Category Archives: Comp Design Principles

Podcast: Keys to a successful sales comp plan

Donya Rose was interviewed by David Johnston on behalf of the Canadian Professional Sales Association. In this 15 minute podcast, Donya provides helpful tips and best practices on a number of topics across sales compensation plan design, including:

  • Plan simplicity (why it’s important and how to achieve it)
  • Role clarity as a foundation for motivating design
  • The dangers of relying too heavily on prevalent practice (vs. best practice)
  • Including sales person perspectives in the plan design process
  • Be sure to test your designs so they don’t surprise you
  • The comp plan is powerful, but it’s not your only tool
  • Good sources for sales compensation management ideas
  • Maintaining your plans once you’ve designed them.

Click through here to listen to the podcast, or scroll down for a transcript.

Transcript

David Johnston: Hello, my name is Dave Johnston. I’d like to thank you for joining us today. One-size-fits-all sales incentive plans are long gone. However, in today’s complex sales environment, the plan design needs of organizations are focusing on sales’ role and the business goals and objectives. Yet, most companies continue to struggle to find the right compensation program and formula that will support their sales success.

The cycle of annually changing compensation designs most often leads to poor overall sales results and wide differences in individual sales performance. What, then, does a company need to do to find the best approach to fit their needs? It’s not a quick and easy process. Research based sales incentive designs have been proven to produce better sales results, but it also takes a multidisciplinary team incorporating the different views of various stakeholders in the organization to development a world class program.

In our CPSA sales compensation podcast series, we address a number of perspectives and best best practices that companies are using today to create sales plans that are dynamic, linked to the key business requirements, and drive outstanding sales results. Understanding how your overall sales compensation program aligns with your business goals, and how sales, marketing, and service strategies will help achieve those goals, is critical in today’s highly competitive local and global economies.

This series will feature experts in sales compensation that have extensive experience in the design, management, and administration for organizations. In today’s podcast, we’re going to talk about best practices for sales compensation management. Our guest today is Donya Rose. Donya is the leader of the sales compensation design practice at Exactly Corporation, a leading vendor of incentive compensation management software, to manage and administer sales compensation for companies of all sizes.

She has over 25 years of consulting and corporate experience in the design and administration of sales compensation programs for large organizations. Her experience spans many industries, sales channels, a multitude of roles for organizations large and small. Donya is a recognized expert in sales compensation design, and is an author of many articles on the subject, and a sought after speaker at conferences and sales meetings.

Donya, thank you very much for participating in this CPSA sales compensation podcast. Before we dive into the questions, tell our listeners a little bit more about you and a couple of the roles or experiences that you’ve had in the past in dealing with sales compensation.

Donya Rose: Well, thank you, David, for that gracious introduction and also for including me in this podcast. I’m always delighted to talk about sales compensation. I’ve been working pretty much exclusively on that topic, as you said earlier, for almost 25 years and I’m still fascinated by it. There’s so many different nuances and it just never stops fascinating me.

One of the things that I have found fascinating in the years of work on this topic, the number of clients I’ve served, the number of comp plans I’ve seen, is that I’ve been privileged to see what sorts of compensation plans seen to stay in place for multiple years, and what kinds of managements may seem like a great idea and the time and tend to be removed the following year.

There are some really specific examples of that, but the pattern I see is pretty clear. It won’t be surprising to your listeners, because just about very senior leader I’ve talked to about their comp plans ask for simplicity. To be more specific, plans that are easy to understand and manage, and that align reasonably well, not necessarily perfectly, with the businesses top priorities, have some real staying power. Whereas, plans that are sort of too clever or too precise or hard to remember tend to get changed in the next cycle.

An example, one of my favorite examples, comes from a client that sells roofing. When I first met them, their comp plan’s core measure was actually square feet, square feet of roofing material sold. Their quotas for their sales people were in square feet. Their problem was that there were certain of their roofing materials that had 13 times the margin value per square foot than others of their roofing materials. Think about the different between, for example, tile roofing that put on a villa and rolled roofing that might put on a shopping center.

They wanted to align the salespeople’s comp with the margin value of what they were selling, so that they would get them focused on the higher margin sales. The problem was, they didn’t want the salespeople to know what the margins were on the roofing. Now that becomes a bit of a challenge. What we did was really simple. We just took all of their many categories of roofing materials and put them into categories: high margin, medium margin, and low margin. We didn’t call them that. We called them three point squares, two point squares, and one point squares. They got three comp points per square foot for the highest margin stuff, two for the next, and one for the next.

Now, obviously, three to one is a really different ratio from 13 to one, which was the real spread in the margin. That simple change redirected the sales effort and made a huge difference in that business’s profitability and the focus of the sales team. The point of that story is that it was simple, it was easy to remember, and it was directionally aligned with what was needed from the business, though it was not a precise reflection of the margin value of what they were selling.

I love that story because it’s just such a great reminder that we’re motivating people. We don’t owe them a precise accounting for everything that they’re doing for us and an income statement on everything they sell. We owe them simplicity and something understandable more than we owe them that precision.

David Johnston: That’s great, and you know what? Practical examples like that make the theory that we talk about a lot more understandable. Well, let’s begin with a question. What are a couple of the best practices for sales compensation management that you see regularly?

Donya Rose: Well, the first one I would mention is always start with clarity about your selling roles. Sales comp is role-based comp. You can’t support your sales people in doing what’s expected of them if you aren’t sure what that is. That’s the foundation. The next one that I’d like to raise is an interesting one, to beware of prevalent practice. I think you need to be aware of prevalent practice, but you also need to not slavishly follow what you know that all of your peers are doing.

You do have to, probably, deliver market competitive pay, but your pay mix, your measures, your payout mechanics, your credit sharing policies, all of those need to be driven by the particulars of your business right now. I think that, oftentimes, sales leaders especially can be a little too tuned into what they think everyone else is doing. That’s not always the right starting place. That’s another tip.

The last one I would put in this category is to listen to your salespeople. Think of sales compensation plan management as a selling process with the ultimate buyer for the work actually being the salespeople who will or won’t find those plans motivating and compelling. You don’t want to design the plan exactly the way the sales team would have done it. It actually needs to make them a little uncomfortable and pull them out of their comfort zone a little bit.

In the end, the salespeople, when they receive those plans and start to understand them, need to feel that they’re fair and find them motivating, and even exciting. That’s always a key part of getting things right with sales compensation management from my perspective.

David Johnston: It makes a big difference when they buy into the plan, certainly. Why do we need to have a best practice, or why is it that we use best practices?

Donya Rose: Well, I believe there are a lot of right answers for any compensation plan. It’s not like there is an answer that’s the answer. I also believe there are even more wrong answers. It’s important to keep your outcome, the final plan that you design, in the realm of those right answers. What are the key characteristics of right answer?

One is the plan needs to, what I call, behave well. That’s kind of derived from my mathematics background. We talk about well behaved functions. The plan needs to behave well financially over a range of possible outcomes. It needs to pay the salespeople fairly and it needs to deliver a reasonable cost of comp to the company. Not just where you expect it to land, but even in some possible, even unlikely, scenarios. It needs to, in quotes, behave well. That’s one of the characteristics of the right answer.

That’s not always easy to understand and see. That’s one of the things that makes it hard. Another is that the plan is a management tool that your sales leadership has to use to support their effort to focus, direct, and motivate the salespeople. That tool, that management tool, needs to sort of feel comfortable in the hands of those sales leaders. Their experience and their perspective needs to be considered as well. Of all the different right answers you could pick, one of the key characteristics of the right answer is that your sales leadership embraces it.

The last one is that I think there’s a huge temptation by some in leadership to actually believe too strongly in sales compensation plans. To think they’re more powerful than they actually are. Therefore, to expect too much of them. Obviously, I wouldn’t do what I do if didn’t think sales comp plans were important. They’re great at focusing sales efforts, supporting the motivation of your team, rewarding for the right type of collaboration.

They’re not great at managing out your under-performers or changing sales behaviors in isolation. Ideally, they provide support for your most important sales priorities, but they’re also supported, the comp plans and those priorities are supported by great marketing, well targeted offerings, excellent onboarding, sales training, high value coaching and mentoring, solid selling tools. If all you change is the comp plan, you’re not likely to get the results you need. At the same time, if you change all the rest of those things and don’t support it with the right comp plan, you’re also missing a chance to support that change as well as you could.

The wrap-up here on why is it so difficult is because it’s an intricate, and somewhat complicated, part of an even bigger, more intricate, and complicated system. You start messing with it and things can surprise you.

David Johnston:That’s great stuff. Great stuff. Now, you know, for our listeners, where do you find best practices for sales compensation management?

Donya Rose:Well, my first place to turn would be World at Work. I know you teach one of those World at Work courses. I think that’s a great starting place for anyone just getting into that. There also are some really good books on the topic. My favorite is an old one, The Sales Compensation Handbook that’s edited by Stockton Colt. That’s something I expect people on my staff who start working with me to read through and really internalize. I also think World and Work conferences are a great source of information. There’s nothing like just seeing a whole lot of comp plans.

There’s nothing in it for me, so I hope you don’t mind me mentioning it, but there’s a lot of great content on my own personal website, donyarose.com. It’s got over 150 topical posts that are just answers to sales comp related questions that people have asked me through the years. If a client asks me a question, “We’re thinking about putting margin into our comp plan for the first time this year. What are your tips about that?” I’ll write them out an answer, but then I’ll kind of genericize it so it’s applicable across a lot of business, and stick it out there in the sales comp answers section. There’s a whole lot of content there as well.

David Johnston:They’re all great sources and I hope people do take you up on your offer to go to your site, because there’s some great information there. Now, once you’ve implemented what you think are best practices, how do you maintain them?

Donya Rose: That’s a great question. Maintaining comp plans is often overlooked. I think, a lot of times people get so focused on trying to get the right comp plan and they think that getting to the right answer, rolling out the right comp plan, is the finale. There’s a very real sense in which it’s not the end. It’s the beginning. How do you do that?

First of all, make sure your communication materials are as great as your plan. Clear, including great examples, nice graphics. I’d even suggest getting help from your company’s communications team. To the extent that you can make your comp plans leverage at least some of the better practices that we’ve learned, collectively, from infographics, to make them exciting and compelling. That’s a great idea.

Remember your sales reports and compensation statements. Those are part of the communication also. If you can make those reports easy to read and compelling, that really helps support the motivational value of your plans. If you want to be really aspirational, go ahead and decide you’re going to make those reports beautiful. If you can do that, you’ll really make a difference in the value of your plan. That’s one. Maintaining them by communicating well along a lot of dimensions.

Another one is, I would suggest that you need to manage your plans throughout your plan year, not just on an annual cycle. At least quarterly, check and see how you’re doing. You had an intention when you put that plan together. You knew what you were trying to change in sales behaviors, outcomes, focus, attainments, I don’t know what. You had an intention.

Be creative and think about how you could measure and test to see whether or not those changes in your plans are having the results that you wanted them to. Take a sort of big experiment approach to the thing and see if you can prove efficacy of the plan changes that you’ve implemented, or learn something from something that didn’t work so well. Treat each plan change and each pay cycle as an opportunity to learn something.

The last idea I’d have for maintaining plans is to plan to make adjustments every year. Just about every company does that. Build on what you have wherever you can. Jarring changes in compensation can be really disturbing and distracting. In fact, they can even rob you of some sales capacity. Unless you have a real imperative to do something dramatic in your comp plans, in terms of changing them, change should generally be gradual and orderly and well supported, again, with great communication. Those are just a few ideas about maintaining plan. The very idea that they need maintaining is the kernel here. Thanks for bringing that up.

David Johnston: Donya, I love your perspective. Thank you for being on this CPSA podcast today. As always, it’s pleasure to get your perspective on a topic that we both enjoy. Well, that’s it for today’s podcast. This is Dave Johnston saying goodbye and wishing you a good day selling. We’re done.

Donya Rose: Great. That was fun!

Accounts Receivable – good sales comp measure or not?

A/R metrics in sales compensation plans are relatively rare. There is often an impulse to include them from Finance, but in the end the sales leadership usually manages to impress upon Finance the importance of freeing sales people to sell and letting a lower cost resource like an A/R specialist in finance take the lead on pulling in the cash.

That said, it’s useful to recognize that A/R can be attributed to one of two issues: deal terms, or on-time payment. Arguably the sales person has more control over deal terms, and deal terms affect A/R balances. So incentives around selling within the parameters of “standard deal terms” can make a lot of sense if that’s the issue (e.g., slightly reduced commission rate or sales credit for deals sold with non-standard terms). If the issue is late payment then the next question is whether that’s due to non-acceptance of the products/services (quality issues), or just chaos and customer cash retention. If it’s quality issues, then do we really want to penalize sales – they probably have their hands full selling in spite of the quality issues. If it’s chaos and cash retention, then it’s probably better handled by an A/R specialist.

In spite of all those caveats, it is a very solid practice to reverse sales credit for any invoice that is reserved for bad debt based on the company’s policies. This crediting rule has the effect of giving the sales people a real interest in avoiding non-collection, but on an exception basis (without carving out some portion of the incentive at target to fund an A/R metric). Then of course when the bill is paid, the sales credit goes back in for the sales person.

However, if A/R has become a significant issue for the company’s balance sheet then it is often a reasonable metric to put into the plans of sales leadership (not individual contributors). They often are the ones approving non-standard terms. And they can stay on top of the non-collection exceptions and put pressure where it’s needed to help with collection.

What your CEO needs to know about your sales comp plans

CEOs don’t need to understand the details of the sales comp plans, but they do need to make sure that a few things are working correctly. Here’s a check-list for what you should be able to demonstrate to your CEO in your next plan review/approval meeting:

  1. The plans are simple and easy to understand. You can explain them to a high schooler who isn’t math-inclined, and they understand them.
  2.  The sales leaders believe the plans are right, and know how to use them to help manage and motivate their team.
  3. The amount of at-risk pay increases with increasing ability to influence individual measurable sales results. And those with less direct influence over results have less risk and upside in their plans.
  4. All incentive measures are objective and financial, except for those used in sales roles with very long sales cycles (market development, huge contracts…) .
  5. If you ask a sales person what they need to do to really make money on your plan, their answer is the same thing you actually want them doing.
  6. The cost of compensation works in your business model. Over a multi-year period, comp cost per person goes up with the labor market (3% or so on average across the team) while sales volume per person goes up faster (5-25%, depending on the stage of the business). This is because the sales leaders are adding to the selling capacity of each person through great tools, smart organization, leveraging good marketing, the right coverage model and market strategy.