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Q&A: Compensation Conundrum
February 25, 2008
When sales are sagging, don't just turn to the usual culprits
By Mike McCue
It's enough to drive any sales manager crazy … the team's numbers are down and you have no idea why. Your competitors don't seem to be suffering a similar drop in sales. The overall market hasn't taken a downturn, nor did you lose out on that big deal you were banking on. Salespeople simply don't seem to be producing in spite of their best efforts.
If this scenario sounds familiar, it might be because you haven't adequately formulated and articulated the relationship between the behaviors you want from your sales force and the rewards you'll provide if they perform them. Companies that fail to do this often suffer devastating results to their bottom line.
"People sometimes forget how much money is paid out to incentivize the sales force," says Matthew Lucy, a Los Angeles-based consultant with Towers Perrin. "When you consider base plus bonuses, they equal 2% to 20% of revenue. It's one of the single largest cost centers in any company."
A second sure indicator of a poorly designed comp plan is that even when incentives are reached and money gets paid out, it doesn't always appear to go to the right people. Lucy says that situation actually reinforces the very behaviors you're trying to change, not only making the plan ineffective as a motivational strategy, but a crippling blow to a sales team's morale.
S&MM posed a few more questions to Lucy on this most crucial of topics, and here is what he had to say in response:
S&MM: What are the newest developments affecting compensation strategy and planning?
Matthew Lucy: The much greater involvement of finance departments has been a very positive change recently. I've been in this industry for 10 years now, and when I first started, finance usually just did the final sign-off on comp packages. They weren't really involved in the design and mechanics. Finance was part of the checks-and-balances system, and of course there was some financial rigor applied to the overall plan, but it really wasn't very involved in the strategy and design of the plans themselves.
S&MM: Why wasn't finance involved in past years?
Matthew Lucy: In the years leading up to 2000, everyone was doing so well financially and that all of the salespeople were hitting their numbers. No one really had to think too much about motivation because everyone was succeeding. It wasn't broken, so no one tried to fix it. After the market bust, there was a lot more financial pressure on hitting sales goals, and with Sarbanes-Oxley, the pressure wasn't just financial—it was regulatory in the form of compliance, auditing and validation. The importance of handling sales compensation appropriately was doubled, and that's why finance has become less of a watchdog and more of an active participant.
S&MM: Why is the involvement of the finance department such a positive development?
Matthew Lucy: At most companies, there are two ways people face: outward toward the customers, or inward toward the shareholders and company owners. Salespeople typically face the customers and pay less attention to the needs of owners, but finance leans in the opposite direction. That creates dynamic tension, and that's a good thing. It forces sales to put more rigor into the impact that their comp plans have on the overall company, and it forces finance to realize the value of keeping those revenue-generating customers happy.
S&MM: How and why is it that most compensation plans fail?
Matthew Lucy: When I'm brought into a company to help them with their compensation planning, there's often a very basic flaw—a disconnect between the behavior that the employer wants to encourage, and the behavior that the plan actually rewards. Years ago they were much simpler in design: Do this and get that. But they've grown so much more complicated because employers tried to do too much with them. So many other factors have been introduced to drive other behaviors that most sales reps don't really know how their own comp plans work.
By trying to do too much, they've weakened the connection between behavior and reward. If a sales rep doesn't know exactly why he gets what he gets, you haven't affected or encouraged any behaviors at all. Also, companies change their high-level strategies about every other year, but continue to use the same compensation structure, which creates the disconnect between the company's goals and the behaviors it rewards. But even worse than ambiguous, complicated and outdated incentive plans are the ones that introduce manager discretion.
S&MM: Why is that a bad thing? Shouldn't a manager have the right to use his or her best judgment for unusual or exceptional cases?
Matthew Lucy: Not when it comes to comp planning. It's absolutely important that managers have the opportunity to make subjective judgments, but comp plans aren't the place to do that. It's critical that management doesn't just throw out the comp plan and pay out whatever they feel is appropriate at the end of the year, based on their observations. Keeping things appropriate, objective and measurable are things that finance does very well, which is why their involvement is so critical. They worry about whether an inordinate amount of money is being paid out without getting value in return, so their influence on plan design ensures that the relationship between reward and behavior is clear to everyone. Because of their diligence and rigor, many reps now know exactly what they're going to get five minutes after they close the deal.
S&MM: What suggestions do you have for companies that want to get better results from their motivational and incentive planning?
Matthew Lucy: First, ensure that what you define as "performance" is clearly rewarded in the compensation plan. For example, if you tell your team that you want to drive volume growth in the overall customer base, but the plan itself only rewards for new accounts, you're motivating your team to focus solely on attracting new clients rather than keeping the current ones happy. What you want to achieve isn't necessarily the behavior you're rewarding.
Second, involve your finance department as early in the planning process as possible. That will help them understand the impact beyond dollars and cents and understand the strategies you're employing. And in turn, their detail and financial rigor will ensure that the rewards you develop are properly tied to the behaviors you want. Don't think of the finance department's involvement as a chore, but as an advantage.
Finally, do a retrospective look at your current comp plan to determine what incentive payment each rep received—not in terms of dollars, but as a percentage of revenue that the individual generated for the company. Those large payments that go out to the top-selling reps often turn out to be less expensive in the long run than the little amounts that go to salespeople who aren't doing the right things.
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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