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By Bradford J. Brown, Principal, Reward Strategies.
A sales compensation plan design that drives business objectives has reaped rewards for a telecommunications leader and its sales force.
Quick Look
A telecommunications company improved its performance by linking sales objectives, roles and measures to sales compensation plans.
An audit of the existing plan revealed that it did not encourage growth of new products and overall performance decreased after budget was achieved.
A design team was formed to review the audit and develop goals for a new plan.
The new plan drives increased performance of all products with emphasis on new products
You can please some of the people some of the time, but you can't please all of the people all of the time. This popular saying also holds true for employees in all fields of endeavor. Take salespeople, for example. They complain that they're not earning enough, their sales compensation plans are too complicated, they don't get paid on time and payments are too infrequent. Sales managers, on the other hand, complain that their sales people aren't motivated and aren't meeting their objectives.
Take a closer look. The causes of sales underperformance and job
dissatisfaction often lie just beneath the surface. Products or marketing strategies are not properly aligned with market conditions. Sales roles are not aligned with marketing and sales objectives. Performance measures aren't linked to strategic company and sales objectives. These fundamental challenges need to be addressed before any sales compensation solutions can be implemented.
A $250 million leader in the telecommunications industry used the following process to develop new sales compensation plans. By linking sales objectives, roles and measures to sales compensation plans, the company improved its performance. The design process and resulting plans were so successful that the company has chosen to remain anonymous to maintain its competitive advantage.
Paving the Way for a Better Plan
At a midyear meeting, the sales force was asked to propose improvements to its sales compensation plan. Attendee feedback was uniform. They were aggravated by not knowing how each year's plan had been constructed, what it would pay for and when payments would be made.
The project plan for the development of a sales compensation plan was
presented. Interviews would be conducted with the sales staff to get a
better understanding of their concerns and suggestions. The resulting plan would link rewards to performance more effectively. Timelier communication and more frequent payouts would be considered.
As a first step, the existing sales compensation plan was audited.
Individual sales performance (revenue and product sales performance; actual versus plan) was reviewed. Individual compensation payment information was evaluated. A sampling of the sales force and sales management was interviewed about the following topics:
Sales roles
Activities
Goals and performance
Feelings about the current sales compensation plans
Suggestions for improvement.
The audit revealed the following:
The incentive plan did not encourage growth of new, high-margin products. The payout formula had a regressive ramp, after budget was achieved. Overall performance decreased after budget was achieved.
Incentive payouts were late. Sales people were dissatisfied with their late sales incentive payments. Although sales were projected to end the year at 97 percent of budget, nearly 40 percent of sales individuals had performance that would provide no incentive payments. (The plan provided for annual incentive payments.)
The top 30 percent of the sales force was projected to earn only 10 percent more than the rest of those who exceeded budget. (See
1.)
(figure one)
A design team was formed, including a sales manager, a salesperson, a
compensation manager and a sales director. The team reviewed the audit and developed the following goals for the sales compensation plan development:
- Make incentive payments on time.
- Make more frequent payments.
- Focus the sales force's attention on exceeding their performance objectives.
Increase reward payments for over budget performance.
The team reviewed the business objectives, sales strategies, sales roles and performance measures. Sales compensation also was benchmarked to the industry using market data from sales compensation surveys to assure competitive pay for all positions.
The team decided to make the following changes to the compensation plans:
Tie rewards to improved results in overall budget achievement.
Reward the sale of newer, more profitable products. Create a ramped bonus structure to deliver increasing payments for achievement in excess of budget. The new plan provides the same payments as the previous plan, for performance up to budget. (See Figure 2.) The new plan, however, delivers increasing payments for performance above budget. If that total budget performance has been met, additional new product revenue is compensated at an even higher rate.
(figure two)
In addition, the team decided to:
Reward sales as soon after achievement as possible with on-time quarterly payouts to increase sales force motivation. Give a "payout calculator" to the sales force for them to track their
achievements and incentive payouts. (See 3.)
(figure three)
Crunching Numbers
The proposed plan was applied to historical performance data. "What if"
scenarios were created under a variety of performance conditions, assuming the plan had been in effect in the previous year. For example, a salesperson who achieved 127 percent would have received $22,545 as an annual incentive payout. Under the proposed plan, the same salesperson with the same performance would receive $34,592 in total payouts. This increased "upside" potential in earnings was two-and-a-half times what the sales individual would have earned at budget performance ($14,000). It was projected that 5 to 10 percent of the sales force would achieve this performance level and was consistent with industry practices.
The additional compensation cost to the company would be $12,047, with
additional revenue of $398,622. Increased margin due to improved rewards for new products also were projected. The plan required an additional $111,187 in revenue to cover the additional compensation costs. Those additional compensation costs resulting from the increased payments to approximately 25 salespersons would have been $52,950. The team decided that the additional compensation costs were a prudent risk, given the opportunity for improved performance, revenue, and improved margin of new products, which the proposed plan would provide.
Weighing Performance Factors
The team was concerned about the impact of a change from annual payments to quarterly payments. What if a salesperson did well at the beginning of the year, but poorly at the end of the year or vice versa? Would the company be paying for and, therefore, reinforcing negative sales behaviors? For example, would salespeople be rewarded for diminishing performance? Conversely, would early poor performance be detrimental (to both the company and the sales individual), despite improved performance later in the year?
A test was conducted to compare quarterly performance and resulting payments with annual performance. The tests showed that quarterly cumulative payments would provide widely divergent payouts depending upon whether performance weakened or improved during the year. Quarterly discrete payouts, on the other hand, would provide the same payouts for both weakening and improving performance. (See Figure 4.)
(figure four)
The team decided to use discrete quarterly payouts to ensure fair and
equitable payouts to each sales individual. The team prepared materials to communicate the plan to sales management and the sales force.
These
included:
A presentation describing the reasons for the changes to the existing plan and the new plan's objectives.
A set of questions and answers to address common questions which were
expected to be on the minds of each salesperson as they were exposed to
their new plans, such as:
Why are the plans being changed?
How will the new plan affect my compensation?
What do I have to do to earn more money?
Additionally, each salesperson was given a "payout calculator" and a sales compensation agreement. The payout calculator enables the salesperson to enter budget information and play with the tool to see earnings under different conditions of performance. This same spreadsheet is used to administer quarterly payouts using actual performance data. Figure 4 shows a simplified version of the payout calculator.
Results Say It All
The sales director communicated the results of the team's decisions with the accompanying communication materials to the sales force. The reaction was very positive. The plan was implemented and the results have been very encouraging. 2001 industry estimates indicate that the sale of telecommunication products will grow by only 1 percent from 2001 to 2002 worldwide. Yet this company's sales force has exceeded its budgets by 9 percent for the first three quarters of 2001. Fifty-eight percent of sales individuals have exceeded their overall budgets and 40 percent have exceeded their new product budgets. More than two-thirds of the sales force received payouts at the close of the third quarter.
The company's CEO attributes the company's improved revenue and
profitability to the sales compensation plan. The plan is driving increased performance of all products with particular emphasis on new products, and the additional investment in targeted rewards has paid off well.
Driving Performance: How to Develop a New Sales Compensation Plan
Step 1: Audit the Sales Force
Interview sales management. Outline problems, costs and success outcomes. Identify expected performance improvements.
Interview the sales force. Identify roles, how they spend their time, how they're measured and suggestions for improvement.
Gather and analyze current pay plan delivery mechanisms, individual
historical sales results and earnings.
Step 2: Develop Goals and Align Sales Strategies, Roles and Measures
Convene a design team consisting of key stakeholders in sales compensation results.
Review the audit results.
Outline the goals for the new sales compensation plans.
Design the new sales compensation plan to ensure competitive pay and
alignment of business objectives, sales and marketing plans, channels,
roles, measures and rewards.
Step 3: Test the New Sales Compensation Plan
Apply the new sales compensation plans to historical results.
Design financial spreadsheet tests which model expected performance results in the new plan year. Review the results to determine competitive, affordable and equitable pay for each performance level: minimum, target and excellent. Determine the cost of sales for each performance level.
Step 4: Communication
Schedule group meetings with salespeople to communicate the new plan's
alignment with business and sales roles and objectives.
Prepare frequently asked questions and answers.
Prepare sales compensation agreements for each salesperson that provide plan details and rules of the road.
Prepare a sales compensation "payout calculator" for each salesperson to calculate projected and actual earnings using the new plan design.
About the Author
Brad Brown is the principal of Reward Strategies, a sales compensation
consulting firm. He can be reached at 978/443-4621 or bbrown@rewardstrategies.com.
Reprinted from Workspan, January 2002, with permission from WorldatWork,
14040 N. Northsight Blvd., Scottsdale, AZ 85260; phone (877) 951-9191;
fax (480) 483-8352 www.worldatwork.org. © 2002 WorldatWork.
Unauthorized reproduction or distribution is strictly prohibited.
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