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Answers by David Cichelli, Senior Vice President,
The Alexander Group, Inc.
The following questions and answers are taken from an online chat session with David Cichelli, nationally known expert in sales compensation issues for The Alexander Group, Inc., SalesLobby.com’s parent company. Minor editing has been performed for clarity. More question and answers are available through SalesLobby.com’s next sales compensation newsletter.
Q: How are equity-based programs used in sales compensation?
A: Most young (start-up) companies provide equity to many employees, including the sales people. Normally, the equity plan and the sales compensation plan operate independent of each other.
Q: What are your thoughts on capping commissions for support roles such as account managers?
A: Only when excessive performance can hurt the business (such as over-selling customers) should you use caps. Those that are afraid of paying too much because they cannot set accurate quotas need to spend more time improving the quota-setting process.
Q: What would be your recommendation for an incentive plan for new businesses with no sales history? If this is a new business, but you're selling it through your existing sales force, should you consider an adder?
A: There could be a good argument for setting up a special sales force, or an over-overlay sales force. This would be the preferred solution. However, if you want your existing people to sell the new business, then you need to link the incentives of the core business with the success of the new business. Or, if it's just a simple extension of the existing value proposition, you might consider a temporary contest to launch the new product.
Q: I am currently designing a commission plan for a division that sells power and industrial equipment to utilities and the like. Sales are characterized by multi-million dollar contracts and long lead times.
Management wants to motivate sales people to design total solutions for their customers rather than just sell a single boiler or generator or whatever. Employees receive a generous base salary and benefit package that includes a defined benefit pension plan and 401(k), but no stock options.
Commission rates are established every 6 month budget period (Japanese company) on the variable pay portion of TCC divided by the budget period sales and paid monthly. However, sales people often go months without receiving anything because sales are not recognized under the plan until the equipment is invoiced.
Sales people need to have engineering backgrounds in addition to sales expertise. Contract managers and engineers do much of the work once the letter of intent is signed. (They are on the regular bonus plan, not the commission plan.)
Management wants the commission plan to have the following clauses:
- Recognize sale when invoiced
- Apply a profit accelerator in order to improve margins
- No cap on earnings
- Split credit for sale when another covered participant assists in securing the sale
- split to be determined at the time the purchase order is secured.
- No credit for sales on which the sales person has not personally worked to secure the order.
Do you see any problems with this design?
A: Thank you for a complete description of your situation. The key challenge here is that long sales cycles and 6-month quotas are a mismatch. Most selling in long sales cycles involves guesswork on when deals will close. Six-month quotas do not give a very big window to anticipate if and when the order will occur. So when commission rates are calculated, they make assumptions on when the orders will occur.
In such situations, its better not to have a ICR (individual commission rate) but instead establish a tiered signing bonus program with a flat commission rate (or regressive) that provides payouts as the project is invoiced.
Now, regarding the other design features:
- There is nothing wrong with recognizing revenue at time of invoice rather than order, particularly if deals can be re-configured or cancelled before the invoice is sent.
- Are you missing a product mix component to encourage "solution selling" that than pushing "iron?"
- Profit accelerators are okay, too.
- No cap on earnings? Yep, we like that too.
- Split credit for those that influence the sale? Another good design feature.
- No credit for no influence?
Q: Some companies use salary as an integral part of the sales incentive calculation. Other companies see salary as a skill/experience/market-based differentiator but virtually ignore it for purposes of the sales bonus calculation.
For example, company #1 might say the total comp mix for their sales job is a 70/30 salary/bonus mix. Employee “A” has a salary of $70k and a bonus of $30k, while employee 'B' has a salary of $84k and an incentive of $36k.
Therefore, the risk/reward profile for the same sale to a similar customer is different. In this case, the salary and fixed comp mix drove the company to different payouts and incentive opportunity for people in the same job.
However, company #2 prefers to use common pay-out factors in their incentive plan in order to pay a consistent bonus for the same kind of sale to different customers.
This method ignores the salary for incentive purposes, and it allows the "mix" to float somewhat because the salaries may be reasonably different by person for skill/experience and/or market.
However, the incentive payouts are more aligned with the risk-reward objectives for similarly complex sales on a dollar payout basis. What are your thoughts on both approaches?
A: Excellent question. In situation #1, the company insists on maintaining a uniform "pay mix" for all incumbents. However, if the base salaries vary, then the bonus amounts will vary depending on the base salary amount. Some companies follow this practice. However, this is the minority -- my guess, less than 5% of companies do this. In fact, I think I can name the large ones -- on two hands.
The preferred method is #2. That is, establish the mix for the job and let the base salaries float depending on individual merit, skill, and contributions -- and keep the bonus amounts equal for all.
The net effect will be to have fair base salaries, fair target bonus amounts, but messy mixes that vary from one person to another. Not a bad tradeoff in my book.
Q: Discuss the implementation of a global sales plan and balancing global consistency and local implementation.
A: At one time the focus on local design and autonomy seemed the preferred model. The following three factors have altered the focus to local uniqueness to global sameness: 1) The emergence of the EU started the process in the early 90's; 2) Next came the focus on global accounts where the need for a uniform pay program became a practical necessity and; 3) the rise of line of business (LOB) business units on a world-wide basis.
While local companies are still insulated from these factors, using pay plans that meet their unique needs, the multinational companies are assuming global sameness unless compelling business or legal issues require local difference. It’s quite a shift!
Q: How do you handle sales from partnership marketing alliances? Would we still try to target a sales mix in terms of base and commission? What if market data isn't easily accessible?
A: Yikes! Are marketing people sales people? Maybe yes! In some companies (like the dot-coms) partnership recruitment is, in fact, a sales job. Because without partners, the business is not robust. However, this job has been around awhile, pre-dating the dot-coms. Sometimes known as a channel partner recruiter.
The job is normally paid using a quasi-sales compensation program tied to recruitment of partners plus the initial performance of those partners. Interestingly, the next phase of such an effort is to split the job between the recruiters (who do not increase in headcount that much) and a new batch of channel managers (a.k.a. alliance managers, or partnership managers.)
These second-generation jobs sometimes fall out of the realm of sales compensation and revert to normal management bonus programs. However, the roof over their head seems to have impacted the compensation decision: if they stay in the sales department, they tend to be paid like sales people, if they are migrated to a marketing department, then they tend to get classic MBO-type management bonus plans. Strange...
Q: We are putting together a team of support specialists for our organization that will not receive commission but will receive an annual bonus based on meeting certain goals. In addition to the annual bonus, we are trying to set up a more immediate award system for our support specialists so they are sharing in the success of each sale. Any ideas?
A: We usually reserve sales compensation for those that have customer contact and are responsible for persuading the customer to act. Everyone else can (or may) participate in a reward program, but, not sales compensation that features: 1) Pay at risk; 2) Difficult quotas; 3) Significant upside earning opportunities.
Support specialists who focus on pre-sales activities often participate in the sales compensation program in a modest team sort of way. However, those that have any post-sales duties normally do not participate in sales incentive plans. If they are pre-support specialists then you can have them receive a very (very) minor contract-signing bonus in addition to the annual bonus.
But don't bother if they have post-sales duties also. The aggravation is just not worth the effort. Finally, have you convinced yourself that you need an incentive plan for these people? What about more focused, accountable supervision?
Q: At the Seattle WorldatWork conference, Towers Perrin reported that high performing companies are 50% as likely to have more team based rewards than non-high performing organizations, while they are twice as likely to have aggressive individual incentives.
This de-emphasis on team rewards seems counter-productive, yet the results suggest otherwise. Is this just a function of a lot of variables affecting behavior, or is team-based pay not all it is cracked up to be?
A: Let me suggest that you direct this question to the folks at Towers Perrin. I am sure they would be delighted to expand on their findings.
Here are my views regarding team incentives for sales people. The late ‘80s and early ‘90s saw a popular rise of team incentives. These practices also invaded the sales area. Guess what? They did not work. Why? Because for a team to be a "team" it must meet the following criteria: 1) There must be a shared goal, 2) They must collaborate in decision making, and 3) They must cross-share roles.
Yes, some sales teams do exist that meet these criteria, but not the avalanche that the "team movement" of the last decade brought upon us. Yes, team incentives work for certain environments -- they require significant investment of perception management to work -- but, we usually find only few circumstances where they are right for sales organizations.
Q: What percentage of participants should the typical sales incentive plan target to receive a payout? Why?
A: In a WorldatWork C-5 course in sales compensation we teach that 60 to 70 percent of the sales force should meet and exceed quota and that 30 to 40 percent of the sales force should not reach quota. Of course, this varies by company, but it seems to be the most prevalent practice. Now, for the question: Why? Well, most sales organizations get "strong" by always raising the bar. Easy quotas do not drive excellence. Same with tough quotas. The good people stay, and those who don't get it, well, they find work elsewhere. Plus, the money "saved" by not paying the poor performers is shifted to the top performers; thus the plan participants pay for the risk-reward opportunity.
For budgeting proposes, when sales over achievement and under achievement situation are expected, what special considerations does a compensation professional take into account in order to design a self-funding capped or no capped payout curve?
Q: To be fair to both the company and the sales force, what are, if any, the best regressive and progressive ratios and the minimum to apply? Let's figure it is for a mature company with a quota assignment system and the sales objectives assignment is correct.
A: Of course, each company's pay opportunities will vary as well as the use of thresholds and caps. However, previous year's performance can act as a mathematical template to estimate payout opportunities.
It's better not to have a cap, but a regressive formula above a high level of performance is sometimes warranted to offset excessive upside earnings, but creative communications are required. "What-if" modeling will help test the sensitivity (payout-wise) of the proposed formula.
Transcript reprinted from "Chat with Cichelli", an online chat with David Cichelli from The Alexander Group, Inc., held on September 20, 2000, with permission from WorldatWork (formerly American Compensation Association);
14040 N. Northsight Blvd., Scottsdale, AZ 85260;
phone (877) 951-9191; fax (480) 483-8352;
www.worldatwork.org. © 2000 WorldatWork.
Unauthorized reproduction or distribution is strictly prohibited.
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