CHANGING LEGACY SALES-PAY PLANS

Last November we talked about sales stagnation and the cause and effect of sales compensation plans in rewarding stagnation and sales force mediocrity.

FLASHBACK - Our prescription was a three-step approach to fixing a pay plan that is not driving success or growth of any kind. These steps were: Set expectations; Measure and share results; and Tie incentive pay to the achievement of annual goals and objectives (and we suggested the word "growth" should be somewhere in the document).

When a sales force (and its pay plan) underperforms, it often means that

• Management or ownership lacks a performance expectation for its sales force; and
• Management has not made it clear that they are only going to pay competitive bonuses for the achievement of that expectation.
  

The history of most sales-compensation plans can be tied to commission plans. Commission plans generally pay for sales volume in a territory or portfolio—without regard for factors such as sales growth, profitability or mix. When these types of plans are applied in a maturing market, large payouts can be annually awarded for little or no growth. Does that mean owners or managers are satisfied with zero or no growth? We think not.

In nearly three decades of sales-compensation plan design, one thing has been clearly demonstrated to me. If you do not communicate your expectations to your sales force, there is little chance these expectations will be fulfilled.

If your sales compensation plan is not linked to achievement of expectations, what should you do? And how should you do it? We suggest a multi-step plan. It follows.

First, decide upon an indicator that best represents company and sales-force success. Try these recent examples for a sales territory—

• Sales will grow by $200,000 in 2010;
• Gross profit will increase by 2% in 2010;
• 20% of sales in 2010 will come from product A or channel X;
• .............?

While there are many ways to articulate sales success, we believe growth is a concept we all can embrace and its simplicity will always be easier to communicate and measure. So if your sales are stagnating, tell your sales force you want it to grow sales volume in the coming year—and be very specific.

Second, decide how much a sales representative should be expected to grow his or her territory. Generally we tell clients that the answer to that question is a function of achieved-market share plus estimated-upside opportunity.

But honestly, we find that many companies do not (cannot) measure or estimate sales opportunity and upside for each or all sales rep territories or account portfolios. We recently conducted an analysis of a client's customer database and identified nearly 20% of the sales upside within current customers and products—just by achieving company "average" sales per customer in key products and product mix. This information was reported and analyzed on a customer-by-customer basis. It was developed using a reliable methodology we have developed over the last decade. Our findings validated (and calibrated) their own beliefs and earlier analysis.

They can now establish reasonable, fair and accurate sales-growth expectations (or goals) for each sales territory. Further, they can also focus the efforts of their sales force by customer and product for improved sales performance. In any case, the sales force will know what is expected of them—and why.

Finally, a sales pay solution needs to be crafted to simply link the achievement of sales expectations with the pay of the sales force in a simple and clear manner.

As it proceeds, a company must put a system in place that will tell the sales force how they are doing (versus their expectations) on a month-by-month basis, and measure this performance in terms those metrics that represent company goals—e.g.: growth, profit, mix...... We have actually found during the last decade that firms have become much more astute in the reporting of sales results to their sales forces.

With this reporting in place and used, a method for paying the sales force for meeting the company's goals can be developed. A successful approach is to build a payout methodology that rewards the individual for meeting the expectations of ownership and management—up to full achievement, at full achievement and beyond full achievement. This can be done with either periodic progress payments versus a "target" bonus, or a bonus paid upon achievement of milestones. Either can work, but achievement-based solutions are simpler to calculate and communicate. The tricks with these types of plan is to keep it simple.

Some clients also continue to pay some amount of underlying commission (on volume) in addition to a bonus as outlined above. This is often done to reward the sales force for the maintenance of current accounts.

We find the above to be a winning strategy when properly implemented.

FLASH FORWARD -In future editions we will discuss implementation and communication of major changes in pay plans for your sales force. Remember, a well-designed pay plan that is poorly implemented and communicated is nothing more than a piece of paper.

Is your sales growth stagnant? Think about the steps we described above, and for more background regarding both opportunity assessment or designing successful growth-bonus plans for your sales force call (847-823-5090) or write me at bob@wilkeningco.com.

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If Rip Van Winkle Awoke Today—What to do in 2010?

During the last few months we have looked back at a number of business processes, tools and institutions to comment on how they have changed during the past 20 years.

The main observation that I would take away from our Rip Van Winkle series is that successful businesses (and here I mean primarily smaller and mid-sized firms) have generally become more effective and competitive over time. Businesses and their executive teams are generally smarter, more disciplined, leaner and more agile than their counterparts of 20 years ago.

With this as a competitive backdrop, we are now hearing that future economic growth (GDP) for 2010 (and beyond) is forecast by many economists to be lower than the growth we have become accustomed to since 1990.

In my view, two economic forces are now about to collide. How will it impact you?

• The theory of "all boats benefit from a rising tide" is out the window. Do not get caught waiting for the tide to come in.
  
• As slower growth and competitive markets meet, there will be a continuing shake-out as weaker companies close or fall by the wayside as the result of more-aggressive companies clawing for increased market share. A possible sidelight of this collision may be continuing higher levels of unemployment driven by a lack of new hiring by lean companies and the closure of weaker competitors. This could present you with the golden opportunity to hire that excellent talent from your struggling competitors you have always wanted. Draw up your shopping list now.
  
• Do you think the last 18 months have been tough? Well, 2010 may be just a continuation. I advise you to continue to do (and accelerate) whatever you have been doing to succeed by:
  
  • Grabbing new market share by investing in sales and marketing;
    
  • Touching new customers; and
    
  • Keeping a lid on expenses (in fact, try to find another 2%+ of overhead cost that you can reduce this year).
    

And what if the economists are wrong? I believe our three-part 2010 prescription (above) is valid in any situation.

With this, we bid goodbye to Rip Van Winkle and thank him for his insight. I personally hope to see him again in 20 years.

NEXT TIME:

The Characteristics of Enduring Family Businesses