Incentives That Fit The Times

We are certainly living in interesting times, the economy is in unchartered territories and most people in the workforce today have not lived through times like this.  The turmoil has certainly impacted if not paralysed decision making because all the reference points have changed, and the conventional wisdom is undermined by facts daily.  But unlike the main stream media, we do not want to dwell in gloom and doom, no on the contrary, we only mention the above facts to highlight the reality that everything has changed, and as such responses also need to change, the question is how, especially since we are not sure of what bearings to use.

Turmoil however is not to be feared, as we have all heard before in turmoil there indeed is opportunity; and one of the great opportunities given the circumstances today is to question and challenge long held assumptions and the status quo.  By the way the same status quo and assumptions that brought us to where we are today.

In sales one of the great sacred untouchable status quos is variable incentives, commissions, or pay outs for revenues delivered.  Traditionally, this has been paid on a measure of results, most often a percentage of new revenue closed or net new revenue; at times on margins or profits rather than just top line; then there is a combined approach especially where base revenue needs to be protected, some portion of variable pay for maintaining the base, and the other for new revenue or new logos.  The common factor being that the pay out is for results.

While no one would argue with the need to pay for results, especially for profits, it is after all the final measure of success, growing profits, usually (hopefully) with growing top line revenues.  There is however room and a need to debate as to whether paying on a single measure encourages the right or good results, or does it act as a barrier to better results, or has no impact at all.

Some things that are not new are two topics that regularly surface in discussions with senior sales leaders.  The first is that revenues, or the deals that lead to revenues, are really just a result of a series of behaviours or actions executed by sales people.  This implies that while revenues are the key measure, they are a lagging indicator, a rear-view mirror view of events. By the time the measure is available, it is too late to do anything about it.  I guess this is why forecasts have become so important, but as a number of studies have shown, in broad surveys, sales forecasts are on average less than 60% accurate. The second is the fact that the same sales leaders wish their underperformers would execute the steps and actions and replicate the behaviour the top performers seem to consistently perform.

One could conclude from this that if we changed the inputs, behaviour and actions, one could impact results, revenue/profit.  Yet the norm when it comes to incentives is to pay for results. This leads to the obvious question: should incentives be changed to drive behaviours and actions to generate the desired results.  After all, aren’t we always told that incentives should drive behaviour?

Whenever you raise this you get a broad range of resistance, usually clustered around the notion that commissions or incentives are reward for performance, and since revenue is a true measure of performance, it should be the basis of incentives.  I should think that those who make a similar argument but exchange profits for revenues are at least more correct and honest.  Let’s face it, we have all seen reps discount deals to the point that once you factor in their commission the deal is not profitable, and you now have a client who will expect that discount moving forward and you will never make back your initial “investment” in winning the account.

There are also studies that show that some 80% of sales reps do not consistently hit quota.  Some never do, the proverbial 70% 80% players; nice guys, customer focused, but never at target, collecting commissions over and above their base pay, while never hitting goal.  Then there are the guys who have a great year followed by three years below goal, again that 60% - 80% range.  These are the same people managers are reluctant to let go because they do not want an empty territory.  The point is that these people continue to benefit from the incentive plan even when they do not fully contribute to results.

With the state of business these days now more than ever it is important to keep your people productively active, it just takes a lot more work and activity to reach the same results we did in previous years.  You also want to prevent them from getting caught in the negative media presented slide will take them on.  So again, action and behaviour become integral to achieving results, so why not examine an approach that focuses on specific actions, not style, but actions: prospecting, client interviewing skills, gaining commitment, etc.  Why not use reward to create and encourage the right actions and behaviours.

Our business is not that unique from a sales process point of view, you need to engage with qualified people, align our selling process to their buying process through a discovery process based on questions, quantify the answers, quantify the impact of our offering, gain commitment and deliver.  These are all actions and do not speak to style.  It becomes very clear that no matter how good one may be in taking the prospect through the discovery process, and gaining commitment for all the right reason, if she does not prospect and engage with prospects, they will not be able to achieve the desired result.  By the time we see the end result it is too late.  Yes, I know that I would be aware of this in advance and take corrective steps, but let’s face it managers don’t always do that in a timely fashion, and behaviour remains.

So we pay reps for new opportunity appointments, (new opportunities can come from existing clients, but it is about opportunities, not account management).  We know that when you join our company, you will need to set 10 new opportunity appointments a week if you want to be able to build a base for success.  After a point you will still do 10 appointments (or so) a week, but not all will be new opportunities, some will be account management or sales calls with opportunities in progress, these pay-off in a different, shall we say traditional ways.

We know that sales will happen if you go out and meet the right people, seeing the right people leads to a bigger pay-off with a nice commission on the final deal.  The payment for the appointments are part of the overall commission pool, so it is not an additional cost to the firm.

We also know that if they do see enough of the right people and properly execute the process (the job of the manager to ensure that), we will get a given number of interested parties to whom we prepare proposals for.  Now we have very specific rules as to who gets a proposal and under what specific conditions and criteria, without these being present, there is no proposal, yes it takes discipline for the reps to do this.  So we pay for proposals that meet the criteria, again drawn from the commission pool.

Finally we also know that if they stick to the discipline around proposals, they will close a good percentage of their proposals, and we pay for closed deals like everyone else does.

By the end of this process the total pay out to the rep is slightly higher than it would be if we paid one lump sum at the end.  The behaviour and actions along the way are not only different, the cycle is shorter, things actually get done.  The over all return to the firm is higher, as is the Return per Call.

Some argue that it doesn’t matter how a rep gets there, meaning achieving targets, as long as they get there.  The problem is that many don’t get there, and not because no one has told them how or that they have to, it is just that no one has broken it down and rewarded the incremental steps.  The ones that get there on their own, regardless of style will not be penalized because they will engage, execute and close along the way.

I am not sure that there is a correct answer to this question, but I am sure that the current answer has not proven to be consistently correct.  As brought to my attention by Christian Maurer Principal at Ultimate Sales Executive Resource:

Pfeffer and Sutton in their Book "Hard Facts, Dangerous Half Truths & Total Nonsense" report that no evidence could be found that companies having variable pay perform better than those without. Ori and Rom Brafman in "Sway" have a section of how monetary incentives work on humans. They stimulate a pleasure center which is stronger than the area controlling altruism. To me this means that incentive pay is incompatible with approaching sales from a service and contribution point of view.

While things are different now, and the rules may be changing there are still some things you can count on.  One is that true sales professionals like to achieve and succeed, and they like to be paid for their success and effort.  Why not leverage that to everyone’s advantage, including the client, by rewarding the entire cycle rather than just the end point.

Comp Plans Drive Behaviour

Comp plans drive behaviour. Yet, how many companies and sales reps don’t understand this simple fact. Company’s change comp plans and can’t understand why sales people leave and/or why they are getting the results they are from the plan. Sales reps struggle with their comp plan or don’t understand the plan and therefore are unable to use the plan to their advantage.

What behaviour are you driving?

In my 20+ years of being a rep I never had a comp plan that increased my commissions and lowered my quota. And each year I received a new and different comp plan and each year a new behaviour was created for the sales team. It was interesting to watch. As a sales executive we were always trying to maximize the ability of the sales team to make money and keep the plan within the cost of sales percentages we had to work within. And there were times when we didn’t get it right.

I am amazed at business owners and corporate sales managers that don’t understand what happens with their comp plans. As an owner if you feel your sales team is not worth the commissions you pay and that they don’t work hard enough and so you cut the comp plan – be prepared for less work and performance. I had a company who decided that after the first quarter the plan was too rich and they dropped the commission levels and made it retroactive to the beginning of the year! I also worked for Linotype who had created the best comp plan I ever worked under. It was the year I made the most money.

What behaviour do you want to create?

What is it that you want your team to sell? Do you need revenue? Do you need margin? Do you need new products sold? Do you need a blend of products sold? So why not just tell the sales team what to do? Sales people are simple beings. They will follow the path of least resistance. However, if you tell them what you want, you create a comp plan that drives that behaviour and then you hold them accountable – then you will get the results you desire.

In 2000 the company I was working for decided to cap the sales reps income. It was felt the cap was more than fair and today I might say that it was. However the resulting behaviour was predictable. The end of January at the sales kick off meeting a rep got off the plane and had a purchase order in his briefcase that with that one order capped his income. Once he signed off his comp plan and told management that he would see them in 2001. He managed that account and more or less took the year off. Many of the top reps left the organization. In the last quarter reps began holding onto orders to roll into 2001, as their income was capped. That kind of behaviour plays havoc with plans for administration and production staff, inventory planning and business planning.

The Linotype plan was a low base salary, a generous commission and a bonus for driving a mix of products and services. I was able to take advantage of all of those factors and was able to take full advantage of the payouts.

Remember – Comp plans drive behaviour.

What works for you?

If you put a sales rep on straight commission do not expect those reps to participate in anything that takes them away from making money. (Meetings, teamwork, administration or anything else that wastes their time). If you put your sales team on straight salary they will show each Monday and ask you what you want them to do this week.

That means that you need to craft a comp plan that drives the behaviour that gets you the business results you need and drives the appropriate level of revenue, margin and product or service mix. And yes – it takes work and thought to make that happen. Driving revenue only can cause reps to discount every deal. Driving margin only will make you more profitable, however it will still cause discounting. Now cut commissions for discounting or add a bonus for maintaining margin and now you will get profitable revenue.

Sayers Says………

What is your comp plan? Do you understand your comp plan? What behaviour does your comp plan create? What needs to change in your comp plan? Does your comp plan behaviour get you to your business goals for this year?