10 costly sales compensation pitfalls - pepperi

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Webinar10 Costly Pitfalls to Avoid in

Sales Rep Incentives

April 13, 2016


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Introduction

• 27 years sales effectiveness and incentive design consulting

• Has worked with hundreds of sales organizations to develop and execute selling strategy – particularly sales incentive design

• Has impacted approximately 100k salespeople

• Works across multiple industries, including: consumer goods, retail, business services, and manufacturing.


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Two Truths About Sales Incentives

They work!

But not always as intended


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The “Big 4” Unintended ConsequencesThe “Big 4” Unintended Consequences

Reps “shutting down”

Reps selling a poor product mix

Reps not hunting

Rep turnover

Key concept: “ROSE” (Return on Sales Effort)


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Characteristics of an Effective Sales Incentive Plan(“working as intended”)

• Drives behavior aligned with selling strategy and sales job expectations New accounts New products Quota attainment Revenue growth and protection Profitable sales

• Attracts & retains top talent• Provides greater rewards for top performers• Has predictable costs that fit within cost of

sales budget


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Four Types of Pitfalls

1. Unclear sales strategy or sales role2. Wrong philosophy3. Bad incentive design decision4. Lack of communication & automation


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Pitfall #1: Unclear Sales Strategy

A

R E

PROSPECTS

CUSTOMERS

Sales Strategy Pyramid

CORE NEW & ADDITIONAL CORE

Acquisition = Retention = Expansion =

A well articulated sales strategy defines: What will be sold To which customer and prospect

segments How much we anticipate selling to each

segment How we will measure success


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Pitfall #2: Unclear Sales Roles


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Pitfall #3: Wrong Philosophy

Cost of Sales Cost of Labor

“The more (or less) the rep makes, the more (or less) the business makes”

“Buy sales reps as we would procure any other critical business resource”


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Five Critical Sales Incentive Design Decisions

1 - Mix- 0/100- 25/75- 50/50- 75/25

2 - Measures- Volume/units- Revenue- Profit ($ or %)- Price realization- Product mix- Cross-sell- New accounts- New products- Retention- Customer satisfaction

3 - Plan Type- Commission- Bonus- Hybrid

4 - Payout Curve- Threshold- Incentive at threshold

- Breakpoints- Excellence level- Use of caps

5 - Payout Frequency- Monthly- Quarterly- Annually


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Pitfall #4: Bad Mix Decision

Benefits

Expense Reimburse

Salary

Target Incentive

Above Target Incentive

Contests

Recognition

Mix = the ratio of salary : target cash, and incentive : target cash

Example: 50/50 = 50% target cash from salary, 50% incentive

Total Cash

CompTarget Cash


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Pitfall #4: Bad Mix Decision

Benefits

Expense Reimburse

Salary

Target Incentive

Above Target Incentive

Contests

Recognition

Total Cash

CompTarget Cash

70/30 0/100

90/10 50/50

What’s the Right Mix?

Low

Low

High

High

Div

ers

ific

atio

n o

f O

pp

ort

un

itie

sInfluence on Sales Results


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• Unaligned measures (e.g., want profitable sales but pay on units or revenues)

• Not influenced measures (e.g., pay on actual profit but don’t influence price, product mix, and costs)

• Can’t measure measures (e.g., pay for new business but cannot track it)

• Too many measures (the fewer the better) – #1 driver of complexity

• It’s not important weighting (any weighting below 10% of target cash)

Pitfall #5: Bad Measure/Weight Decision


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Pitfall #6: Bad Plan Type Decision

Commission Plan

Absolute plan:

- % Revenue- $/Unit

Best used for:

- New Business- Rep drives every transaction

Bonus Plan

Relative plan:

- % of quota achieved

Best used when:

- Potential varies- Rep is just part of the sale

Hybrid Plan

Combination:

commission and bonus plan

Best used when:- Quota is imp.- Level incentive opportunity

Pitfall

• Use when sales are recurring and rep has modest influence

• Use when territories change frequently

Pitfall

• Use when setting quotas is difficult

• Use when quota setting is punitive (performance penalty)


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Pitfall #7: Bad Payout Curve Decision

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

0% 50% 100% 150% 200%

Ince

nti

ve E

arn

ed

% of Quota Attained

Illustrative Payout Curve

Threshold = 50% quota

Straight-line Payout to Quota

Rate of Pay Accelerates 2x to 150% Quota

Rate of Pay Decelerates above 150% Quota but remains uncapped

Excellence = 150% quota

Payout Curve Pitfalls• Threshold too low (pay w/poor

performance)• Threshold too high (reps shut

down or leave)• Deceleration above quota (reps

slow down at period end)• Capping payout (reps shut down

or move sales b/w periods)• Not addressing windfalls (reps

have “career year” without contributing)


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Pitfall #8: Wrong Payout FrequencyLo

w

Low

Hig

h

High

Influence on Sales Results

Div

ers

ific

atio

n o

f O

pp

ort

un

itie

s

70/30Monthly to Quarterly

0/100Weekly toMonthly

90/10Quarterly

50/50Monthly

Payout Frequency Pitfalls• Paying too infrequent vs.

role, mix, and measurement capability

• Paying too frequently


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Pitfall #9: Poor Communication

• Never assume the plan is understood In best practice companies, 10-

15% of reps don’t understand their plan

In the worst cases, 80%+ of reps don’t fully understand their plan

• Standard communication protocol includes: Overview of the incentive plan,

company selling strategy, and role in execution – Head of Sales

Q&A session Distribution of FAQs 1:1 with immediate Sales

Manager “Incentive Letter” “Plan Document” “Incentive Calculator”


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Pitfall #10: Lack of Automation and Administration

Right Credit

Right Calculation

Right Payment

Right Time

Poor admin is the #1 cause of sales incentive plan failure. Not applying and communicating sales creditaccurately or timely is the chief reason for poor administration.

Overly complex incentive design, contributes to the administrative challenge, as does failing to invest in the right automation tools.

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Thank You!www.pepperi.com

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