Retail Industry HR Roundtable Understanding the Sales Compensation Equation March 22 2007 Brita Lerohl Toronto
Agenda Mercer s Point of View Elements of Sales Compensation Design Mercer s Experience with Retail Sales Compensation Retail Sales Compensation Trends Mercer Human Resource Consulting 2
Mercer s Point of View
Mercer s Point of View Sales success requires alignment Business Strategy (including sales strategy) Return on investment is maximised when: Strategy is aligned with organisation structure and rewards Employees are focused on activities that drive business success Sales force structure (including sales roles) Sales management and HR practices (including rewards) It is important to recognise that: As a business evolves and business strategy changes, the organisation structure, focus of the roles and reward practices may change The process of alignment is therefore continuous Mercer Human Resource Consulting 4
Mercer s Point of View Top performing Sales Organizations take a holistic approach to the design and implementation of their Sales Model Strategically Focusing the Sales Effort Customer Segmentation Channel Management Value Proposition Selling Strategies Sales Processes Optimizing Sales and Sales Management Processes Selling and Service Roles Organization Structure Sales Coverage Sales Management Processes Metrics, Planning & Goal Allocation Managing Change Motivating and Enabling the Sales Effort Compensation and Recognition Performance Management & Career Pathing Leadership and Culture Communication Recruiting and Selection Education and Training Technology/ Sales Force Automation Mercer Human Resource Consulting 5
Mercer s Point of View Understanding the specific activities each role must perform is the key to successfully aligning compensation Customer/ Prospect Sales Process Key Activities & Roles Roles Sales, Non-Selling & Support Roles. Job Focus Key Activities Allocation of Time Roles Key Focus & Activities Skills Required Results Expected Performance Measures Compensation & Rewards Mercer Human Resource Consulting 6
Mercer s Point of View Common triggers for a review of the sales effort 1. 1. The The external external environment environment has has changed changed Customers Customers buying buying habits habits / / demographics demographics Competitors Competitors Channels Channels of of distribution distribution Products Products Regulation/legislation Regulation/legislation Labour Labour market market Competitive Competitive practices practices 2. 2. The The internal internal environment environment has has changed changed Business Business strategy strategy Reorganization Reorganization / / new new roles roles Mergers Mergers / / acquisitions acquisitions Cultural Cultural values values Teamwork Teamwork 3. 3. Evolving Evolving goals goals and and strategies strategies require require new new reinforcement reinforcement Financial (e.g., costs, volume, profit) Financial (e.g., costs, volume, profit) Revenue Revenue and/or and/or share share growth growth Margin Margin Investment Investment Marketing/sales Marketing/sales Target Target customer customer segments segments Business Business retention retention New New production production Cross-sell Cross-sell / / breadth breadth of of product product mix mix Price Price realization realization Human Human resources resources New New recruiting recruiting profiles profiles / / skill skill mix mix Skill Skill evolution evolution Retention Retention of of top/average top/average performers performers (turnover) (turnover) Mercer Human Resource Consulting 7
Elements of Sales Compensation Design
Sales Compensation Philosophy There are two strategic approaches to sales compensation philosophy and the right approach depends on several factors Cost of Sales Payouts based on volume Sales people get a piece of the action for each sale Pay typically not calibrated with external market Cost of Labor Payouts based on competitive market rates Target pay levels established for sales roles Pay is calibrated off of target; based on performance The most appropriate pay philosophy depends on several factors Start ups and new markets Heavily transaction focused Requires little teaming and is primarily an individual sale Sales person typically owns the customer Allows a less disciplined sales management culture Performance is managed mostly by the compensation plan Requires little to no support Sales people could be independent contractors Business Stage Sales Process Customer Relationship Management Performance Support Employment Mature markets, complex sales organizations Allows for more of a relationship based focus Could require teaming Company typically owns the customer Requires a more disciplined sales management culture Performance is managed mostly through goal setting Requires extensive support Sales people are company employees Mercer Human Resource Consulting 9
Design Objectives Sales compensation plans should be designed to meet several key objectives 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, prominence and accountabilities Align with other key sales management programs and practices and the desired culture of the sales effort Be appropriately simple and clearly communicated, understood and reinforced Be managed properly to meet the changing needs of the business Mercer Human Resource Consulting 10
Design Elements Sales compensation plan design considers 9 key elements 1 Role Prominence 2 3 4 Job Eligibility Total Target Compensation Pay Mix Upside / leverage 5 6 7 8 Performance Measures and Weights Goals and Quotas Formula Mechanics Policies and Procedures Mercer Human Resource Consulting 11
Role Prominence Low Prominence Weak personal sales relationship Product, company, service carry the relationship Low risk of sales loss if salesperson reassigned or terminates Company driven sales force plan Sales process is team focused Medium Prominence Product (brand), company and service requirement is strong Less proactive more compliance oriented Medium risk of sales loss if salesperson reassigned or terminates Sales process is less salesperson driven and more team focused High Prominence Low prominence of product and company Strong personal relationship sale Very proactive sales force High risk of sales loss if salesperson reassigned or terminates Sales process is salesperson driven Low mix, if any, of pay at risk Medium mix of pay at risk High mix of pay at risk Mercer Human Resource Consulting 12
Job Eligibility Eligibility for incentive compensation is determined by job role factors rather than titles 1 x x x External Customer Contact Internal Roles (Marketing, Sales Support) Role in Sales Process (Lead vs. Support) Influence Over the Sales Result Mercer Human Resource Consulting 13
Total Target Compensation Factors Influencing Competitive Positioning 2 Industry Attractiveness Maturity Stability Supply of Talent Hiring and Turnover Company Image/Product Quality Promotion Opportunities Historical Performance Risk Factors Performance Targets Culture Workload/Staffing Levels Training Emphasis Hiring Needs Turnover Affordability Mercer Human Resource Consulting 14
Pay Mix The allocation between base salary and incentive pay should foster an appropriate level of performance 3 Level of base salary/ hourly rate should be meaningful Competitor practices may be a guide Potential reward should reflect level of personal selling role Inherent risk should be offset by upside Company market share/number of prospects Types of products/services Sales cycle and number of transactions Mercer Human Resource Consulting 15
Upside/Leverage Pay mix matches the desired job behaviors as well as characteristics of the buying and sales processes 4 50 2:1 Upside Potential 100% TTC 10 10 10 20 20 20 50 50 1:1 Upside Potential 90 80 50 Influence Low High Sales Process Long Short Buying Process Complex Simple Mix and Upside Potential Mercer Human Resource Consulting 16
Performance Measures and Weights Appropriate performance measures meet three criteria 5 Criteria Definition Controllable Ability to impact measure(s) In line-of-sight link to behavior is clear Measurable Quantification Consistent results Frequent reporting Strategic Supports business strategy Matches customer needs Mercer Human Resource Consulting 17
Goals and Quotas Quota allocation links company and participant goals 6 Shareholder and Management Requirements Company Goals Goals Allocated as Quotas Districts/ Divisions Districts/ Divisions Districts/ Divisions Locations Locations Locations Locations Locations Market Opportunity Reps Reps Reps Reps Reps Reps Reps Reps Mercer Human Resource Consulting 18
Formula Mechanics Calibration of performance versus quota 7 90% Attain 60% to 75% Attain 5% to 10% Attain Threshold Target Excellence Mercer Human Resource Consulting 19
Policies and Procedures Document the sales compensation process and communicate the plan to affected employees 8 Documentation should include: Definition of performance measures Link or line of sight between individual performance measures and compensation Quota setting process (and procedures for adjusting quotas if needed) Plan formulas and sources of figures used in formulas Payment procedures Policies that answer common practical and legal questions Timing of measurement and payment Mercer Human Resource Consulting 20
Mercer s Experience with Retail Sales Compensation
Mercer s Experience Some key challenges we have observed with designing, implementing and administering retail sales compensation programs Sales compensation plans remain static for many years Product price inflation can result in out of date sales quotas Compensation plan no longer aligns with sales strategy Commission/variable oriented compensation plans can lead to customer cherry picking Impacting customer service and company reputation Compensating for selling time vs. merchandising/ answering the phone/ product training Sales commission plan goal setting Goal setting process is often viewed as unfair by sales staff Too many goals dilute focus or worse sales staff may simply ignore Poor inventory planning Impact sales associate/sales management earning potential Limit add-on sales Mercer Human Resource Consulting 22
Mercer s Experience Some key challenges we have observed with designing, implementing and administering retail sales compensation programs Managing vendor product sales incentives (SPIFFS) Complex administration inventory and payroll Too many concurrent programs can result in little overall impact Understanding actual compensation levels Sales force scheduling May require different sales compensation philosophies/programs to attract, retain and motivate sales associates during peak and off peak sales hours (i.e., Saturday afternoon vs. Tuesday morning) Impacts on internal measurement & tracking systems Management sales reports needs Pay stub impacts Your experiences? Mercer Human Resource Consulting 23
Retail Sales Compensation Trends
Retail Sales Compensation Trends Key Canadian and U.S. market trends Canada Actual base pay wages increased an average of 3.0% from 2005 to 2006 Increased market prevalence of incentive compensation programs for store operations associates (part/full time & management) Group/Team incentive or bonus rising in popularity; although individual incentive or bonus (based on individual results) is still the favoured practice for full time sales associates Revenue/sales the most common performance measure used at both sales associate and store management level Luxury retailers remain more likely to offer variable pay to sales associates coupled with more competitive base wages versus department or specialty store sales associates Declining average associate discounts average discount of 33%, generally off current retail price Sources: 1. Mercer Retail Industry Compensation & Benefits Survey, 2005 & 2006 Mercer Human Resource Consulting 25
Retail Sales Compensation Trends Key Canadian and U.S. market trends United States Actual base pay wages increased an average of 3.0% from 2005 to 2006 Most prominent base pay increase observed for store management positions average increase of 10.0% Declining market prevalence of incentive compensation for sales and service associates, Luxury retailers excluded Increasing market prevalence of incentive compensation for team leader positions Increased prevalence of variable pay for telecommunications customer service representatives, and sales specialist roles Sales/Merchandise volume the most common performance measure used for store/district sales management positions Declining average employee discounts average discount of 30%, generally off current retail price Sources: 1. Mercer Retail Industry Compensation & Benefits Survey, 2005 & 2006 2. Western Management Group Retail Sales Compensation Survey Mercer Human Resource Consulting 26
Questions Contact Information: Brita Lerohl brita.lerohl@mercer.com 416-868-2798 Iain Morris iain.morris@mercer.com 416-868-7094 Mercer Human Resource Consulting 27