Whenever a dip in sales generates complaints that the sales compensation plan is broken, sales organizations should take a deeper look: The issue with the compensation plan might be merely a symptom of a more serious problem buried deep within the sales process. Unfortunately, sales compensation is often the first and only tool management reaches for when a problem arises, and that can be akin to grabbing a hammer when a wrench is what's needed to get the job done.
A company’s sales compensation strategy needs to evolve over time. For a young organization, it might be as simple as straight commission. "I’ll give you 6 percent on anything you sell in Iowa" works for a small sales force with one offering. But as that company expands, the workforce might grow into the hundreds with reps specializing in certain lines. If these sales teams start bumping into each other within accounts, and if they resort to cutting costs on each other, the sales process enters a new dynamic.
Examine All Elements of Sales Effectiveness
Sales effectiveness is determined by how an organization directs, organizes, executes and supports sales and marketing (see the figure below). An organization that wants to pinpoint a problem that is causing sales to decline needs to begin by analyzing the systems and processes it has in place.
Source: Sibson Consulting
Directing Sales and Marketing
As companies grow, many face a chronic gap in their ability to convert strategic priorities into a sales strategy and an action plan that everyone in the sales organization understands and can use to produce profitable growth. In many cases, the breakdown attributed to sales compensation can be traced to another tool — a component of sales strategy. To determine how the sales organization is being directed, companies need to ask a series of questions, such as:
• What is our marketing strategy?
• What products/services are we promoting?
• What customers/segments are most important?
• How much growth is expected and from what sources?
For example, when a software company’s salesforce began to underperform, a finger was pointed at the sales compensation plan. An assessment of the sales organization, however, found that an outdated view of customer segmentation was creating the dilemma and the resulting drop in revenue.
Further examination revealed that different segments of the market presented very different opportunities. Some segments were more attractive than others. For instance, Segment A represented only 2 percent of the company’s customers but 20 percent of the revenue. The company took a close look at every segment and identified the opportunities for growth. It then developed sales strategies for each market, determining how much business was repeatable, what accounts it could grow and where to pursue new business.
The company explored how the sales process should differ for each segment. Differences in sales potential, sales process and sales strategy demanded different roles.
Once all of these elements are tracked and defined, then compensation design can be factored into the equation. In the example just described, while the pay plan did need fixing, the approach that resulted was completely different from what it might have been had the true causes of the problem not been uncovered and addressed.
Take into account other causes for
underperformance, then factor
compensation into the equation.
Organizing Sales and Marketing
To act on its sales plan, a company must develop an effective coverage approach to organize around attractive market opportunities. Too often the sales organization fails to reconfigure itself to meet the changing demands of the strategy and the market. It’s important to explore the issues that affect organization by asking:
• What sales channels are we using and are they successful?
• What sales/service roles exist? What sales/service roles should exist?
• Are there enough salespeople in the right roles and locations?
A chemical company blamed its sales compensation plan for its inability to grow. Since it needed its salespeople to increase new business, management reasoned that it had to offer higher incentives for new accounts. The company’s nine business units, however, had different sales opportunities; some had growth potential, others did not.
Geography mattered, too. The company thought it had locked up the Northwest and that the Midwest offered the best landscape for growth. In the Midwest, reps were crisscrossing the Great Plains to ferret out new business. When an investigation examined the amount of time sales reps spent on various activities, it revealed little opportunity in the Midwest but untapped opportunity in the Northwest, where reps could delve deeper into large, existing accounts and achieve knockout revenue growth.
While the supposed solution was to pay more for new accounts, the actual solution — the proper tool — was to further penetrate existing accounts in the Northwest. As a result, the company expanded its salesforce and redesigned the sales roles to mine opportunities better. Ultimately, the pay plans were redesigned to fit the new sales roles and complement the way resources were redeployed — a much different solution than first supposed.
Executing Sales and Marketing
A company puts its planning and organization work into action by executing according to the sales objective. Although this is where compensation comes into play, additional elements or tools—performance management, metrics and quota setting—affect execution. It is important to understand how an organization measures and rewards sales execution. Questions such as the following can bring the true issues to the surface:
• How is a salesperson’s performance measured, and how often?
• What criteria are we using to determine whether a salesperson is doing a "good job"?
• Are there sales quotas, and, if so, are they set fairly?
A manufacturing company selling to the industrial and automotive markets was concerned with the performance of its sales force. A majority of its reps were not making quota, and those that were could not carry the rest of the organization. The first inclination was to fix the sales compensation plan to reward those reps who were performing above goal — to sweeten the deal. An assessment of the situation, however, revealed that quota-setting practices were more to blame than the compensation plan. All goals were set at 8 percent above the previous year’s revenue, regardless of past territory performance or growth opportunities. Consequently, many representatives felt defeated before the year even began.
The answer for this company was a combination of revised sales roles and more realistic goals. (It acknowledged that some territories were maintenance territories with lower growth goals while others were growth territories with higher growth goals.) It made minor revisions to better align the compensation plans and the roles.
Supporting Sales and Marketing
To perform at a sustainable peak level, an organization must have the right support mechanisms. Selling messages, tools and technology mirror the company's go-to-market decisions and actions by reinforcing its value proposition and automating sales planning and execution. Recruiting and career-path management bolster human capital impact by aligning it with the company’s sales process, organization structure, performance management and development processes. Questions to ask in this area include:
• What programs are needed to support the sales strategy?
• What competencies are required for the sales force to succeed?
• Are recruiting and opportunities for career growth adequate?
Sales compensation is just one of several sales management tools a health insurance company needed to use to improve profits. With fewer than 100 sales professionals and almost 40 sales compensation variations, compensation clearly needed to be addressed. The problem was the organization was also changing its focus, from member growth to profitability. Looking at its profit margins, the company discovered that changing the behavior of its account management team to work with groups on healthy living was more important than building its member base.
In addition to revising its coverage strategy, aligning its sales roles, changing its compensation plans and identifying its margin drivers, the company is now developing new selling messages and tools and retraining its sales force so the reps can focus on helping clients manage their members’ health proactively.
A breakdown in a company's sales compensation plan may be related to many issues, from changes in customer buying processes to territory shifts. Smart companies dig deep to find the problems and then apply an array of tools — one of which may be pay — to achieve a turnaround. Before a company rushes to fix a problem with its sales compensation "hammer," it needs to be sure it has used its entire sales management toolbox to address other aspects of the sales organization that are in need of a fix.
Dennis Spahr is a vice president in the Chicago office of Sibson Consulting. As a sales effectiveness consultant, he works with organizations to restructure their sales organization and evaluate their rewards strategy to gain competitive advantage and optimize individual performance.
Reprinted by permission of The Segal Group, parent of The Segal Company and its Sibson Consulting Division.
©2009 by The Segal Group. All rights reserved.
Small to Mid-Size Businesses Shift Sales Comp Strategies, SHRM Online Compensation Discipline, April 2009
For Sales Personnel, Incentive Targets Lead to Bigger Bonuses, SHRM Online Compensation Discipline, October 2008
Complex Compensation, Global Operations Challenge Sales Force Performance, SHRM Online Compensation Discipline, July 2008
Companies Fail To Communicate Comp Plans to Sales Managers, SHRM Online Compensation Discipline, June 2008
Sales Compensation Planning For HR Professionals, SHRM Research, June 2007
SHRM Video, Compensation for Sales Managers, June 2008
SHRM Online Compensation Discipline
SHRM Salary Survey Directory
SHRM Compensation Data Center