Incentive Planning: 7 Loopholes Your Sales Team Hopes You Never Discover FEATURED FACULTY: Chad Albrecht, Principal, ZS Associates 847.492.3651 chad.albrecht@zsassociates.com Jonathan Ezer, Consultant, ZS Associates 212.370.8851 jonathan.ezer@zsassociates.com
Chad Albrecht, Principal, ZS Associates Chad Albrecht is a Principal with ZS Associates, and leads the B2B sales compensation practice. Chad is a Certified Sales Compensation Professional (CSCP) and has 14 years consulting experience with Hewitt Associates and ZS Associates. During that time, he consulted with clients to create and implement motivational sales incentive plans and set fair and challenging sales quotas. Chad has worked with clients in many industries including medical devices, software, business services, online recruitment, pharmaceuticals, and manufacturing. Chad is the author of several articles in publications including Compensation and Benefits Review, World at Work Journal, Sales and Marketing Management, and Workspan. In addition, Chad is a regular speaker at multiple conferences. Jonathan Ezer, Consultant, ZS Associates Jonathan Ezer is a Consultant with ZS Associates. He designs sales incentive compensation plans for firms in a variety of industries, including insurance, business services, online recruitment and pharmaceuticals. Jonathan is a Certified Sales Compensation Professional (CSCP) and has 5 years of sales compensation design and administration experience. He has directed original research projects on variable incentive pay practices, and sales compensation loopholes.
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Gaming the compensation plan: The 7 most common sales compensation loopholes C4CM Webinar ZS Associates 617.557.5800 www.zsassociates.com Today s Objectives & Agenda Objectives of Today s Discussion Expose common ways salespeople exploit loopholes in sales incentive plans and how to avoid them Agenda 7 common sales compensation loopholes How to encourage the right kind of gaming Q & A 2012 ZS Associates 2 1
Today s Presenters Chad Albrecht Principal in Evanston, IL Jonathan Ezer Consultant in New York, NY Phone: 847.492.3651 Email: chad.albrecht@zsassociates.com Chad Albrecht is a Principal with ZS Associates, and leads the B2B sales compensation practice. He is a Certified Sales Compensation Professional (CSCP) and has 14 years consulting experience with Hewitt Associates and ZS Associates. He has worked with clients in many industries including medical devices, software, business services, online recruitment, pharmaceuticals, and manufacturing. He is the author of several articles in publications including Compensation and Benefits Review, World at Work Journal, and Sales and Marketing Management. He has an MBA degree with distinction from the University of Michigan and Bachelors degree in Computer Science from the University of Iowa. 2012 ZS Associates 3 Phone: 212.370.8851 Email: jonathan.ezer@zsassociates.com Jonathan Ezer is a Consultant with ZS Associates. He is a Certified Sales Compensation Professional (CSCP) and has 5 years of sales compensation design and administration experience. Jonathan has designed sales incentive compensation plans for firms in a variety of industries, including insurance, business services, online recruitment, B2B, and pharmaceuticals. He has also initiated multiple original research projects on variable incentive pay practices and sales compensation loopholes. Jonathan has a PhD from the London School of Economics and a Bachelor s degree in Mathematics from the University of Waterloo. ZS Associates is a global leader in sales and marketing consulting, technology and operations ZS Overview Full range of commercial services More than 28 years of experience in sales and marketing Consulting, Software and Outsourcing Worked with more than 1,000 companies in over 70 countries Over 2,000 professionals in 20 offices worldwide Two offices and 800 professionals in India Marketing Technology & Operations Sales Onsite, Onshore, Offshore Consulting Analytics & Technology Consulting Outsourcing BARCELONA BOSTON CHICAGO EVANSTON FRANKFURT LONDON LOS ANGELES MILAN NEW DELHI NEW YORK PARIS PHILADELPHIA PRINCETON PUNE SAN DIEGO SAN FRANCISCO SHANGHAI TOKYO TORONTO ZURICH Javelin 2012 ZS Associates 4 2
Contents 1. The 7 most common sales compensation loopholes 2. How to encourage the right kind of gaming 3. Conclusion and Discussion 2012 ZS Associates 5 Loopholes Loophole #1: Game the metrics Reps can game their compensation plans by focusing solely on the metrics used for evaluation, without thinking about the broader impact Metric Sales Revenue Sales on total portfolio Number of phone calls Gross Margin % Potential Rep Behavior Sell at all costs, invent product application Sell at the lowest price possible Sell only one product Sell loss-leaders Make several very short phone calls to maximize payout Avoid selling high volume, low margin % products that are margin positive to the company Outrageous example: Bank teller enrolls new customer in the wrong account type, gets the bonus, fixes it the next day 2012 ZS Associates 6 3
Loopholes Loophole #2: Sell every other period With goal based plans, quota attainment drives the calculation of incentive pay Reps can take advantage by working hard every other quarter to maximize payouts Note: This loophole exists on monthly or quarterly plan, or annual plans with improperly designed interim payouts Rep 1 Consistent Performer Rep 2 Inconsistent Performer A story of two sales reps Q1 Q2 Q3 Q4 Quota $1.0M $1.0M $1.0M $1.0M Sales $1.1M $1.1M $1.1M $1.1M Attainment 110% 110% 110% 110% Rep earns a modest increase over target pay throughout the year Sales $200K $1.8M $200K $1.8M Attainment 20% 180% 20% 180% * Rep 2 could earn more over the course of the year if there are stand-alone payouts or if the interim upside payout was not well designed 2012 ZS Associates 7 Rep earns high leveraged payouts in Q2 and Q4. Loopholes Loophole #3: Hold back sales One way to gain an advantage is to hold back sales towards the end of year if the net result of doing so results in higher compensation across 2 years Monthly Sales??? Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec A sales rep can gain several advantages from holding back sales 1. Get a lower quota in the following year since prior year s sales data is often used as a input into the quota setting process 2. Get off to a fast start the following year due to pent up demand 3. Earn more incentive pay. At the end of the year, some reps are above the cap, others are below the threshold. In either case, any sales would have no impact on incentive pay. 2012 ZS Associates 8 4
Loopholes Loophole #4: Exploit the payout curve A well-designed payout curve offers few opportunities for abuse 250% A badly designed curve offers several opportunities for abuse 250% % of target pay earned 200% 150% 100% 50% % of target pay earned 200% 150% 100% 50% When a rep is close to a kink, the potential impact of 1 sale can be very large. In some cases the rep may feel the need to close the deal by all means necessary. 0% 0% 50% 100% 150% 200% % of quota attained 0% 0% 50% 100% 150% 200% % of quota attained The incentive to game the commission plan near the kinks is sometimes too great to pass up. In a retail bank, branch managers would ask a family member to open a new account in order to push them over the threshold. Outrageous example: Software salesperson sales a seat to his mother to get him over quota 2012 ZS Associates 9 Loophole #5: Enter bad data Loopholes The successful functioning of a sales compensation administration system is dependent on the honesty of its users. Unfortunately, when reps are directly paid based on self-reported data, the temptation to inflate or mis-represent events might be difficult to ignore. Some examples include: Entering incorrect data in order to get around pricing restrictions Self-report events that never happened Exaggerate the strength of the pipeline in the CRM system Outrageous example: Change the formulas in the MS Excel spreadsheet if the cells are unprotected 2012 ZS Associates 10 5
Loopholes Loophole #6: Collude with customer Sometimes a cunning sales rep s best ally is the customer How to collude with the customer for higher pay How to subtlety manipulate the customer for higher pay Sell products to customers who you know won t pay their bill. Take home the incentive pay, let someone else worry about collections. Extend credit to a customer, even when it s undeserved. Provide customer with excessive perks and goodwill. When the incentive split based on based on ShipTo addresses, offer to sweeten the deal for the customer if they ship more product to your territory When the number of transactions impacts incentive pay, split a large order into multiple smaller orders to maximize incentive payout. Ask for the highest score on a customer satisfaction survey Outrageous example: Get the CEO to sign off of a deal to help make the Wall Street number 2012 ZS Associates 11 Loopholes Loophole #7: Manage your manager Sometimes reps can gain an advantage by influencing the territory alignment process If the territory alignment is unscientific, quotas will be biased. Some reps will have a much easier time making their numbers. Reps gain advantage by understanding the biases better than the sales comp designers. Other ways to earn higher payouts: Be extra nice to your manager, especially if your comp plan has a large MBO component Try to negotiate your way onto every large deal ( Siebel Surfing ) Hoard sales Outrageous example: Offload accounts that are about to be lost to an unsuspecting colleague 2012 ZS Associates 12 6
Contents 1. The 7 most common sales compensation loopholes 2. How to encourage the right kind of gaming 3. Conclusion and Discussion 2012 ZS Associates 13 Avoiding Negative Gaming Sometimes we want their reps to game the plans But we want them to game in the right way Give reps obvious ways to exploit the comp plan Limit number of comp plan components/linkages Use simple, objective metrics Anticipate undesirable behaviors and implement controls if necessary Establish long enough plan periods to eliminate the temptation to sell every other period 2012 ZS Associates 14 7
Contents 1. The 7 most common sales compensation loopholes 2. How to encourage the right kind of gaming 3. Conclusion and Discussion 2012 ZS Associates 15 When designing a sales compensation plan, it is always important to anticipate undesirable behaviors Conclusion Incentive Feature Very high incentive component Paid on units Paid on sales Incentive based on customer satisfaction Manager sets objectives or determines reward Monthly objective with over-achievement bonus Caps Team incentive Complex plan Potential Rep Behavior Sell at all costs, invent product application Discount Enlarge territory Seek satisfaction at the expense of seeking sales Work the manager, not the customers Sell every other month Hoard sales Relax Ignore it 2012 ZS Associates 16 8
Conclusion Questions? Chad Albrecht Principal in Evanston, IL Jonathan Ezer Consultant in New York, NY Phone: 847.492.3651 Email: chad.albrecht@zsassociates.com Phone: 212.370.8851 Email: jonathan.ezer@zsassociates.com 2012 ZS Associates 17 9