SI Review: May 2011

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Beyond Numbers

Staffing firms’ top sales compensation challenges

Believe it or not, sales compensation is not really about the numbers; it’s about communications. At its best, a sales compensation plan can fit on the back of a small cocktail napkin but have a huge effect by aligning the sales organization and driving performance to the sales strategy. At its worst, it can steer sales reps toward the wrong behaviors and stall the sales machine.

Recently, SalesGlobe, Staffing Industry Analysts and Monster.com teamed up to survey staffing companies across the country to benchmark sales roles, sales compensation structures, pay levels and practices in staffing. Our objective was to provide depth and dimension around sales compensation, including not only pay levels by job but also information on how job roles are designed, how organizations are structured, how plans are designed and how companies are dealing with the top sales compensation issues in the industry.

What’s different about high-performing sales organizations?

High performing sales organizations consistently operate effectively in four major competency layers, each of which contains certain disciplines that drive sales effectiveness. Sales compensation is one of these critical disciplines. The sales competency layers are:

  • Insight into markets, customers, internal performance and competitor performance.
  • Strategy around target segments, product and service offers, messages to the customer and the action plan for hitting the company sales goal.
  • Coverage models that take strategy to the customer, including the sales channels, customer-facing jobs, sales processes and approaches we use to deploy the sales force.
  • Enablement programs like sales compensation, quotas, talent management and account planning that drive and support the efforts of the sales organization.

As an enablement discipline, sales compensation sits downstream from Insight, Strategy, and Coverage and must respond to decisions made in the upstream disciplines. When conversations about sales compensation become too myopic and don’t consider the rest of the major disciplines, the compensation program will become disconnected from the company’s strategy. What appears to be a sales compensation challenge can actually be a symptom of a larger sales effectiveness misalignment that includes sales compensation.

Sales compensation design follows a process that begins with the foundation of sales roles and builds with market pay, salary/incentive pay mix, upside potential and performance thresholds, measures and priorities, mechanics, objectives and quotas, plan governance, and plan operations. If you’re sitting in a sales compensation meeting where the team’s first move is on their calculators, then you’ve started halfway through the process.

Our study reveals five major sales compensation issues challenging staffing companies. Following the flow of the Sales Compensation Design Process, they are:

  1. Supporting the sales strategy and sales roles (cited as a top-five issue by 33 percent of companies)
  2. Differentiating top performers (25 percent)
  3. Supporting solution selling (43 percent)
  4. Keeping the organization engaged (40 percent)
  5. Setting effective quotas (40 percent)

Supporting the Sales Strategy and Sales Roles

There are three basic sales strategies to grow the business organically: current customer revenue retention; current customer penetration selling, which includes product penetration with additional products and buyer penetration with additional buyers of current products; and new customer selling.

Each strategy can be covered by a combination of potential sales roles. The major component of the sales compensation plan that reflects these roles is pay mix — the portion of total target compensation allocated to base salary and target incentive. How do you know if you should use a 90/10 mix (90 percent base salary and 10 percent target incentive), a 70/30 mix, or a 50/50 mix for a particular job? The mix varies based on sales role factors like sales strategy and sales process characteristics. For example, if the job is account management-oriented, incentive pay will likely be a smaller percentage of total pay than a job that’s new customer-oriented in order to promote behaviors that are consistent with longer relationship development processes. Use a pay mix with too much incentive at risk and you may promote aggressive behaviors inappropriate for account management.

We think of sales roles with the Canine Model, which is a bit more descriptive than the traditional hunter/farmer model. Dobermans are on the prowl for new customer opportunities typically with significant pay at risk that drives proactive behavior and rewards big for high performers. From our survey results, a sales rep who pursues new customers has an average pay mix of 60/40 ranging to about 50/50. With less pay at risk, your Dobermans may not hunt. Dobermans, on average, met about 89 percent of their incentive targets in 2010, a challenging year, but the top performers did exceed the high end targets, according to our survey.

Retrievers, meanwhile, seek out opportunities in current customers using their well-developed sense of relationships and knowledge of their domain. Account managers’ pay mixes of 70/30 are a more moderate ratio to promote longer-term account planning and customer solution development. Retrievers earned about 97 percent of their target incentives in 2010.

Collies are the ultimate retainers of relationships and customer revenue. They stay close to the customer and, at times, may actually be mistaken for a member of the customer’s organization. These service delivery roles have a pay mix of about 85/15 in the industry and often think about customer relationship first and revenue second. Sometimes we have to give this lap dog a nudge off its sofa to think about growth.

Then we have the hybrid or blended roles, canines with a combination of blood lines. We share a word of caution about roles like selling branch managers, selling recruiters and selling sales managers. Jobs with disparate or competing responsibilities can stretch bandwidth and decrease sales effectiveness. Blended roles in the industry usually have a middle-of-the-road pay mix around 70/30 to 80/20.

Differentiating Top Performers

Differentiation applies the Reverse Robin Hood principle by asking, “How can we take from the bottom performers and reward the top performers, increasing the impact of our compensation plan?” Too many companies overpay the underperformers and underpay the top performers, making it difficult to attract and retain the right talent for the business.

The key for a sales compensation plan that puts incentive pay at risk is to provide the opportunity for significant upside potential. Sales compensation plans typically reward with an amount of upside potential in relationship to the pay at risk. For a top 10 percent performer, the rule-of-thumb in the staffing industry is a ratio of $1 to $2 of additional incentive for every $1 at risk in the incentive plan, a 1:1 or 2:1 upside ratio respectively. For example, for a pay mix of 50/50 with a $50,000 base, a $50,000 target incentive, and a 1:1 upside, the rep would have the opportunity to earn another $50,000 if she was a top 10 percent performer.

One area to beware of is how much we pay low performers. For example, we recently found a company paying significant money to reps under the minimum performance expectation. Because this minimum wasn’t linked to the incentive plan, the company paid out about $3 million that could have been used to retain high performers or allocated to other investments.

On the topic of pay levels, our survey noted some optimism looking ahead. In 2010, salary increases were minimal: About 62 percent of companies reported they did not increase salaries. In 2011, 46 percent of respondents said they anticipate no salary increase. However, 30 percent of companies anticipate a 1 percent to 3 percent salary increase, and 22 percent of companies anticipate an increase of 3 percent to 5 percent.

Supporting Solution Selling

To get from transactional selling to solution selling, we have to look beyond compensation and focus on the strategy and the sales process. We can then develop the compensation plan to support it. The challenge for most companies is how to move solution selling beyond a headline to an actionable and consistent approach the organization can execute. To reach this point, organizations have applied the Creative Quotient approach to help their teams develop skills and consistent methods to innovate their sales processes and create new solutions for customers.

When it comes to sales compensation, there are several ways to reward solution selling. You can hardwire a measure of solution selling into the compensation plan, requiring reps to achieve this objective to earn target incentive. But, if all reps don’t have these opportunities in their accounts or if they don’t have the method or skills, hardwiring can lead to disaster. Alternatives such as providing a gate to the upside potential in the plan or using an incremental add-on incentive can motivate behavior without putting the total plan at risk.

Keeping the Organization Engaged

In tough economies and in competitive environments for sales talent, keeping the sales organization engaged can result in higher productivity and lower turnover.

The average turnover in the staffing industry was about 26 percent in 2010, a high number even for a sales organization. About 28 percent of that turnover was voluntary, and the other 72 percent was initiated by the company. Greater engagement can reduce voluntary turnover and also increase performance, reducing the need for the organization to coach people out. As the labor market continues to heat up this year, engagement will become even more important to retain the right talent.

Sales organization engagement extends beyond the sales compensation plan to career path, benefits, work content, and affiliation with the company. One of the most impactful methods for increasing engagement is through reward and recognition programs. The most commonly used rewards programs in the staffing industry are team performance rewards (46 percent of companies), quota attainment rewards (42 percent), fast start rewards (27 percent), and product rewards (24 percent).

Trips are one of the more popular rewards in the staffing industry. About 40 percent of companies offer an annual trip as a reward. Most are trips to domestic locations and most include spouses or a guest. Other rewards range from cash, to quality of life rewards, to various forms of recognition. The most effective programs use measures and rewards that are significantly different from the sales compensation plan, have clear incremental objectives from the sales compensation plan, and deliver a predictable ROI to the organization.

Setting Effective Quotas

Quotas are the critical link between the sales compensation plan and performance, yet 30 percent of companies don’t have quotas ready in the first month of the year, leaving the sales organization without clear objectives.
A great sales compensation plan can be rendered ineffective with bad quotas. In a well-managed sales organization with effective quota setting, 50 percent to 70 percent of reps reach their quota in a typical year. One challenge is that most quotas are set based on historic sales performance trends for each territory, a method that doesn’t consider future sales potential and can create performance penalties for high performing reps who received even larger quotas the next year.

Advancements in quota setting are coming through approaches that incorporate relative market opportunity for each territory or detailed sales potential estimates to better align goals with capability. Quota setting is as much about the process as it is about the numbers reps receive as their goals. Using a process that is transparent, well-understood and simple can increase involvement, reduce rep resistance and increase ownership of the process.

Effective sales compensation works within a broader sales effectiveness context. Apply a best practice sales compensation process to your organization and consider the five big challenges as you evaluate and design your plans. Incorporate insight on the market, using the Staffing Industry Survey on Sales Compensation and Sales Job Practices to design the right sales compensation program for your business.

                                                                                                                                                                                                                                      

Mark Donnolo is managing partner of SalesGlobe and The Sales Leadership Forum. He specializes in helping leading sales organizations drive sales productivity through sales process innovation and coaching, sales strategy and incentive compensation. He can be reached at mdonnolo@salesglobe.com.

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