Untangling the Sales Compensation Snarl Capital Associated Industries Compensation and Benefits Conference August 28, 2012 The Cygnal Group has prepared this document for the benefit of attendees at the above-named event. This document is incomplete without the accompanying discussion and contains proprietary material. This document should not be reproduced, either in total or in part, circulated, or quoted from without the expressed written permission of our firm.
Untangling a snarl 2
Untangling a snarl 3
Untangling a snarl Patterns can be hard to see But once you see them, the chaos subsides And understanding emerges 4
Contents Purpose of sales compensation 6 Financial effects of sales compensation 8 Sales roles 9 Sales compensation and strategy 11 Responsibility for designing plans 12 Guiding principles 14 Fact gathering 15 Interviews 17 Survey of the sales people 18 Role profiles 20 Eligibility for sales compensation 22 Pay structure for sales 23 Measures 24 Types of incentives 27 Team measures 28 Strategic Sales Objectives (MBOs) 29 Pay frequency 30 Caps 31 Plan communication 32 Evolution of plans over time 37 Plan review checklist 39 5
Incentive compensation serves several worthy purposes Communication Purposes of Incentive Compensation Clarify key accountabilities for each role Assign specific productivity targets for each person Communicate priorities among focus areas Support of change initiatives Create the motivation to change focus and associated behaviors Reinforce continuing strength in established capabilities Talent management Attract needed talent Reward top contributors to ensure retention Risk management Offer the possibility of added compensation in years when it is affordable Reduce the cost of compensation in years when results are disappointing 6
The right sales compensation plans depend on many comp plan characteristics Motivated sales people Right risk/reward balance Right upside opportunity Straightforward compensation mechanics focused on the most important sales... Measures aligned with company strategy Fair and attainable performance standards/goals Limited choice in how to make money working collaboratively... Measured at the right level of aggregation (company, region, team, individual) Include the right sales crediting policies (layered, splits, ) Individual and sales management plans aligned to create value Appropriate cost of compensation at all likely levels of sales productivity Reasonable effort required to track, report and administer 7
Financial results of sales compensation plans show up on the income statement Income Statement for ExCo Revenue $54,600 Cost of goods sold $32,760 Gross Profit $21,840 40% Operating expenses Sales and Marketing $4,914 General & administrative $5,460 Research and development $6,006 Distribution $1,092 Total operating expenses $17,472 Operating Income $4,368 8% Increased revenue Faster product launches Penetration of new markets Utilization of new channels Focus on the best sales opportunities Increased gross profit More aggressive pricing Focus on more profitable product mix Reduced selling expense Efficient use of sales resources Management of sales compensation costs 8
Most sales roles are variations on these basic 10 (continued on the following page) Sales Role Territory Manager Summary Description Sells standard products or services to all accounts in an assigned geographic territory Account Manager Sells standard products or services to assigned named accounts, working to sell additional offerings and increase account profits New Business Developer Channel Manager Hunts for new accounts, proving the business case for the company s offerings, often unseating competition Manages distributors and/or independent sales representatives to maximize revenue and the company s profits from it Segment Specialist Supports the sale of company offerings into assigned customer segment (industry vertical) with solid understanding of the segment s unique business challenges and value creation processes 9
Most sales roles are variations on these basic 10 (continued from the preceding page) Sales Role Product Specialist Summary Description Supports the sale of a specific company product line with technical expertise Order Taker Enters orders and ensures satisfactory fulfillment (often a call center role) Contract Seller Crafts responses to RFPs, matching company offering to customer needs, often creating large-scale long-term commitments Sales Manager Manages and coaches individual contributor sales people, assisting with strategically important opportunities Sales Executive Determines the sales strategy, channel strategy, and resource requirements; responsible for sales results and the cost of delivering them 10
Sales compensation plans reinforce key accountabilities of the sales roles, and link back to business strategy ExCo s Key Strategic Initiatives How ExCo will compete and win in its market 3 5 top priorities for the next year or so Development Strategy What Development needs to do to support the strategy Ops Strategy What Operations needs to do to support the strategy Sales Strategy What Sales needs to do to support the strategy Illustrative Example Sales Roles Key Accountabilities Incentive Plan Measures Account Manager New Business Developer Maximize account profitability at assigned accounts Further penetrate assigned accounts with new products Identify high-potential new accounts, and establish initial contracts with them Gross margin dollars New product revenue Revenue from targeted new accounts 11
The compensation design team makes all the key decisions to finalize and communicate the plans Illustrative Example Steering Committee CEO/President of the company/division CFO VP Human Resources Sponsor the project Appoint the Design Team Approve the recommendations of the Design Team Design Team VP Sales 1-3 Sales Managers HR/Compensation Manager Sales Controller Compensation Administrator IT Project Manager Design the compensation plans Orchestrate the communication of the plans Ensure systems are in place to calculate, report and monitor plan performance Technology Team IT Project Manager Compensation Administrator Others from IT as needed Ensure measures can be tracked and reported accurately Implement plans as designed in plan administration system 12
Buy-in for the new plans may be improved significantly through participation of a Challenge Team Illustrative Example Steering Committee CEO/President of the company/division CFO VP Human Resources Design Team VP Sales 1-3 Sales Managers HR/Compensation Manager Sales Controller Compensation Administrator IT Project Manager Challenge Team Thought leaders from the sales organization Review and improve plan communication materials Help create buy-in across the sales organization Technology Team IT Project Manager Compensation Administrator Others from IT as needed 13
The Steering Committee should begin by establishing or confirming a set of Guiding Principals Questions for the Steering Committee 1. What key measures of the success of the sales effort will be used to determine whether or not the new compensation plans are successful (revenue growth, profit improvement, compensation cost as a percent of revenue, sales turnover, etc.)? 2. Which sales roles are in-scope (incentive-eligible), and which are not? 3. Where, vs. the market, do we target Total Compensation? 4. Is the answer different for base salary vs. variable pay? 5. How many times the target amount should our top 10% performers earn? 6. Do we require that incentive pay be tied to objective, measurable financial results, or will we allow subjective measures? 7. How important is simplicity in compensation design as compared to fairness? 8. Are we willing to invest in systems solutions to track and report results and calculate pay, or must we rely on systems already in place? 9. Are we willing to have uncapped plans? If not, what is the cap? 14
The Design Team s first task is to gather the information needed to make good design decisions Fact Gathering Information Sources Business strategy and sales strategy Strategic planning documents and presentations Mission statements Financial performance goals Interviews with top executives (President, VP Sales, VP Marketing, etc.) Sales roles Organization charts for the sales group Position descriptions for all positions in scope Sales territory information such as maps or account groupings Interviews with at least two incumbents in each position in scope continued on the following page 15
gather the information needed Fact Gathering Information Sources Historical pay and performance Compensation plan documents for all positions in scope Summary of any available sales compensation survey data Employee performance and pay data for at least two full prior years and current year-to-date by employee (name, title/role, salary grade, division, location, start date, performance goals/quota, actual base salary, actual performance against goal, actual cash incentive earnings) Turnover statistics by position Current salary structure for each position (base minimum, midpoint, maximum by grade; target cash comp; mix; etc.) Current non-cash recognition program documentation Documentation regarding any special cash incentives not included in the standard plan documentation (e.g., contests, third-party incentives) continued from the prior page 16
Interview sales people they are the ultimate buyer for your work Interviews of a few (2-3) people from each role can reveal a great deal Some suggested topics: How the sales process works from the sales person s perspective (lead source, interdependencies among selling roles, buying influences outside the control of sales, ) What current plans drive them to do that they know is not value creating for the company What they especially like about their current plans What they believe about the plans of direct competitors What aspects of their job and rewards opportunities attracted them into the job, and what they continue to value the most 17
An online survey To ensure you understand the perspective of the sales force, offer them a chance to participate in a survey A few sample multiple choice questions with answer options of Strongly Agree, Agree, Disagree, Strongly Disagree: I understand my sales incentive plan. The plan document shows the details of the incentive plan clearly and helps me understand it. I know how to maximize my incentive earnings. The incentive plan keeps me focused and motivated throughout the year. The incentive plan supports collaboration where it is needed. My goals for the incentive plan are achievable. I understand how my goals were set. The incentive plan rewards me for results I influence directly. The activities and results that contribute the most to my earnings are also the most valuable to the company. I believe my incentive payments will be on time. I believe my incentive payments will be calculated accurately. When I receive an incentive payment, I understand the connection between my results and my pay. My manager understands my incentive plan. My manager supports me in doing what I need to do to earn well. 18
Before beginning the design process, be sure you can answer these questions Why are we doing this? What business problem are we trying to solve? If there is disagreement about how to proceed, what are the conflicting perspectives, and what is their basis? (Have both sides represented on the Design Team if possible.) How will we know if we made things better or worse? A year from now, we expect something to have improved, something measurable what is it, and what is the target? (Examples include revenue growth, gross margins, sales cost as a percent of revenue, sales retention, customer retention.) Whose approval will be needed to change the comp plans? Often this includes leaders in Sales, Finance, HR/Compensation, and sometimes even IT if administrative systems are complex. Be sure you know what each constituency expects, and what their yardsticks are. They are likely to be different from each other. What will it take to ensure the buy-in of first-line sales managers and sales people? This often starts at the beginning of the design process with announcements, managing expectations and gathering suggestions from the sales people Remember that it s about a lot of things, but motivation is central and these are the people you are trying to motivate 19
Role profiles capture key characteristics of each selling role Key questions to define a selling role for compensation design purposes Primary Charter Skills and competencies What 2 5 things is this role expected to contribute? What skills and competencies make for a solid performer in this role? Sales Process Territory/ portfolio definition Sales cycle length Number of active prospects Source of leads Cross-selling opportunity Interdependencies (teaming) How is this person s responsibility defined (geographic territory, named accounts, customer type, etc.)? What is the length of time from identification of an opportunity to a closed deal? How many opportunities is a person in this role typically working at one time? How does this sales person find out about new opportunities? Is this person able to (expected to) sell company offerings outside his or her primary focus area? Who else besides this sales person is needed to close the typical sale? Decision makers and influencers Post-sale role Typical deal size Typical quota/ portfolio size Prominence (degree of influence in making the sale) Potential measures What is the job title of the primary buyers and influencers at the customer? To what extent is this seller expected to stay involved in the fulfillment process after the sale is made? How big (in revenue or margin) is the typical deal? What is the typical quota or portfolio size for this role? How much does the customer s decision to buy depend on the contributions of this individual? Based on the rest of the role profile, what are the best potential measures of sales productivity for this role? 20
Role profiles capture key characteristics of each selling role Illustrative example role profile for a new business role Primary Charter Skills and competencies Sales Process Territory/ portfolio definition Sales cycle length Number of active prospects Source of leads Cross-selling opportunity Interdependencies (teaming) Acquire new profitable relationships Offer full spectrum of services Relationship management Prepare and lead internal team in the solution sales effort Business acumen (ability to structure a deal and make the business case to provide demonstrated value proposition to the prospect) Industry expertise Good understanding of the full spectrum of product offerings Vertical markets / segments May have geographic sub-slice Decision makers and influencers 6 to 18 months Post-sale role None 4 to 6 Assigned major prospects Limited cold calling Substantial Pre-sales Solutions team Own company senior management Finance Typical deal size Typical quota/ portfolio size Prominence (degree of influence in making the sale) Potential measures Senior executives VP Procurement C_O as final decision maker $5 to $10 million $10 to $15 million Medium to High Revenue Gross margin Number of new customers 21
Eligibility for variable incentive pay depends on a number of factors Ideally, sales incentives are offered to those in roles with the following characteristics Direct influence over customers buying decisions is a key part of the role Productivity of individuals or small teams... Can be measured reliably Is directly linked to financial results for the company Delivering results is so important that you are willing to pay incentives to those who produce, even in a year in which the company misses its goals You have (and want) people in the role... With a tolerance for personal risk Willing to bet on their own ability to be productive Excited by the idea of handsome rewards for outstanding results Sales incentive plans cost more to design, communicate and administer than broad-based employee pay plans. They should be used only when conditions are right to create value for the company. 22
A pay structure is a key part of balancing productivity expectations with selling roles and market pay rates to create value for the company Target Cash Compensation + Pay Mix + Leverage Across all Roles Pay Structure 23
With the pay structure established, each role should be assigned up to three incentive measures Good measures are... Aligned with key accountabilities of the role Directly influenced by the sales person in the role Track-able based on existing systems And have already been tracked and monitored for at least six months before they are used in a sales incentive plan Three or fewer in number Measured at the level at which results are generated (individual, small team, division, etc.) 24
There are several basic types of measures, appropriate in specific situations Type of Measure Volume Revenue Profit Market share Use when... Sales people have little to no control over pricing Different products and customers with the same volume have similar value to the company Sales people have little control over pricing Different products and customers deliver similar profitability as a percent of sales Sales people influence profitability via product mix and/or pricing The company is comfortable with sales people knowing at least relative profitability of products Market dynamics affect all providers in the market similarly so that the size of the market is not the direct result of effective selling Market share can be measured reliably and frequently continued on the following page 25
There are several basic types of measures, appropriate in specific situations Type of Measure Customer satisfaction Strategic sales objectives Use when... Sales people strongly influence ongoing customer satisfaction Customer satisfaction can be measured reliably and frequently There is general consensus that customer satisfaction directly influences company profitability Other measures in the current fiscal year will not reflect the value created by the sales person (due to startup situation, long sales cycles, etc.) Quantitative and objectively-verifiable measures can be devised for each sales person, though the same measure may not be appropriate for all sales people continued from the prior page Measures will be further defined in terms of scope, crediting, incentive form, frequency, level, and capping later in the design process. 26
There are many possible incentive types Goal based incentive (a.k.a. bonus) Binary bonus Step bonus Continuous bonus Payout curves, acceleration and deceleration Steps to design a typical bonus component Commission Commissions and productivity Commissions with and without a threshold Accelerated and decelerated commissions Linked components Matrix Multipliers 27
Team incentives may be useful when responsibility for sales is shared among members of a selling team Mechanics For a team incentive, a measure is defined for the entire team, and all members share equally in the reward generated by the team s performance Appropriate when... Team membership is well-defined The team is small enough that each person feels s/he can make a meaningful difference in team results Team results can be measured reliably Members of the team depend on each other to sell Not appropriate when... Team members are linked only by reporting relationships (not shared effort on shared accounts or opportunities) The only real reason is to share the upside ( pooled lottery ticket ) Note that team measures may be combined with individual measures when team members back each other up, as in many Inside Sales teams. 28
Strategic Sales Objectives: MBO-type measures come in several types, only one of which is appropriate for use in sales incentive plans Qualitative measures (also referred to as subjective or discretionary) Activities (e.g., number of calls per week, number of in-store displays installed, number of trainings conducted) Personal development goals (e.g., completing a specific sales training course, mastering a skill) Not appropriate sales compensation objectives Demonstrated progress towards long-cycle sales success Customized to match the accounts and opportunities of the individual seller, or Not directly measured in current year revenue or other hard financial performance (e.g. first substantial sale to one particular strategic account, number of new accounts over a certain value, replacements of competitors in specific targeted programs) The objective is a customer/prospect/channel partner action demonstrating deepening commitment to the relationship and eventual sale/volume continued... 29
Generally, more frequent payouts are better, with a few caveats More frequent payouts are generally better Maintain high awareness level of key business goals Improve motivation with rewards offered soon after results are delivered Provide information needed for sales management to intervene and provide coaching early More opportunities to celebrate successes and reinforce good results Less frequent payouts should be considered when... They are needed to align payouts with business reporting periods for reliable measurement of results Payment at target is small enough that the amount is more meaningful if it is offered less frequently The cost/level of effort to calculate and pay the incentive is high The sales cycle is long (quarters or years) 30
Caps should be used sparingly, if at all, in sales incentives Sales people hate caps And they re usually not necessary Alternatives to caps Deceleration above excellence Per-deal caps to limit earnings on any single transaction to a very high value (e.g., the total annual incentive target for the role) Limit very large deals to a percent of the marginal profit generated by the deal (e.g., 20%) One case where caps are recommended If a role has both an individual and team version of the same measure, leave the individual component uncapped and cap the team component 31
A well-planned series of communication steps ensures sales plans are well-understood and motivating Typical Annual Communication Events Communication Step Announce the launch of the new plans Introduce the plans Individual plan review and coaching Objectives Delivered by Format Alert sales people to the fact that new plans are coming Create excitement Establish credibility Demonstrate linkage from business strategy to sales objectives to sales roles to the comp plans Describe the plans in overview format Emphasize how to succeed under the new plans Ensure each sales person understands all aspects of their compensation plan Work with each sales person to create a plan for them to meet their own earnings goals for the year Sales or divisional leadership Sales management in small groups based on reporting relationships Sales managers to subordinates Email and/or voicemail, or Article in regular newsletter In-person presentation One-on-one in-person discussion Materials Needed Memo Voicemail script Management presentation Plan document Earnings and productivity history Earnings calculator for the new comp plan THE H E CYGNAL C Y G N A GROUP L G R O U P 32
The management presentation introduces the new plans to the sales staff The Global Sales group is central to executing the growth strategy Enter new segments (government and corporate first) l Create expertise in specific segments, and tailor standard offerings to create value for those segments Form strategic relationships with high-potential customers l l l l l Sell solutions Incorporate test development and data management with computer-based testing delivery Maintain relationships after the sale to ensure business continues and increase account penetration Create reference-able customers Target high-potential customers and proactively pursue them with solutions they might not have devised themselves Sell higher in the organization (to those with whom a value proposition resonates) Deliver on sales goals l l In-year new revenue Total contract value What Global Sales needs to do to help create the increased growth l The Business Development Ensure contracted Manager s revenue is delivered key through the first full year of test delivery accountabilities are directly linked to the new incentive plan measures 2 A well-composed management presentation... Starts with business strategy Links strategy to selling roles Provides an overview of the pay plans for all roles Provides basic concepts and definitions common across pay plans Finishes with a clear statement of the path to maximum earnings Key Accountabilities Acquire new contracts for ABC Co. services Maximize Total Contract Value Ensure expeditious startup Stay engaged through startup period to ensure client satisfaction Target and grow revenue from high-potential customers and segments Incentive Plan Measures Total Contract Value The total value of each deal closed over the life of the contract Startup Revenue Revenue before delivery begins, plus Revenue for the first twelve months of delivery Total Contract Value is more familiar, and is defined here as well Total Contract Value The greatest rewards will go to those who sign significant contracts, and exceed their Startup Revenue goals Target high-potential accounts l l Since all the incentive is calculated as a percent of revenue, the most effective way to generate more income is to generate more revenue Work aggressively to create and win opportunities of significant size Sell the full range of ABC Co. offerings 3 Startup Revenue NTR A B C D E F 2004 2005 2006 2007 The example above shows a new three-year contract sold in March of 2004, with pre-delivery revenue (NTR) prior to delivery, and delivery revenue starting in August Startup Revenue = NTR + A + B Total Contract Value = NTR + A + B + C + D + E + F Balance your efforts betw een large deals and generating revenue this year it s like portfolio management l l l Be sure you can cover your 2004 Startup Revenue goal Ensure on-time start of test delivery Ensure testing volume meets expectations Add new services to existing contracts Keep working towards those larger, longer-term opportunities they will turn into a great deal of Startup Revenue in future years Sell all the services l More services means more revenue, and a competitive advantage to help win deals 32 5 THE H E CYGNAL C Y G N A GROUP L G R O U P 33
The plan document provides details and examples D. Plan Policies and Practices Eligibility All Business Development Managers are eligible to participate in this plan, however, subject to applicable local law, a Business Development Manager must be employed in good standing on the date a payment is due hereunder to be eligible to receive a commission payment or portion thereof. Interpretation and Administration The language contained in this Plan is not intended to create, and does not create, a contract of employment between Prometric and its employees for any specified period of time. The payment of any incentive compensation award does not guarantee that one will be earned in the future. Nor shall the payment of incentive compensation awards be construed as an indication that overall job performance is satisfactory. This Plan states the policy of the Thomson Prometric Sales Incentive Compensation for Business Development Managers. Interpretation of the policy will be solely within the discretion of Prometric s sales management This Plan supercedes all previous incentive compensation plans and agreements regarding incentive compensation, and/or other documents relating to incentive compensation. Incentive awards will be computed using financial data determined in accordance with Prometric s standard practices and general accepted accounting principles. Total contract value Rationale Management intends that the commission basic structure of this program This remain component in effect rewards the Business Development Manager for the total for the fiscal year. However, management reserves the right expected to modify, long-term value of deals closed. revise, or terminate the program at any time including the current Plan Year. Any such amendment, suspension or termination may be Summary retroactive Description to the beginning of any Plan Year. No such amendment, suspension A or commission termination will be calculated based on the total estimated value of the shall adversely affect any employee s rights under the Plan in contract any amounts at the time of signing. previously received by him/her or credited in a deferred compensation At least 50% of the commission earned will be paid the month following account. the signing of the contract. The payout timing is based on deal size, and shown in the Payout Timing by Contract Value table below. Management reserves to right to adjust territory and/or account assignments At the end of the first twelve months of test delivery, the total value of the and related quotas, other objectives, and other Plan provisions during the contract will be re-estimated and adjustments will be made if the new year based on overall business or individual circumstances. estimate differs from the original by more than 10%. Commissions payable under this Plan are not guaranteed. Total If Prometric Contract is Value, not in both cases, is made up of revenue from all sources paid as agreed by the customer, in part or in full, the commission recognized may by Prometric, including but not limited to: accordingly be reduced to reflect the actual services that have been sold and paid for or that service has ended. Commissions paid to the Business Test development Development Manager is an advance at the time of payment against Test preparation all future commission payments, such that any reduction or withdrawal Test publishing of A. Plan Overview Business Development Manager service will be deducted from any future commission payments Technology that may development become due. Data management Plan objectives This sales compensation incentive plan has the following objectives to align Test delivery. pay with company growth goals: Focus sales effort on high-potential clients. Payment timing Reward those who ensure successful and timely startup of services sold. Each payment of the Total Contract Value Commission will be made at the time of the second payroll following Plan the year month in which such The commission Plan Year is January 1 through December 31, 2004. payment becomes due in accordance with the Payout Timing by Contract Value table. For example, for a Incentive contract signed plan in March with all paperwork components Plan Component Weight Payout Frequency completed in March, the first payment of the Total Contract Value Commission would be made by the second payroll run in April. Total Contract Value 60% Monthly/as earned Commission Calculation Startup Revenue 40% Quarterly The commission is calculated using the tables shown below. Commission Effective plan documents Clearly state the components of the plan and their target values Provide payout tables and definitions Show example calculations Include the plan provisions and contingency statements Total Contract Value Commission Rates Each component will be described in detail on the following pages. Total Contract Value Caps Commission Earned Total incentive earnings for any one contract are capped at the smaller of: Ranges applies to contract value $500,000, or ($millions) within range 20% of estimated total profit from the deal. $20.0 M or more 0.20% The cap applies only to the specific deal for which it is invoked (and any $7.0 M - $19.99 M 1.25% others that meet the same criteria individually). Incentives for any other $1.0 M - $6.99 M 1.00% business besides the capped deal will continue to be earned as outlined in this document. $0.2 M - $0.99 M 0.75% less than $0.2 M 1.00% The caps will only be relevant for very large contracts, typically $35 million in total contract value or higher. Shared sales credit Occasionally, more than one Business Development Manager may be needed to close a deal. In this case, sales credit may be split between the two Business Development Managers using one of the two following weighting schemes: 1. 50% each. This is appropriate when each of the two Business Development Managers share the workload to close the deal nearly equally. 2. 75% to one / 25% to the other. This is appropriate when the primary Business Development Manager for the contract spends the majority of the time working the opportunity, and will maintain the relationship and manage the account for future opportunities (75% credit), and the other Business Development Manager provides essential expertise, influence, or other assistance (25% credit). The planned split should be discussed and agreed to between the Business Development Managers, and approved by their supervisors, before they begin working the opportunity together. The split credit applies only to the opportunity worked by both Business Development Managers, not to later contracts with the same account handled by the primary Business Development Manager without assistance. THE H E CYGNAL C Y G N A GROUP L G R O U P 34
Earnings calculators help speed understanding, especially when plans have changed significantly XYZ Co. Account Manager Incentive Earnings Calculation Worksheet Employee Name: Richard Hughes This calculator is for estimation purposes only. Final determination of payment will be made by Unifi management. Enter text or data in white cells only. Individual Gross Margin Bonus Annual Payout at Target Performance: $16,000 Individual Gross Individual Gross Act % Quarterly Goal Actual Quarter Margin Goal Margin Actual Goal Payment $1,500,000 1 $1,000,000 $1,232,123 123% $6,161 $1,000,000 2 $1,000,000 $858,465 86% $3,056 #REF! $500,000 3 $1,000,000 $987,564 99% $3,917 #REF! $0 4 $1,000,000 $1,125,648 113% $5,256 #REF! Q1 Q2 Q3 Q4 Totals $4,000,000 $4,203,800 105% $18,391 Business Unit Gross Margin Bonus Annual Payout at Target Performance: $4,000 Business Unit Business Unit Act % Year-End Gross Margin Goal Gross Margin Actual Goal Payment Actual Goal Year Total $40,000,000 $41,236,541 103% $4,309 $0M $10M $20M $30M $40M $50M Gross Margin Total Payout by Quarter Total Annual Payout at Target Performance: $20,000 Individual Gross Business Unit Gross Payout by Component 19% Quarter Margin Bonus Margin Bonus Total Individual Gr $18,391 1 $6,161 $6,161 Business Un $4,309 Individual Gross 2 $3,056 $3,056 Margin Bonus 3 $3,917 $3,917 Business Unit Gross 4 $5,256 $4,309 $9,566 Margin Bonus Totals $18,391 $4,309 $22,700 81% Earnings calculators Model the compensation plan for one individual Provide a place to enter individual targets and results Speed understanding of the plan behavior under different circumstances 35
Sales reporting should be considered part of the communication process A checklist for sales reports that support effective selling Reports are accurate and timely Reports show information in an accessible format Right level of detail usually a summary followed by detail one level down Make the so what obvious Sales people aren t always the most analytical among us be sure both the information and its implications for the business and for their pay are clear Provide individual sellers with the information to Prioritize activities Understand their own performance against goals Provide sales managers with the information to Provide needed coaching Manage performance of direct reports Understand their own performance against goals 36
Compensation plans evolve as company strategy and priorities change How things usually evolve It is helpful to create the expectation among sales people and management that: Over time, sales compensation as a percent of revenue should decrease in most companies. This is because the sales person becomes less and sell prominent as the company builds: Product or service value Brand awareness Selling tools Lead generation capabilities Complexity of the offering Generally, sales compensation for each sales person should continue to increase with the market but each sales person s productivity should increase by an even greater amount 37
The long-term relationship between sales compensation and revenue follows a predictable course Illustrative Sales comp COS Profit ($000) Sales Comp per Sales Person Year 1 2 3 4 5 6 7 8 9 10 % change year 1 to 10 $100 $107 $114 $123 $131 $140 $150 $161 $172 $184 +84% # Sales People 2 4 6 9 14 18 23 27 29 28 Revenue per Sales Person Sales Comp % Revenue $1,000 $1,133 $1,288 $1,470 $1,685 $1,942 $2,251 $2,628 $3,093 $3,677 +268% 10% 9.4% 8.9% 8.3% 7.8% 7.2% 6.7% 6.1% 5.6% 5.0% -50% 38
Regular review of your plans against your objectives will help guide plan changes and adjustments Checklist for plan performance review Are we achieving the results we set out to achieve Is our compensation cost as a percent of revenue (or margin) improving? Is the plan motivating to the sales people? Do sales people understand their plans? Do they see them as fair? What do they say the plans drive them to do? And is this what we want them doing? Are we attracting and retaining the talent we need? How does our performance distribution curve look? Are at least 50% of our people at or above target performance and compensation levels? Are fewer than 5% earning no incentives? Are a few people (about 10%) earning the fully leveraged incentive, or more? Are the most productive people earning the most money? Have sales roles or key accountabilities changed enough that we need to reinforce the changes with aligned changes in the compensation plans? 39
End Donya Rose Managing Principal The Cygnal Group +1 919-933-2204 donya.rose@cygnalgroup.com We help you make your numbers better cygnalgroup.com
The Cygnal Group s focus is sales compensation The Cygnal Difference Experienced Consultants at Your Service All Cygnal Group engagements are led by Principals in our firm. Your Engagement Leader will be present for every Design Team meeting, actively involved in developing all recommendations and deliverables, and will serve as your primary contact throughout the project. Proprietary Incentive Design and Modeling Tools Our proprietary plan design and modeling tool enables real-time design during Design Team meetings. The plan model enables the Design Team to keep an eye on the implications of the design for both individual eligible employees and the overall business results as key parameters are set and changed and the plan is tuned. Compared to the traditional PowerPoint-based meeting format, the quality of the design decisions is improved dramatically without sacrificing clear presentation of key concepts and meeting flow. Plan Communication and Implementation Expertise We are specialists in delivering compensation as a management tool. Our capabilities include developing communication strategies, messages and content to ensure your compensation plans create motivation and excitement among your sellers. Continued Support We understand that our clients want sales compensation plans that meet the needs of their business. Our hours, trips and deliverables can be part of making that happen, but they are not our product. All of our design engagements include unlimited access to your Engagement Manager for the first year with your new plans. The Cygnal Group s product is more effective selling by your sales team enabled by better sales compensation plans. 41
We work with clients of all sizes, private and public, across all industries, bringing solid domain expertise to bear on your unique sales compensation issues Advanced Sensor Technologies Allscripts AMCOL / Asia Minerals, Global Paper Ameri-Co / Carriers, Logistics Allstates America Transport Systems Arysta Life Science Aviat Networks / Harris Stratex Networks Blakeman Transportation CarQuest The Channing Bete Company ChemWare Choptank Transport Comcast / Business Services Consonus Technologies Cott Systems Criterion Brock CRST Logistics Daiichi Sankyo DART Advantage Logistics DealerTrack Delta Systems Dur-A-Flex Elsevier / CDS Group Elster / Solutions ETS / Prometric Flynn Transportation Franklin Street Partners Genomic Solutions GXS HD Supply Ingram Entertainment Integrity Logistics Invensys / Eaton Irving Oil JH Rose Kalsec Kingsgate Transportation Magnet Street Meritech Misys Banking Packsize PDI - Ninth House Roehl Transport Roofing Supply Group Rose Paving Red Hat Software Sensus / Metering Systems Scholastic Publishing SDI / Verispan Solae Standard & Poor's / Capital IQ SunGard / Higher Education SunTech Medical Taylor Distributing Tellabs Thomson Learning Trinity Transport Unifi Valassis Viewpointe Waste Management 42
Visit our web site for a rich and searchable library of Sales Comp Answers 43