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Implementing Best Practices and Supporting the Achievement of Sales Results in Multiple Business Units at Financial Services Companies
By Bill Gauthier, Principal, The Alexander Group, Inc.
Leading the sales compensation design effort means establishing a set of corporate-wide sales compensation design parameters that allow “flexibility within a framework” at the business unit level.
Most large corporations are not homogeneous, uniformly structured organizations. In fact, they are collections of individual business units, each with its own target markets, unique products and
aggressive sales goals. This fact creates certain challenges to the effective management of sales compensation.
Business unit managers are professionals. They have acquired the knowledge of their specialty area over many years. They have the operational skills to effectively develop market strategies, design market- specific products and successfully
sell to customers. They know how the industry operates and what competitor practices are. Too often, however, they
adhere closely to “industry practice” in sales compensation design without a clear understanding that there are design options and what those options are.
Business unit managers are under considerable pressure to produce sales results and they want to achieve those results without interference from what they perceive to be internal bureaucratic pressure. In the matter of sales compensation,
this translates into a strong desire to control the design and management of plans without any constraints or limitations
imposed by anyone outside the business unit.
Corporate compensation managers have a different, but equally valid perspective. They want to ensure that best practices are adopted across the entire corporation, that business unit sales compensation plans are designed within the context of
a corporate compensation philosophy, and that common vocabularies regarding sales compensation design features are used throughout all business units. Sometimes these objectives are wrongly perceived at the business unit level as attempts at bureaucratic control.
It is important to get sales compensation “right”. A poorly designed plan will not achieve optimum results. Too often, corporate compensation managers observe that business unit managers:
- Adopt plans that may have been right for another company in the industry, but are not appropriate for the business unit that adopts them.
- Too often fail to recognize that sales compensation plans must change as a sales organization’s target customers, selling models and sales jobs change. The plan that worked well in a wide open market will be less than effective in a market that is characterized as a battle for market share.
In the matters of sales compensation design and management, both the goals of the business unit manager and the goals of the corporate compensation manager can be met with a proven process that provides a win-win for both parties.
How does a corporate compensation manager add value, support business unit growth and at the same time bring corporate sales compensation philosophy and sound sales compensation plan design principles to each business unit? The answer begins with developing a common set of over-arching philosophies,
principles and frameworks that can be used across all business units, but which allows design flexibility at the business unit level. The following process can be used to achieve these objectives.
1. Sharpen and Clarify Both Corporate Objectives and Those of Individual Business Units
It is important to begin the process with a summary of the strategic business objectives the corporation is focused on. These may include, for example, aggressive revenue and profit growth, maximization of market share, the emphasis of strategic products, and objectives regarding acceptable risk. In
addition, it is also useful to identify business unit objectives and then illustrate how corporate objectives are supported by business unit objectives. Identifying corporate and business unit objectives is a valuable exercise because it identifies points of agreement, creates a community of purpose
and establishes reference points that all business units can relate to. It also serves as the basis for identifying specific performance measures that can be used in sales incentive plans.
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A Proven Process that Works
1. Sharpen and Clarify Both Corporate Objectives and Those of Individual Business Units
2. Obtain Executive Input and Achieve Alignment
3. Develop a Corporate Philosophy of Sales Compensation
4. Develop Common Vocabularies for Communicating Sales Compensation Plans
5. Identify and Communicate Sound Sales Compensation Design Principles
6. Develop a Process for Coaching and Advising Business Units
7. Establish an Audit Capability to Review Practices and Results
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2. Obtain Executive Input and Achieve Alignment
A critical next step is to interview senior executives and obtain their:
- Confirmation of the business objectives you have identified in Step 1
- Viewpoints on issues related to sales compensation philosophy, design and management
- Advice and direction on key business results they wish to achieve through the sales organization
This information is typically gathered during one-on-one interviews of approximately 45 to 60 minutes in length. The material advantages of this step in the process are: 1) identifying the range of viewpoints in the organization, 2) ensuring that critical decision makers participate in the process
thus facilitating eventual buy-in to the results of the effort, and 3) securing eventual alignment with a defined corporate philosophy of compensation.
3. Develop a Corporate Philosophy of Sales Compensation
A corporate philosophy of sales compensation is intended to give direction and guidance to the specific design decisions that are made in the business units. While individual statements of philosophy are general in nature, they can have a powerful influence on specific design features.
Examples of philosophical statements are as follows:
- Our sales compensation plans will reflect best practices in the marketplace. (This statement precludes use of an '“industry practice" if it is not a "best practice").
- We will pay more for more and less for less. (This statement bars plans that do not sharply distinguish between the compensation of "par", "sub-par" and "outstanding" performers).
- We will reward multiple dimensions of performance. (This statement discourages the use of “volume only” plans and encourages the use of balanced performance measures that may address volume, profitability and strategic measures).
- We will express priorities clearly. (Plans with too many performance measures or with equally weighted performance measures will fail this test).
- We will use sales compensation as a complement to, not a substitute for, sales management. (This statement of philosophy places accountability for sales results on sales management, not on a particular sales compensation plan design).
- We will pay only one time for one dollar of revenue. (This statement ensures that those who are responsible for the persuasive act of selling will receive incentive compensation and those who are simply present at, or who contributed only peripherally to the sale will not).
- We will measure at the lowest possible sales job level at which sales performance can be assessed. (This statement limits the use "galactic" performance measures that are simply not influencable by a salesperson).
These statements of philosophy are examples. Others can be identified. Their value is that more specific sales compensation principles can be developed in support of them as a way to influence sales compensation plan design.
Once statements of philosophy are drafted, they are circulated among senior executives for the purposes of obtaining input and achieving alignment. Statement drafts include both the statement itself and a paragraph describing its implications.
4. Develop Common Vocabularies for Communicating Sales Compensation Plans
There is standard sales compensation terminology which can be readily identified. It is important that it be used throughout an organization for a number of reasons:
- It ensures clarity of communication within the organization. Terms mean the same thing in all business units.
- It facilitates recruitment. Discussions with job candidates are made easier since outsiders are more likely to use commonly accepted terminology.
- It ensures more successful benchmarking and market compensation surveying since standard terminology will minimize misinterpretations of competitive market practices.
An example of standard terminology are the following definitions of the two alternative sales compensation plan types: commission and bonus.
- Commission. Compensation that is paid as a percentage of revenue (overall or by product, product group or account type), or as dollars per unit sold.
- Bonus. Provides an opportunity for a plan participant to earn a pre-defined dollar amount, called a target award. To earn the target award, the participant
must achieve a target quota or goal. A formula is used to pay lesser or greater awards than
the target award, based on performance relative to the quota.
These definitions appear to be obvious, however, in practice they are often given different labels such as bonus being called an “incentive” (actually, the term incentive in a general term
that would include both commission and bonus) or “commission” being used as a general term including bonus. It is not difficult to see the advantages of
using standard – and commonly accepted - terminology across a corporation.
5. Identify and Communicate Sound Sales Compensation Design Principles
At this point in the process, much has been accomplished. We have clarified the general business of objectives of the corporation as a whole and those of the individual business units. We have obtained and documented executive input, we’ve
developed a corporate philosophy of sales compensation and achieved alignment among senior executives. In addition, we’ve developed a common vocabulary for discussing and communicating sales compensation plans throughout the organization. Our
next step is to identify sales compensation design principles.
Sales compensation design principles are broad, over-arching approaches and policies that serve as the foundation for sales compensation plan design in all business units. They are more specific than statements of sales compensation philosophy
and address technical sales compensation issues.
The use of sales compensation principles will enable business unit managers to: 1) understand the specific implications of corporate sales compensation philosophy for sales compensation plan design in their unit, 2) resolve issues that are in
conflict, 3) eliminate radical shifts in policy and approach, 4) provide a sound basis for plan design, 5) design plans with confidence, and 6) provide a reference point so that questions regarding plan design can be answered.
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Sales compensation design principles typically address issues such as:
- Use of a “cost of sales” or “cost of labor” approach to managing sales compensation costs
- Definition of the labor market
- Competitive pay position in reference to the labor market
- Eligibility to participate in a sales incentive program
- Determining the amount of total compensation at risk
- The salary component of a sales compensation program
- Performance measures number: kinds, use and strategic weightings
- Relationship of pay and performance
- Payout frequency
- Earnings limitations
- Incentive compensation for sales managers
- Use of incentive compensation “pools”
- Use of stock
- Sales job types and their implications for sales incentive compensation plan design.
Each principle is defined and the implications of each principle are also stated. This information gives the business unit manager clear guidance, but also considerable latitude in which to design plans.
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Example:
Performance Measures – General Principles
The selection of performance measures used to determine sales incentive compensation awards is critical to the design of a successful program. In our organization, the following general rules
will apply to the use of performance measures:
- Aligned with Business Objectives. Performance measures used to determine sales incentive compensation awards must be aligned with and in direct support of the corporation and the unit’s business objectives.
- Easily Administered. Performance measures used in sales compensation plans should be easily tracked and measured, readily calculable and easily understood.
- Objective and Quantitative. Performance measures used to determine sales incentive compensation awards should be objective and quantitative whenever possible.
- Subjectivity. Management recognizes that unanticipated market events can occur that make sales goals easier or more difficult to achieve. Some degree of subjectivity in making sales incentive compensation
award decisions is therefore appropriate in certain cases. Subjective evaluations of performance should be limited, however, to no more than 20 percent of the award. In cases where subjective evaluations of performance
are used, a clear statement of the criteria that will be taken into account when making those decisions will be communicated directly to plan participants.
6. Develop a Process for Coaching and Advising Business Units
Corporate compensation managers need to execute a process that allows them to participate in the plan design process at the business unit level. This is best done by adhering to the following rules:
- Understand the business of an individual unit with a focus on how they achieve success
- Identify obstacles to success and how they can be overcome.
- Evaluate the current sales compensation approach and determine: 1) how it supports or does not support business objectives, and 2) how it conforms with or does not conform with corporate sales compensation philosophy and principles.
- Participate in a structured plan redesign process that presents these issues and findings and that points toward a solution. That process should be conducted using resources outlined in the box below:
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Resources used to coach and advise business units:
Form a Work Group. A multi-functional work group with representation from business unit and corporate compensation management should be formed.
Use a Common Design Methodology. A common design methodology should be used to develop sales compensation plans in each business unit. The Alexander Group, Inc.’s Sales Compensation Design Platform is a proven method
that results in a comprehensive, time-efficient plan design exercise.
Develop a Work Plan. A list of sequential sales compensation plan design steps, each with a date for accomplishment and the activities of the Work Group and it s members, keeps the process on track and results in a timely
conclusion. The Work Plan has five phases:
- Assessment. Fact-finding and information gathering.
- Alignment. Sales compensation philosophy and principles, as well as, business objectives and strategy are identified and agreed to.
- Design and Development. Plan objectives are defined plan design alternatives are discussed, conceptual solutions are identified, specific solutions are agreed upon, and cost modeling is completed.
- Automation. Automation capability is assessed and needs are identified.
- Implementation. An implementation action plan is developed that includes a timeline, an listing of the events that will occur (e.g., sales management training, plan introduction meetings, etc.), the roles of individuals in the events
and the materials that will be prepared.
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7. Establish an Audit Capability to Review Practices and Results
The regular audit of sales compensation plans is the strongest tool available to ensure adherence to principles. An audit capability should include:
- A timeline to determine the frequency of audits
- Specific audit tools such as:
- A survey to identify the views of plan participants on the
- appropriateness of the plan design and the success of
- implementation and communication.
- A spreadsheet that will summarize sales goals, actual performance
- and target and actual pay levels. The spreadsheet should also
- calculate the cost of sales so that year to year trends can be
- identified.
- A summary of how the market, the competition and the sales jobs
- are evolving and how plan design must change to keep pace with
- them.
A set of specific action steps should result from the audit process. These steps will result in new plan designs that are in support of management’s objectives, aligned with corporate sales compensation philosophy, and consistent with sales
compensation plan design principles.
In Summary
What do business unit managers get out of this process? Most importantly, they get direction on key issues related to plan design, thus helping to ensure rapid management approval of their proposed sales compensation plans. In addition,
they get "freedom within a framework" - the ability to develop the sales compensation plans they see fit, as long as they are within the parameters established by the statements of sales compensation philosophy and the sales compensation plan design principles.
What do corporate compensation managers get out of this process? The most significant benefit is that they are able to bring an organized and systematic process to bear on a critical business issue on a corporate wide basis. They are able to establish a degree of
control over sales compensation in the form of "guardrails" that ensure that best practices are adopted and the most common errors that impact sales compensation plans are avoided.
The process of sales compensation design should involve multiple points of view. Obviously, business unit managers should have major voice in plan design. They have the most at stake and they are directly accountable for business results. However, their views
regarding plan design must fit with the broader context of an organization’s sales compensation design philosophy and principles. If both of these viewpoints – corporate and business unit -- are accommodated, the strongest sales compensation plans result and
an organization is in the best position to achieve its growth and profitability objectives.
Bill Gauthier has a wide range of sales management consulting experience with financial services companies. He also has seven years of management experience in retail financial services and in merchant banking. He can be contacted at
bgauthier@alexandergroupinc.com or (203)905-5579.
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