Sales force effectiveness

Sales incentives can’tmake a bad rep good,but they sure canmake a good rep bad.Global Sales Force Effectiveness &Rewards Advisory Leader,Joseph F. DiMisa

1

Sales reps are skilled at evaluating the risks andopportunities in the market. The really good reps willthen manage aspects of their existing businessrelationships or contacts to create a competitiveadvantage in winning opportunities.

While prospecting these opportunities, the keycomponent for an informed and motivated sales rep, isthe ongoing analysis of their historical performancethat creates a comprehensive personal sales forecast.This knowledge of the sales pipeline, and ultimatesales probability, is then calculated against quotaattainment and results in the rep’s payout. In otherwords, sales reps are motivated by “clear line-of-sight”between their performance and their pay.

But what happens when their forecast and quotaattainment do not tightly align to the compensationpayout? If a rep ends up earning a lower payout thanthey feel they deserve, or not being able to tie theireffort to their incentives, distrust and skepticism cancreep in. In even worse cases, overpaying lowerperformers can damage the motivation of top sellers(and average sellers) due to a lack of differentiation orrecognition for true performance. Whether your salescompensation plan is underpaying a sales rep orenabling poor performance, the long-term results willnot be positive, and will turn your top performers into“bad reps.”

In order to keep your reps motivated, engaged andambitiously optimistic, a company should evaluate andassess certain components of the compensationprograms every 12 to 24 months. As business strategy,job roles, products and customer needs change, soshould the key elements of your sales compensationplans.

Understand how jobs specialize to helplink pay opportunity.

To design a simple sales compensation plan that isperformance-based and differentiates top performers,a designer needs to first understand that differentsales jobs have different priorities. The priorities of thesales job represent the behaviors that are supportedand driven through the sales incentive plan.

A typical sales job has five key priorities that need tobe understood:

1. Target customers.

Segmentation defines the types of customers/accounts the job targets. Customers may be definedby size, type, strategic importance, geography, etc.Different types of accounts require different skill setsand selling techniques.

Questions to ask about customer targeting include:

What/Who are the assigned customers/targets?Are the customers existing, new, or a combination?

How many accounts are current (they arecustomers now), target (want to sell to them), ordormant (haven’t purchased in a while)?

How often do reps call on each category ofcustomers?

What is the rep’s focus, e.g., major accounts,geography, etc.?

Sales force effectiveness

2

2. Overall sales and revenue strategy.

Once you’ve identified the job’s targeted customers,you need to understand the job’s primary salesstrategy, new business, retention of customers orgrowing existing customer base revenue.

Each one of the sales strategies takes a different skill.Acquisition reps are hunting for new customers; theyhave to create awareness and stimulate interest. Whenthe focus is retention, the rep’s role is to maintain therelationship and revenue. Growing the base involvesbuilding relationships, but in addition, the rep seeksout new sources within the organizations of currentcustomers.

Sales strategies play a large role in how sales jobsshould be compensated, and depending on the role,pay may differ significantly.

Questions to ask about sales strategy include:

What type of selling does this role do?

How does this selling support the overallorganizational strategy?

How does the company value the different types ofrevenue?

How should the company compensate differentlybased upon the different roles and strategy?

3. Individual contributor or sales manager.

Sales jobs can be specialized by organization andreporting structure (individual contributor versusmanager, etc.). For example, an account manageroversees all sales activity into an account and issupported by a team of sales representatives. In othercases, sales representatives independently cover anaccount, most typically smaller, non-strategicaccounts.

Questions to ask about hierarchy include:

Is the role an individual contributor, a team seller, anoverlay resource, or a sales manager?

What other support roles should be considered forincentive pay?

How are the resources allocated/assigned?

How is the sales manager involved in thetransaction/selling process?

4. The selling process.

Sales process focuses on the steps a rep takes tocomplete the transaction—what are they actuallydoing? Do they identify, qualify, propose, close, fulfill?Each of the steps in the sales process has a value

associated with it, and you need to understand whatthe value is in order to pay appropriately on it.

Questions to ask about the overall sales processinclude:

What are the steps the seller uses to complete thetransaction (sales process)?

Does the typical transaction cross all of these steps?

Is a certain transaction more valuable than another?

Is the transaction a one-time exchange or anongoing flow of business?

What is the length of the sales cycle?

When is the transaction considered closed orcomplete, i.e., at order, at billing, or at delivery/installation?

5. What products are they selling?

Sales jobs can be specialized according to productand/or product lines. Each product has an associatedvalue, and you want to make sure the sales incentive iscommensurate with a product’s value and profit.Additionally, if reps specialize in selling certainproducts, they develop in-depth technical knowledgeand expertise in selling assigned products and/orproduct lines to many customers. That expertise maybe worth a premium.

Questions related to products and services include:

What is the range of products or services the sellerrepresents?

Do products/services differ by customer?

How is each type of product or service measured insales results (units, sales value, revenue, margindollars, margin percent)?

Are individual quotas set for the products orservices?

Picking your sales plan measures toensure easy pay alignment.

Once you have clearly defined your job, the task ofsetting targets and paying the role becomes easier,you focus on what you are expecting the role to doand measure it against that objective.

When considering the measures to use in the salescompensation plan, you need to ensure your choicesreflect the business strategy of sales roles (definedabove). Starting with measures without understandingstrategy is a poor decision, as you can end upmotivating the wrong sales behavior, paying for the

Sales force effectiveness

3

wrong results, and diminishing the sales force’smotivation when the plan needs to be corrected mid-year.

Four categories of performancemeasures.

The measures used in an incentive plan define thespecific performance standards or criteria thatdetermine success. Achievement against the measuresbecomes the basis for assessing sales results andawarding incentive payments. Generally, there are fourtypes of measures: financial/production measures,strategic measures, input and activity measures, andsubjective/judgment measures.

1. Financial/production measures.

Typically, financial/production measures are the coremeasures in an incentive plan. They focus on salesdollars, margin or margin dollars, or units, and mostoften measure volume. Many plans give financial/production measures the most weight so that thelargest share of target incentive is linked to them.These measures should be tied directly to the successof the organization’s financials.

A sales incentive plan for direct sellers should have atleast one financial or production measure, and itshould be the primary measure.

2. Strategic measures.

Strategic measures also are considered core measures,but usually are seen as secondary to the financial/production measures. Strategic measures dealspecifically with an organization’s strategic prioritiesand may focus on specific customers or products, ormeasures that drive a specific strategic priority (e.g., acustomer retention factor, unit factor, customerservice, or quality).

If a plan has a financial/production measure, it iscommon to also see a strategic measure that helpsdrive overall revenue or production. As with financialmeasures, strategic measures usually are givensignificant prominence or weight.

3. Input and activity measures.

Activity measures focus on a sales professional’sactivities, events or milestones, such as key customerevents, key sales process steps, number of qualifiedleads, conversations, number of sales calls and so on.Organizations may use these measures when theywant to achieve major milestones, have a long salescycle, or in cases in which more typical criteria may be

difficult to measure. Activity measures also are usedwith new product launches or in new businesses whencertain activities are critical to gain customer interest.

4. Subjective/judgment measures.

Subjective/Judgment measures typically relate toobjectives that are less quantitative (numbers related)and more qualitative (observed), making themsomewhat tough to measure. They may includeprofessional objectives or discretionary behaviors thata sales representative must demonstrate.

Subjective measures are less prominent and have theleast weight in the measurement hierarchy.

The rules for performance measureselection.

To be effective, performance measures must becontrollable, measurable, aligned and limited to threeor fewer.

Controllable

Incentive measures must be controllable, which meansthat sales representatives must:

Have clear line-of-sight to the measures.

View them as attainable, even if they require stretchto achieve.

Understand the necessary actions as well as possessthe capacity to take those actions.

Know exactly what they are being measured on andbe able to influence the measure.

Understand how the measure links to their overalltarget or quota and their pay.

Essentially, the link between behavior and results mustbe clearly understood, attainable, and tangible.

Measurable

The organization must be able to consistently andeffectively determine results against a measure. Theorganization also needs to be confident that themeasures are driving the proper behaviors. Thisrequires:

Reporting results regularly (e.g., monthly, quarterly)to help identify directions and trends.

Providing a view into both what has occurred andwhat lies ahead.

Ensuring communication about the plan is clear.

Sales force effectiveness

4

Aligned

Measures must align with the strategic businessobjectives of both the overall organization and thesales organization. Plan measures must tie directly tobusiness strategy and drive overall corporateperformance. Also, measures for the sales force mustalign with the key objectives of the sales managementteam.

Limited to three or fewer.

A compensation plan should have no more than threemeasures to ensure that the sales representative isable to direct the appropriate focus to eachperformance measure. Too many requirements cancause a dilution of effort. Remember: Less is more.

Upside pay—Pay a good sales rep toperform.

An important component for top reps is “upside.”Upside refers to the amount of additional incentive paythat can be earned for achieving outstanding levels ofperformance over the target incentive (i.e., above-target performance earns above target incentive).Upside typically is expressed in ratio format. A 1:1 ratiomeans that at target performance a salesrepresentative can earn one times his/her targetincentive. A 2:1 upside means earnings can be twotimes the target incentive. Typical upside for a top repcan push into the 3:1 or 4:1 levels.

Plan mechanics—Ensure a bad repdoes not get paid.

A plan’s mechanics are where the rubber meets theroad in compensation plan design. Payout formulae,payment terms, caps, thresholds and links form theunderpinnings of plan design. They bring thecompensation plan into focus and ensure payelements and measures are brought together in a waythat spurs the sales force to accomplish criticalobjectives and earn rewards commensurate with theiraccomplishments.

A plan’s mechanics create the structure and details forhow a compensation plan actually pays out given arepresentative’s level of achievement. Depending onthe incentive plan structure, mechanics may includepayout formulae and/or payout tables that correspondto results against quota or target.

A “link” refers to how each mechanic or designcomponent operates in parallel with each other, orhow they link based on the different levels ofperformance achievement. A link between

components allows an organization to ensure thatsales representatives have balanced performanceacross their various objectives. Typically, when planshave links, a representative is required to achieve acertain level of performance across multiplecomponents before earning higher pay (e.g.,excellence pay). Earnings may be flat over 100% ofquota or target on Measure 1 (i.e., no accelerated pay)until Measure 2 also reaches 100% of target. Onceresults exceed 100% for Measure 2, the accelerationkicks in.

Mechanics and links can add complexity and, toooften, confusion to a plan. The moment salesrepresentatives learn about a new plan, they take outtheir calculators to see how the plan will affect theirbottom line. They study the plan’s mechanics todetermine how all components link. This helps them tounderstand—in real terms—how the plan will affectthem and which behaviors are necessary to achievethe greatest rewards. If representatives don’t quicklygrasp how the plan works and what they can earn, itmay mean the plan is over-engineered—either there’stoo much going on, or the mechanics are too complex.When designing a plan, leave out those extra bells andwhistles. Too often, these add-ons create unnecessarycomplexities that garble the message. You can’tcontrol everything. Leave some of the management tothe managers.

When considering certain plan mechanics, askyourself: Do plan mechanics and corresponding linkrequirements encourage peak performance, or do theyover-regulate or hinder achievement by adding toomuch burden?

Thresholds and deceleration.

A threshold is a minimum performance level that mustbe achieved so incentive earnings can start accruing.Typically, either no incentives are earned up tothreshold, or earnings are severely decelerated untilthe threshold is met (e.g., plan pays 10% below athreshold but 20% above the threshold). Commissionplans typically have no threshold, as they pay fromdollar one.

Advantages: Thresholds are particularly useful whenrepresentatives have a stream of business and acertain percentage of that business is predictable orrecurring. The larger the percentage of predictable/recurring revenue, the higher the threshold can be.Thresholds usually are set at or below the 10thpercentile of performers. In this way, they can createan artificial target for lower performers to strivetoward.

Sales force effectiveness

5 © Korn Ferry 2018. All Rights Reserved.

About Korn Ferry

Korn Ferry is a global organizationalconsulting firm. We help clients synchronizestrategy and talent to drive superiorperformance. We work with organizations todesign their structures, roles, andresponsibilities. We help them hire the rightpeople to bring their strategy to life. And weadvise them on how to reward, develop, andmotivate their people.

Disadvantages: Without a threshold, representativescan earn from dollar one—a feature that can be highlymotivational. Even low performance is better than noperformance. Remember that “no-threshold” plansrequire financial modeling to ensure that the dollarspaid out will be within acceptable ratios of dollarsbrought in. Companies that don’t use a threshold mayhave lower commission levels at lower levels ofperformance.

Measurement periods and payoutfrequency.

A plan’s measurement period specifies the time periodover which performance is measured. Standardperiods include monthly, quarterly or semiannually.These interim periods usually roll up into a longer,cumulative period, typically a year (cumulative year-todate results). With a cumulative period, companiestypically hold excellence payouts back until totalcumulative results are tabulated.

Representatives do receive pay for performance up totarget for each segment. Paying for cumulative resultsaligns pay with the attainment of annual goals — anapproach favored by the finance department. Yet, ithas a motivational downside: Representatives maygive up if they fall behind quota early in the year.

Some plans employ a standalone feature (e.g., monthlydiscrete) in which each measurement period stands onits own and is not tied to another period. This can keeptop sellers in the game, but also can lead tooverpayment if most monthly goals are achieved butthe overall total doesn’t add up to the annual goal. Asimilar approach is to measure results quarterly andinclude a year-end measure for annual goalachievement. In a “fifth quarter” approach, earningsare held back and paid when results for all quarters arein. If attainment is high in all four quarters, theincentives held in reserve are paid out.

Payout frequency denotes how often incentives arepaid (e.g., bi-weekly, monthly, quarterly). Factors toconsider include the payment size, administrativeburden and feasibility. Can the plan be implementedand paid consistently without a large burden?

Evaluation is the critical final step in the optimalincentive design process. A thorough, consistentreview can help avoid or prevent issues before a plan isrolled out, or while it is in play. Overpayments,underpayments, high cost of sales, poor performancedistributions, plan “gaming” and so on are all typicalcompensation problems. While these problems cannever be totally avoided or prevented, a tightevaluation process with the right analytics helpsconfirm what is happening with the plan and whethercourse corrections are needed before moving forward.

A company should look at three views:

1. Overall financial picture: How is the plan functioningand what are the costs (i.e., salesforce earnings andthe company’s return on that investment)?

2. Performance against overall objectives: Is the plandriving the right behaviors and functioning asdesigned?

3. Differentiation of payouts based on performance:Are the top earners the top performers?

To keep your good reps good, it is critical to considerand address your plans in a logical and organizedmanner. Getting all the checks and balances in place atthe start will ensure you have a plan that truly rewardsand motivates your top sellers.

For more information or to discuss your saleseffectiveness questions, please contact Joseph DiMisaat +1.770.403.8006 or joe.dimisa@kornferry.com.