships with customers. In banking people bank with bankers, not with banks. In restaurants the food brings you in, the service brings you back. In health care, bedside manner matters. In every industry and segment,
September 15, 2001 Page 2. of 6. successful in the trenches CRM is about people: your customers, and your employees. CRM cannot succeed unless the organization s workforce is engaged, enabled and integrated into it. And, performance incentive compensation is a key element in making it happen. Here s how to succeed at it. Define Your Priorities, Make A Plan, Set Goals Although it seems obvious that enterprises should have a Business Plan, with goals, strategies, and action plans that reach down through lines of business to each employee, most don t. The bottom line is that every consistently successful human endeavor has a plan as its basis. Written or not, plans are the basis for actions. Priorities what the organization wants are the basis for the Plans themselves. Priorities are manifested in the organization s goals, strategies, tactics, policies, procedures, manuals, measurement, compensation, training, coaching, internal communications, and marketing. So, if Priorities are vague or contradictory, Plans will fail. Therefore, it is critical to be sure of your Priorities, and be sure that you don t have different Priorities that conflict, at any level. Being clear about Priorities and Plans for each employee and business unit, and ensuring their enterprisewide consistency, is essential to success. Not doing so has serious consequences. In a large Midwest U.S. bank, the brokerage and trust departments independently implemented sales incentive plans, without any inter-department coordination or higher-level oversight, and created an environment where 75% of all incentives paid were for portfolio dollars that trust and brokerage were pirating from each other s existing customer accounts. The results were a huge waste of incentive dollars, counterproductive internal competition, and lost credibility among confused and frustrated customers. When Priorities and Plans are clear and non-contradictory, employees positively respond to the organization s specific performance expectations of them. To succeed, every employee must know their specific goals, objectives, targets, budgets, strategies, and action plans; and their related accountabilities and responsibilities. Setting goals also means ensuring that employees really understand the business you re in, and how your enterprise actually makes money and spends it. Every employee needs full clarity about their contribution to and responsibility for the organization s Revenue Generation, Expense Generation, and Asset Growth activities. A sobering fact for most industries today is that upwards of 70% of employees do not know how their company makes money. How can an enterprise succeed if only three out of ten employees understand the business the organization is in, much less how it relates to them specifically? It cannot, and that is why it is essential to ensure that the workforce is informed. Written performance expectations or goals, typically represented as budgets, quotas, targets, and usually part of a Personal Performance Plan, are an explicit statement from the enterprise of what it takes to Succeed. The importance of
September 15, 2001 Page 3. of 6. goals should not be underestimated; and they should be provided to every individual and team throughout the enterprise. A word of caution. When it comes to setting goals, be careful of what you ask employees to do, because they will give you exactly what they think you re asking for. For example, during the Sales Culture era, bankers wanted more revenue generation from their sales forces. They incorrectly deduced that a greater quantity of sales would derive more revenue, so they set goals to increase Sales Ratios. And, they got what they asked for: higher Sales Ratios. But, instead of opening a customer-requested single $100,000 one-year CD, employee s sold four $25,000 three month certificates, and then re-sold them for full sales credit every quarter-end. So, instead of being measured for producing a single $100,000 sale, they got year-to-date credit for producing sixteen sales for $400,000 total even though the bank generated no additional revenue. Sales quantities sky-rocketed, until bankers realized to their dismay that employees were re-selling the same dollars over and over again, with no real growth or revenue to the bottom line. Employees did what was asked for in the goals that were set: higher quantities per customer seen (even if it was the same customer and dollars). If the banks had wanted higher revenue and more profitable customer relationships, then goals should have been based on sustained revenue and customer portfolio value. Keep It Simple In the design of employee incentive programs, a critical objective must be: Keep It Simple. Why? If the employee doesn t understand the program, the program won t generate the desired results. Plainly stated, though it sounds rudimentary, Keep It Simple is a proven guideline for what has worked in the real world. Practically, you should be able to explain to an employee their incentive plan in one to three minutes. If you can t completely explain the plan within this general timeframe, it is more than likely that the plan is too complicated for complete and useful understanding. Overly complex plans create so much uncertainty that employees almost immediately relegate them to irrelevance. Simplicity reinforces workforce success. Paying Out Incentives: Sales vs. Relationship, Individual vs. Team Another basic management rule extends to incentive plans: don t hold people accountable for what they don t control. This means you should avoid complex multi-tier programs that tie incentive awards to results in which employees don t have direct participation. Typically, depending on the type of market within which they work, sales and service employees have some mix of responsibilities for new account/relationship acquisition, existing account/relationship retention, ongoing customer service quality, and other day-to-day operational roles. In creating an incentive plan, collaborate with employees to define their three to five Critical Job Factors (CJF): those performance factors essential to job success, and identify reasonable improvement goals. Then, for each CJF, define a
September 15, 2001 Page 4. of 6. relative priority Weighting, so that Weightings of all Factors sum up to 100%. Weightings quantify the relative Priority of each CJF, where some are more important than others. Don t let any Factor have a Weighting of less than 10%, since those that do get ignored because of their relative insignificance. Exhibit A. SAMPLE INCENTIVE PLAN WEIGHTING MATRIX PRODUCT REFERRAL TO OTHER LINES OF BUSINESS PRODUCT SALES REVENUE PRODUCTION CUSTOMER RELATIONSHIP PORTFOLIO MANAGEMENT SERVICE QUALITY & CUSTOMER SATISFACTION TOTAL INDIVIDUAL 10% 30% 0% 10% 50% TEAM 0% 0% 40% 10% 50% TOTAL 10% 30% 40% 20% 100% For employees whose role it is to refer or generate new product sales, incentives should be based on the relative value of the products referred and/or sold during a period of time (month or quarter), considering the product s term, and its tangible contribution to the company s revenue and profit. These results are parallel to an enterprise s Income Statement: revenue generated during a period. Thus, for banks, selling a long-term high-yield asset (or low cost liability) is relatively more valuable than one that is short-term and low-yielding (or high cost); and the higher the balance, the relatively more valuable still. For employees whose role it is to manage customer relationship portfolios, incentives should be based on the relative value of the portfolios at a recurring point in time (month-end or quarter-end), based on revenue and/or profit contribution value of the specific products, their terms, and their amounts, in the managed portfolio. These results are analogous to the enterprise s Balance Sheet: portfolio values at the end of a period. By combining Sales and Relationship measures, the company incents not only what it sells, but what it retains over time. Generally, because individuals generate them, referral and sales incentives are usually individual in nature. Whereas, because it is often difficult to assign each customer to one specific relationship manager, relationship portfolio-based incentives are usually team or group in nature. Employees that participate in both product sales and relationship management activities, in both individual and team capacities, should have an incentive plan and related incentive budget distribution that reflects the relative Weighting of each as a percent of their total job responsibilities (as shown in Exhibit A.). Avoid Co-Worker Competition A frequent oversight, and one with substantial negative impacts, is creation of incentive plans that motivate direct competition between co-workers. Of course, in some obvious cases, this is the desired result. However, for the vast majority of incentive plans, co-participant competition will disrupt desired standard work behaviors, warp desired
September 15, 2001 Page 5. of 6. business processes, foster distrust and uncertainty, and poison morale. Instead, incentive plans should target employee s competition vs. their goals; their own business as usual. Incentive plans oriented towards If I Win You Lose will have poor overall results. Win-Win oriented approaches in goal-setting and pay-outs should be fostered and rewarded within the framework of the plan. Manage Incentives, Don t Let Them Manage You One of the biggest misconceptions business leaders have regarding recognition and incentive plans is that if we set up this plan, it will solve all of our problems, drive us to achieve our goals, and manage us to success. Frankly, it doesn t work. Since market conditions and resulting Priorities deviate further from their initial conception as time passes, a non-evolving incentive plan will cause irreparable damage to the personnel, resources, and social fabric of the enterprise. To ensure ongoing plan relevance and effectiveness, and to insulate against their potential harm, incentive plans should be subject to a formal, ongoing review and enhancement process. Train and Develop Skills and Expertise One of the reasons many incentive programs fail is that employees don t yet have the skills to achieve and exceed the goals that are set for them. It is essential that each employee receive the skill and competency training and development they need to succeed. Employees also need to have job-appropriate learning opportunities in which to transform received knowledge into applied expertise: also known as Experience. (continued) Measure & Report Results To keep employees adaptable to Priority changes over time and to communicate actual results, an automated performance measurement and incentive reporting system (a.k.a. tracking ) is essential. The old adage that what gets measured gets done is true because measurement and reporting systems are explicit statements from the enterprise on how Success is happening, or not. In addition to being universally accessible (ideally through low-cost true browserbased platforms), and highly flexible, measurement systems should be both accurate and timely, so employees have full confidence in the results: The Strategix Performance Manager is exactly that solution. How Much To Pay The objective of performance incentives is to stimulate performance to exceed business as usual. Total compensation for employees should exceed market averages when performance exceeds market averages. A reliable general rule is that for every six dollars of net revenue improvement or expense reduction resulting from beyond business as usual employee performance, an organization should add one dollar to the total incentive budget. This makes incentive
September 15, 2001 Page 6. of 6. programs essentially self-funding, and pay-outs related directly to the tangible benefit generated from improved performance. Getting & Keeping Long-Term Advantage Successful business enterprises now know that sustained competitive advantage doesn t come from new products (that competitors can easily copy), or from innovative technologies (that competitors can acquire and install). Long-term competitive advantage comes from the workforce when employees are engaged, enabled and integrated into the execution of coherent business priorities and plans. Success happens when the workforce is doing the right things (priorities), with the right tools (technologies), the right ways (processes). Performance incentives, intelligently conceived and implemented, provide dramatic and continual improvements in results by motivating employees to execute on desired priorities with relevant processes, and rewarding them for their successes. * * *