WHY DO WE DO THIS?—THE PRINCIPLES OF EFFECTIVE EXECUTIVE PAY DESIGN

As pay-plan designers we are often caught up in the methodologies and nuances of creating effective and enduring executive-compensation plans. From time to time, it is good to push back from the word processor and spreadsheets and try to remember what we are actually trying to accomplish.

I was reminded of this recently when speaking with a client regarding the objectives to be accomplished with the design of a new executive-compensation plan (and pay strategy). In that discussion, I outlined a set of design principles that I believe must be universally applied to the design of any executive or other employee compensation plan.

Let me share my four principles (with a perspective toward executive pay) with you:

1. Linkage—the interests of the executive team and ownership must clearly overlap and be joined;
   
2. Consistency—there must be reasonable consistency in the application metrics, payouts and methods across and among executives and units. However, there can be great differences between business units and executive roles that must be recognized. Further, senior-executive pay models and templates must be usable to develop broader variable-pay reward systems and practices for lower-level managers and professionals.
   
3. Sustained performance—true increases in value are the result of sustained operating and financial performance as well as growth. Care must be taken to assure that executives are encouraged to take the long view and not just maximize and be rewarded for today's actions.
   
4. Fairness—all pay arrangements must be perceived as fair and financially equitable to both participant and the shareholders. Further, executive-compensation systems (and all compensation systems) must be - and appear to be - competitive with market practices to be effective.
   

While the above comments have been tailored to senior executives, we believe these principles generally have application to all employee groups.

When we create or revise an executive or other type of incentive plan, the above-stated principles are the first (and last) best-practice benchmarks to which we refer during the design process. Are there other principles you have or would apply?

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IT'S 2:00 P.M., DO YOU KNOW WHERE YOUR SALES FORCE IS? [Part 2]

In our recent webinar we talked extensively regarding how to identify the RIGHT accounts on which your sales force should call. We offered simple and tested techniques for assessing both the size and potential of an account or prospect. We also discussed how this information could be used to categorize all accounts. [See our April 2010 E-Notes.]

In some regards the solution can again be stated simply—your sales force should spend the majority of its time with the largest accounts. In fact some companies operationalize this concept by establishing an annual sales-call plan or budget for sales-force account contact. A typical sales-call plan might look something like the following:

What does such a chart say?

1. The company and sales force are committed to spend a certain amount of sales-force ENERGY annually on each of its accounts. This energy will vary by account size (as interpreted by sales volume; in the case shown).
   
2. Further, the company has an expectation of its sales representatives regarding the amount of effort that they will expend with each and every account in their territory or portfolio. Every account deserves its share of attention, and they will get it. While the expectations built into the above plan are clear, our experience tells us that these expectations will often be negotiated when it comes to the largest accounts. This will generally occur based upon both the input of the sales force and the desires of the account ("I do not want to see a sales rep every month.") Hence these expectations will often be mutually modified, in fact.
   

We often call these plans "shorthand" sales plans, because while they do not detail anything regarding what to do, they quite clearly tell the sales force how often an account is to be contacted. We have discussed this concept in recent months as one of our 5 Rights of Sales Effectiveness.

Do you currently have or use such a sales-call plan? If not, create one (use our model, if you like) and then apply these expectations or rules to each of your sales territories. It is a simple process that can be completed with a spreadsheet in an hour or two. And when you are done, you will know how many sales calls are required in each sales territory for the year. Or, what is the amount of ENERGY required to be applied to each account?

But, there is an unintended yet natural consequence of this analysis. If we have now established how many annual sales calls are required in a territory, then it is logical to ask how many sales calls per year you can "physically" expect your sales force to complete?

This can be a complicated question with a number of factors to consider. Based on our experience with the design of sales territories and goal setting, we will provide a typical benchmark that you can apply to your analysis. For purposes of this discussion, we have built a simple sales-call capacity model based upon the following four principle assumptions:

• 1,800 annual sales rep hours are available;
  
• 1.5 hour sales calls (on average) are required at each account;
  
• An estimated 30% of sales-rep time is spent travelling between accounts; and
  
• "Slack time," (time during normal business hours when work cannot be done—e.g.: your last sales call ends at 3:45 PM) is 10% or less of all available sales time.
  

The result is an estimated call capacity of 750-800 sales calls per year. Of course, changes in any of the above assumptions will change the estimate. [Refer to our webinar slides to see a range of possible sales-call capacity outcomes.] How does your territory-by-territory plan stack up?

• Are there too many sales calls for the sales rep to make in their territory?
  
• Are there too few sales calls to fill up a sales rep's day, week or month?
  
• Do the actual number of sales calls (and you should know this number) being made by your sales force bear any resemblance to what is required?
  

As an example, we have done an analysis of four actual sales territories and compared the amount of ENERGY required today versus a "right-sized" territory of roughly 200+ accounts with a generally correct balance of ABCD accounts. The right-sized territory requires about 775 sales calls annually. That example is shown below.

So again, as we did last month, let's ask ourselves what we have accomplished. There are two things—

1. You have created a methodology and approach to determining which are the RIGHT companies or accounts for your company and sales reps to call upon based on both current sales volume and potential (in April); and
   
2. Now, you have applied some common-sense rules to determining how much sales-force ENERGY is required for the RIGHT accounts, and every account or territory. Further, you have also utilized a methodology and yardstick that can tell you effectively whether you have a large-enough sales force to apply all of the ENERGY required.
   

But wait, we have not yet considered the impact of prospective accounts and account potential on required sales-force ENERGY. And this impact can be, and generally is, quite material. We will add this final piece to the puzzle in next month's E-Note.

The methodologies used during this analysis have been developed by Wilkening & Company in the course of assisting clients in areas of sales-force productivity improvement and effective sales-territory design. For more information regarding challenges facing companies in these areas, contact Wilkening & Company at (847) 823-5090 or bob@wilkeningco.com

NEXT TIME:

How does account potential and prospective business affect the work of the sales force?