Show Me The Money

Savvy sales leaders know that an effective compensation strategy is critical for retaining and motivating sales talent.  Most salespeople are motivated, at least in part, by money.  If you provide them with everything they need—competitive products and services, an effective sales methodology, tools, support, references, technology, training, coaching, leadership, and management—but don’t compensate them properly, they’ll either underperform and leave, or be overpaid, leaving you in an unenviable situation.

Mike Meisenheimer is with NewSigma, LLC, and writes a blog on compensation for salespeople.  I was speaking with Mike last week on the phone and thought I’d share the answers to some of the questions I had with you.  Here’s the interview:

Dave Stein: The downturn has been pretty traumatic for a lot of sales teams; what kinds of issues did you see in terms of sales compensation?

Mike Meisenheimer: In addition to the regular challenges around measures, mechanics and pay levels, we’ve seen a greater emphasis on goal setting, or trying keep sales teams motivated with goals that suggested market growth in a contracting market. Sales organizations have struggled with their philosophy around goal alignment, that is, between the individual and the company, and variable pay. Should we be paternalistic, by reducing goals or providing pay guarantees, or let the salespeople sink with the rest of the company, at the risk of further sales erosion and the potential of people leaving when the market improves.

DS: Any emerging sales compensation trends in 2010?

MM: In 2010 we’ve really seen more companies focusing on revenue growth, and investing in the sales force for growth. While things aren’t turning out to be as bullish as people may have thought would be the case nine months ago, many companies are more profitable now, so no regrets. We’ve seen a significant increase in investments for supporting the sales force, including administrative and operational headcount, and systems. While the economy is pretty fickle, sales compensation investments are ramping up steadily.

Another trend this year, going back to the issues of goal alignment and pay philosophy, includes improved plan processes and governance. This is especially true in the banking industry and businesses feeling burned by plans and policies that were not in line with a contracting business environment.

DS: We often hear companies say that sales people don’t understand their paycheck, going on blind faith that incentives were paid out properly. Have you seen similar situations in your work, and if so what is your opinion on how to deal with this situation?

MM: Unfortunately, this a more common occurrence than you might think. It is not enough to simply have a good plan design. There needs to be a tight linkage between the way people learn about the plan, understand how they are doing and connect the dots with their final checks. We see three common mistakes: 1) Under-merchandising the plan launch. Rather than a robust strategy that involves sales management and engages the field, an email comes from corporate; 2) Limited progress reporting; plan participants don’t receive regular updates on their performance; and 3) Lack of detailed incentive reporting; incentive statements should reflect performance against each measure in the plan, earnings, any adjustments and the associated transactions. Certainly improved automation can help. However, in our experience, the companies that seem to be most effective employ a well defined and well orchestrated series of communication and reporting activities throughout the year.

DS: Are there any guidelines for how often should comp plans be designed and re-designed?

MM: At a minimum, companies should evaluate their sales comp plans annually to ensure plans are in line with the business requirements. Most of the firms we work with are dynamic – new markets, new products, acquisitions, reorganizations. About 70% of the companies we survey on this question change their incentive program each year because of changes to the business plan. More generally, plans should be evaluated and (potentially) redesigned as business conditions and sales priorities evolve. With improvements in automation and the accompanying flexibility, we’re also seeing an increase in the number of companies that make mid-year plan changes. Whatever the frequency, the important thing is to define and follow a structured analysis, design and launch process that engages cross-functional stakeholders and reflects the priorities of the business.

DS: There has been quite a bit of press around software solutions for compensation administration; are companies really finding a positive ROI?

MM: Based on recent survey data, between 70% and 80% of companies report a positive ROI within the first 12 months of an ICM investment. There are other benefits, such as the ability to measure and test coverage model changes, that management can’t easily quantity but have strategic implications. We currently track approximately 25 vendors offering solutions in this space. Due to the variability in how companies pay their salespeople, complex rule sets (e.g., splits, product overlays, global accounts), and typical data challenges, the implementation of these systems can be time consuming and difficult. But for those companies reporting tangible benefits, they tend to classify them into one of three categories: 1) pain avoidance or gap closure — an example might be an improvement in accuracy rates or the time to process payments; 2) aspiration, such as improved reporting; and 3) regulatory or compliance.

DS: What should sales leaders and their compensation managers be thinking about as they prepare for 2011?

MM: For those sales leaders having made investments in their sales forces this year, they need to demonstrate a positive return, or show some evidence that positive ROI is forthcoming. Similarly, compensation managers need to assess the degree the sales compensation program is in line with expectations. If they haven’t started already, management should be evaluating the plans and support processes given current requirements and next year’s strategy.

We’re advocates of starting the plan evaluation and design process early, since modeling and launching program changes usually takes longer than management anticipates. We always hear managers say “never again” after rollout of their plans comes weeks late. Well, now is the time to make good on that promise. Sales leaders also need to keep stay current on what’s motivating their salespeople, and what’s distracting them. Like you said, it’s been a tough couple of years for a lot of sales teams. Disengagement and distraction has a direct impact on sales productivity and profitable revenue.

DS: Thanks, Mike.

Photo source:  Fotolia – Andrea Danti