Archive for the ‘Plan Mechanics’ Category

Sales Compensation Plan Designs – Cost of Sales vs. Cost of Labor Models

Tuesday, May 9th, 2017

By Clinton Gott, Principal

One of the most common and significant topics during sales compensation design engagements focuses on the right mechanic to use – whether to use a Cost of Sales or Cost of Labor model. In simplest form, Cost of Sales models use absolute commission designs while Cost of Labor models tend to use quota-based plan mechanics. A Cost of Sales model offers a set commission percentage against the volume results generated. Meanwhile, a Cost of Labor model attempts to deliver market appropriate pay levels aligned to a job’s worth in the market for delivering an expected level of production. There is of course a lot more to this story, and deciding on the right approach is an essential design question.

Cost of Sales Model

As mentioned, the Cost of Sales Model implies using an absolute commission mechanic. For example, a salesperson may receive 10% of each dollar of revenue generated. Typically, such designs may start with some expectation of performance so the commission rate can be set to deliver some approximate income level. For example, if a company believes a typical salesperson should generate $1,000,000 in revenue and wants to pay them approximately $100,000 in variable pay, then the rate would be the 10% mentioned above. In some cases, the absolute commission rate is simply selected based on some dollar amount a company is willing to share with a salesperson, in effect to offer someone a “cut” of the deals one drives. These designs are simple, not particularly elegant, and can fairly be described as “old school”. They are generally used for specific cases including:

  • When a company first opens its doors – classic startup plan and that sometimes continues through the high growth phase.
  • If a company is not confident or able to identify expected productivity expectations, also known as quotas or goals.
  • When most salespeople have similar territory opportunities and thus earning opportunities.
  • More transactional environments often with shorter sales cycle times.
  • Salesperson rather than company “owns” the customer.

In most cases, companies using a Cost of Sales variable incentive model will still offer some kind of base pay – very few sales environments are truly 100% commission. Quite often though, this Cost of Sales model will eventually start to show its age and begin to break:

  • Startup companies often move from SMB customers to Enterprise sales – that often means much larger deal sizes resulting in much larger incentive payouts. Earnings can begin to dwarf the market cost of the sales talent needed. A common story occurs the first time a sales rep makes more than a C-level executive, design questions will start to crop up. This issue can bubble up even more quickly if C-level resources are also helping to create and close the new massive Enterprise deals – “why should the sales rep get all that commission for the deal I drove?” becomes a familiar refrain.
  • Salespeople will sometimes build up a book of business that is large enough to sustain a comfortable wage year over year. Growth can often start to stall in these instances if the extra incentive doesn’t feel significant enough to reward for the extra sales efforts.
  • Adding products or services often leads to more complex sales environments requiring added sales resources including sales specialists, technical specialists, and inside sales. The initial absolute commission rate is no longer cost appropriate, but reducing a legacy commission rate usually goes over like a lead balloon. You’ll soon hear, “What happened to my 10%?!”
  • Without clear quotas and incentives directly tied to quotas, leadership may feel disconnected from a clear vision on how the overall corporate goal will be achieved.

Those and other issues almost always arise, leaving companies looking for a solution to drive growth in a more reasoned, exciting, and cost effective manner. Enter the Cost of Labor model.

Cost of Labor Model

The Cost of Labor model attempts to offer a market appropriate total pay level to salespeople who achieve fair and reasonable productivity expectations, again often called quotas or goals. The market level is usually identified as Target Total Compensation (TTC) and is a combination of Base Pay and Target Incentive, the balance of which is represented in the Pay Mix, e.g., 50/50 means half in base and half in expected variable pay. When a salesperson hits his or her quota, that person earns one’s individual Target Incentive amount. There are a plethora of design nuances to consider, such as when incentives should start being paid (threshold) and what happens for above quota results (usually some acceleration). We can leave those details for another day, but companies usually find Cost of Labor quota-based models are useful in many cases:

  • More moderate to low growth stages where every dollar of growth can be more challenging and feel more important – acceleration above goal creates the growth energy needed.
  • Need to protect and penetrate a base of current accounts in addition to acquiring new ones.
  • Unequal volume potential in assigned territories or books of accounts – can lead to unequitable earnings opportunity from winning the “territory lottery”.
  • Complexity requiring multiple sales participants versus “lone cowboy” market makers.
  • Companies have a better understanding of the levels of productivity that can be expected from the salespeople – the data and process for setting goals exists.
  • A desire to have clear accountability for who is responsible for delivering a part of the total organizational goal.

It is extremely important to clarify that Cost of Labor models are no less exciting or energy-filled than Cost of Sales models. If anything, a well-designed quota-based plan can create more energy, both including enough downside risk (the “stick”) and upside urgency (the “carrot”). Offering the right level of upside by way of the acceleration rate is absolutely essential, and that topic alone deserves its own study and consideration.

In some sales environments and with some stakeholders, you may find nostalgic feelings for the “good old days” of absolute commission plans. Or some may hold on to an ideology that absolute commission plans are simply “the right way to pay” and will best drive growth. Case after case though shows that in most instances, goal-based plans actually drive better results and create more fair payouts than traditional absolute commission models. We published one such example in Workspan where we piloted quota-based plan designs vs. legacy commission designs in a relatively flat growth environment; those on the quota-based plan drove revenue 3% higher than those on absolute commission. The new goal-based plan design was considered a stunning success.

Earlier I used the phrase “fair and reasonable productivity expectations”, which is almost always the most challenging part of quota-based plan designs. Establishing a clear methodology, ideally that improves over time, is at the foundation of doing high quality quota setting. Few companies feel particularly good at quota setting yet just about all of them do it, certainly at the topline level and quite often down to territories or accounts. There are a number of best practices that we can share at another opportunity.

In terms of plan designs, I often say to my clients that, “There are no fundamentally bad plan designs, but there is a time and place to use each type of design”.  Admittedly, that may be a bit generous to some of the plan designs we’ve seen out there, but most are developed from some point of reason by someone trying to do the right thing or to solve a business issue. When it comes to using Cost of Sales or Cost of Labor models, here too there is a time and place for each option. In most cases though, companies will benefit by eventually evolving to well-reasoned and carefully crafted quota-based plans.

For more information, please contact us at info@bettersalescomp.com.

Four Sales Compensation Lessons from Wells Fargo

Thursday, October 27th, 2016

By Clinton Gott, Better Sales Comp Consultants

Millions of fake customer accounts. 5,300 rank-and-file employees terminated. $190M in federal regulatory fines. Fraudulent behavior apparently dating back years. The recent headlines about Wells Fargo have been scathing. Even without the full details, it seems obvious quite a few infractions were committed by the sales organization and leadership team at Wells Fargo. In the pursuit to find blame, fingers seem squarely and subjectively pointed at the sales compensation program, whether fair or not. What is objectively clear is that companies are concerned, as questions about sales compensation plan risks and requests for risk assessments have taken a pronounced spike. Our clients have been asking Better Sales Comp Consultants for our perspectives, and we have identified four important lessons relating to the fiasco at Wells Fargo.

1. Plan Designs – seek balance and follow best practices

Plan designs themselves are not usually the primary cause of plan risks, whether in terms of unexpected compensation costs or the likelihood of unethical behavior. However, one symptom of poor plan designs is often a desperate and frustrated sales environment.  One particularly relevant topic in this situation concerns inadequate base pay with overly aggressive pay mixes.

In talking to contacts familiar with the Wells Fargo sales comp plans, there was very little base pay and very aggressive pay mixes. If all or most of pay is being delivered in variable pay, the sales energy and urgency can move from healthy and energetic to desperate and dangerous. A very aggressive pay mix particularly with low overall pay levels means results don’t just cause tension or belt-tightening but can compromise one’s ability to put food on the table and a roof over one’s head. Salespeople should be motivated and hungry rather than starved and reckless if sales results don’t break well in any given day, week, or even month. A reasonable pay mix in alignment with best practices can help create the right balance.

Plan measures are also a relevant topic area, as the “Great Eight” cross-selling metric has been repeatedly cited as a driver of this situation at Wells Fargo. First, the goal of eight, allegedly selected because it rhymed with great, seems whimsical at best; we hope that’s more an urban legend than a true goal-setting methodology. But the cross-selling objective isn’t necessarily a wrong or illicit one. Companies often want to drive strategic sales and increase the penetration from certain products. The real issue here is the opportunity to cheat that seemed to exist in this high transaction B2C sales environment and that such behavior was seemingly condoned, which we’ll explore later. But don’t necessarily blame the cross-selling measure itself for the events at Wells Fargo, as product penetration and growth strategies can be strategically effective and do not inherently inflate risk.

BSC Advice – offer a reasonable fixed portion of pay and include sales personnel in a performance management program. Create the right foundational environment while offering exciting and optimistic variable incentives that will foster a healthy sales culture with positive sales energy.

2. Goal Setting – get real about unrealistic stretch goals

Few supporting programs can create more desperation than overly aggressive goal setting. If goals appear unattainable, even with hard work and high performance, then one shouldn’t be surprised if cheating becomes a “go to” move. Some misguided sales leaders say that the best way to increase performance is to increase quotas, while most folks know there is more to this story. A better expression perhaps is the best way to increase cheating, demoralize salespeople, and eventually create turnover is to stretch quotas excessively. We’ve observed overly-hedged quotas becoming more prevalent and more pronounced during the tepid recovery after the 2008 collapse. A recent BSC/WorldatWork quota study suggests about half of companies over-allocate quotas and the most ideal range is only 5-10% down to the frontline salespeople; that amount seems like a fair hedge and allows for some flexibility in making deployment and account decisions. Anything more will likely lead to fewer than 50% of reps achieving goal, a sales culture of losing, and a much higher likelihood of risky behavior.

In the case of Wells Fargo, it appeared that not only were goals stretched but over-zealous sales managers would over-emphasize goals and results as often as every two hours. One can easily imagine a dark and anxiety-laden environment, more like a boiler room than a sales office meant to optimize customer interactions and drive related sales outcomes. It’s an outdated model, prone to risky behavior. Further, this approach likely falls extremely flat with coveted Millennials or really anyone who understands the two-sided coin of sales and service.

BSC Advice – use quota over-allocation thoughtfully. Attempt to limit total hedge to no more than 5-10%. Stay focused on a positive performance culture and avoid the boiler room drama.

3. Corporate Governance and Oversight – mitigate risk and protect your business

With all the negative attention on the financial services sector from 2008 and other times, it’s both easy and hard to imagine this kind of fraudulent activity would pop up once again at a bank. Skeptics may say it’s in the industry’s DNA, and one would think lessons should be learned from prior misconduct. Some may feel that pushing past the envelope will again pass with few repercussions. The depth and breadth of the Wells Fargo fraud is clearly not just a frontline sales rep issue. Management likely had to encourage it or at least have been willing to look the other way.

Companies should ensure the right governance rules and oversight processes exist. Define who is responsible for what, and hold them accountable. I’ve had clients with audit groups who sampled and reviewed plan payouts and deal details to ensure appropriate conduct and ethical behavior, not just to do the right thing but to minimize corporate and shareholder risk. At Wells Fargo, it’s hard to believe the fallout from years of fraudulent accounts and burned customers didn’t escalate to someone somewhere, but there should have been a person or group looking for abuse and mitigating risk. As a consultant, I’ve joined my project sponsors for interactions with internal audit groups. While they haven’t always seemed necessary, I’ll look at them in a much different light now. Wells Fargo’s fraudulent behavior should alter perspectives and will likely cast a longer shadow than some currently anticipate.

BSC Advice – take corporate governance seriously, as not just “the right thing to do” but for the health of your business. Invest in appropriate audit resources to support that mission.

4. Zero Tolerance Policy – foster ethical behavior as a mission critical activity

Companies should have a zero tolerance possible for unethical behavior. This should apply to all levels. Ethics should be part of the dialogue around all business behavior… yes, even in the rough and tumble world of sales. It should be pillar of a company’s mission statement.

There were rumors about Wells Fargo whistle blowers receiving the kind of treatment one should least encourage – ignored, shunned, and at worst, terminated. Leadership needs to create the right culture, and it should trickle down to every level. The ideal outcome is a culture of both high ethics and high performance from an elite organization.

BSC Advice – focus on ethical behavior in your mission statement, in leadership communications, and as part of your performance management culture.

In conclusion, sales compensation plans and programs can be a great way to align salespeople and company results, excite sellers, and drive optimal performance. It’s easy to point blame at the plan design or even goal setting at Wells Fargo, and those elements should be carefully considered. But one should raise the focus up a notch. Focus on the leaders, the messages being sent, and the corporate culture that enabled this situation. Hopefully, with the right controls, a culture of ethical performance, and both appropriate plan designs and goal-setting methodologies, other companies can learn from the many lessons of the Wells Fargo crisis.

Moving from Traditional Licenses to Subscriptions – Better Sales Compensation Practices

Thursday, March 3rd, 2016

By Clinton Gott, Principal at Better Sales Comp Consultants

One of the most common questions we receive from software organizations today is how the sales compensation program can support the strategic evolution from traditional licenses to subscription-based (SaaS) models. Wall Street and company valuation methodologies all seem to reward for it, and many have to come to label this the new “strategy du jour”. It’s not always the easiest change to make and the change itself may mean different things and have different implications to those espousing such a strategy. While each organization’s specific needs, opportunities, and intentions may be unique, there are a number of considerations that we recommend keeping in mind.

Subscription Sales – “New to Some but Not to Others”

It’s helpful to first realize that subscription or recurring revenue transactions may be somewhat new to software companies but they are not new to a wide range of industries. Consider insurance premiums that renew each year and thus represent run rate business. Or consider an organization that sells credit information to banks for loan processing; they buy that information each and every year. From the Consumer Packaged Goods space, channel managers who sell through retail chains clearly experience run rate revenue. For those who want to go way back and may have hoofed it as a newspaper delivery person, that too is a run rate or recurring revenue model. I recall getting my $1/month for each house on my route; I didn’t know I was on the cutting edge of strategic evolution. The key distinction is a company serving as an ongoing supplier of products or services versus a company with one-time or intermittent purchases. Clearly, many industries have been wrestling with this topic for a long time, while some software organizations are facing it for the first time, at least for software licenses although not necessarily for maintenance and/or services.

In some of these industries, such as insurance, compensation is paid on the run rate business, which creates a familiar annuity stream that is often common and accepted. In some worlds, these plans will utilize a hard threshold (compensation payouts occur only after a certain point of results) or a soft threshold (compensation payouts start at first dollar but at a lower rate and increase as results progress toward a performance expectation or goal); these pay line features can help focus sales energy on the portion of the achievement curve most under a rep’s control, e.g., where they control protection and growth, rather than purely absolute volume. These are not necessarily models that the software industry typically tries to emulate nor should, but it’s a good reality check to understand that the situation is not truly new.

Software and the Focus on Bookings

Software is one industry with a legacy of paying on bookings. Compared to some pure revenue based models, paying on bookings or contract signing more closely ties the compensation payouts to the software license sales directly under a salesperson’s control. Folks often feel booking-based plans create more sales energy, inspire more motivated reps, and align to exciting sales cultures. And bookings of course avoids the annuity feel in high run rate models and avoids the challenges of using thresholds to create the right energy. [One side note of course concerns the need for role clarity and who supports new vs. existing accounts, but that’s broader than this article and is best left for another day.] In terms of sales comp practices, we find software organizations are most interested in continuing to pay sales incentives on some form of booking, and so most designs attempt to align to this objective. But how and where do subscription licenses fit?

Software Evolution Part I – “Living in Both Worlds”

In many cases, when software companies talk about evolving from traditional licenses to subscription licenses, they rarely mean a sudden and wholesale change from selling perpetual licenses to term and/or SaaS. Particularly in large software transactions in a B2B space, we find most companies really mean they want to support a customer buying the software in any number of ways – perpetual, term, or SaaS. The organization wants to support any and all software license sales, while still encouraging a steady and gradual migration toward subscription deals. Even then though, many acknowledge that customers need to be allowed to buy the way they want to buy, or some competitor will swoop in and offer the flexibility the customer desires. In these cases, the most important feature of a sales compensation plan is that it does not push a salesperson to force a customer to buy in an uncomfortable way.

One important concept companies consider is how to create deal neutrality or deal agnosticism for the sales rep. This means that no matter how the customer wants to buy, the sales credit and the incentive payment is kept relatively consistent. If we pay the same effective commission rates for a perpetual deal vs. an annual license, it’s easy to see the rep will only push for the much larger perpetual deal. Poorly designed sales comp plans can sabotage rather than enable an evolving subscription strategy.

One of the most common approaches is to find way to normalize the credit of each license. One technique is to decrease the sales credit for a perpetual deal to align to the Annual Contract Value (ACV) for comparable subscription deals. We also of course need to consider how to handle Maintenance as well as Professional Services, all under the construct of paying on bookings. In the space below, we provide an example of how one organization chose to create deal neutrality.

This table was specific to one organization’s business and will almost surely not be perfectly applicable to another. But the overall concepts are worth consideration. This client determined their Core Crediting Rules based on a historical analysis of prior deals and an estimate of how they could create deal neutrality for future deals. The salesperson was basically kept whole in terms of sales crediting and compensation, regardless of how the customer wanted to buy.

In other cases, we’ve seen examples of crediting rules that slightly overvalue the results for SaaS versus traditional licenses. Or we’ve seen crediting upticks on the ACV value based on the number of binding years in the contract. Again, each case is different, but the overall concept is one of the better sales compensation practices companies should consider when moving from traditional licenses to subscription based opportunities.

Software Evolution Part II – “Diving in with Both Feet”

In much less common cases, a company may simply decide to actively end sales of traditional licenses and move 100% to subscription based sales. The case of Adobe several years ago is one commonly cited example where an organization made an aggressive and near full scale move. In these cases, the necessary sales compensation plan design approach still goes back to best practices – identify the right measures, determine the best mechanics, and work on the plan details to accomplish your objectives. In many ways, companies that go in with both feet are resurrecting as pure play SaaS organizations, and terms like MRR, QRR, and ARR will all arise. In reality, the building blocks of an ACV based plan, potentially with crediting upticks for multi-year results can still work quite effectively. ACV and SaaS sales often go hand-in-hand.

Overall Impacts – “Be Careful What You Wish For”

In most cases we’ve encountered, strong early enthusiasm to move toward subscription based deals ends up waning a bit as repercussions are assessed. There are usually significant revenue recognition impacts in the current year. Companies like Adobe had to prime the market to understand that near term revenue may drop to gain the benefit of steadier and longer-term results. We’ve seen this effect even in privately held companies as no one wants to miss overall financial targets or see near term increases in the expense to revenue relationship, even when considering the future benefits that subscription-based results can offer. Patience is rarely a virtue in today’s modern world.

As one recent client told us, “We can’t kick our addiction to end-of-year perpetual deals!”. We hear this quite often. There are cases where a company’s leadership may simply need or want to have a deal taken perpetually versus sticking to the steady subscription strategy. In such cases, having a deal agnostic sales compensation plan can ensure the sales representative is willing to follow whatever directions he or she is given. The right plan can align overall strategic vision, pragmatic in-year revenue recognition requirements, and the resulting sales compensation payouts. It can also work for the customers who are allowed to purchase the way they desire. Ultimately, we believe the best sales compensation plans work for the company, the sales representative, and the customers as well.

Underperformers – Why Sales Compensation Rarely Offers the Best Solution

Thursday, November 15th, 2012

By Clinton Gott and Ted Briggs

In a typical sales organization, sales reps can be categorized as A players (stars), B players (good/decent), and C players (poor). We often find a normal talent distribution with 20% in group A, 60% in the group B, and 20% in group C. There can be a slightly higher or lower percentage of folks in groups A and C, but most of the sales leaders when reflecting on reality and not pure aspiration, strongly support this general notion. Each of these groups has unique needs and requires a different talent strategy. In the case of the C players, the sales compensation program is actually one of the least important concerns, yet is often where companies spend the most amount of time.

Sales compensation needs to support your overall talent strategy. We can start with general views on how sales compensation is best matched to managing each performance group:

  • A Players – “Feed your Top Dogs”. If “true sellers”, these people will leave if upside is poor. Typically, accelerators should take top performers upwards to the 90th percentile of market pay data. Strong upside is the best compensation approach to attract and retain these resources. Click HERE for more information on setting accelerator rates.
  • B Players – “Power of the Masses”. The key is finding ways to move productivity up a bit – small increases equal big results. Sales compensation, with effective downside and upside, can help. Communicate clearly where they should focus and create meaningful downside while primarily selling them on the attractive upside.
  • C Players – “Move Beyond Compensation Fixes”. Compensation is a poor tool to manage or remove low performers. These people normally “hang on”, and even if paid poorly, they often lack the confidence or ability to find another job. Other talent management solutions are required.  Yet too often, an organization’s efforts are focused purely on sales compensation fixes for dealing with these underperformers.

Why does sales compensation get undue attention when talking specifically about C performers? First, variable pay and performance results always come with an emotional response. Often we hear executives ask, “Why should a rep performing below goal receive any variable incentive? They already receive a base salary!”  This notion forgets that sales reps often have significant dollars at risk and that the role’s pay package is represented as Total Target Compensation (TTC) for the total job performance. So someone who hits 80% of goal on a 50/50 plan almost surely should earn some variable incentive.

Second, changes to compensation seem like an easy fix. By tweaking a rate and creating more downside in the payout curve, a complicated question (“how to make our lower performers and our sales force in total more effective”) seeks a simple solution (“stick it to them with less compensation!”). This rarely yields positive results and in many cases, actually makes results more negative.

Third, people often overstate the power of sales compensation. Hey, money matters, money motivates. A bad plan can do a ton of harm, while a good plan clearly makes a difference in creating the right focus and driving performance. But sales compensation is just one piece in a total sales effectiveness equation. This is why we often indicate that we at “Better Sales Comp Consultants” really need to be “Better Sales Consultants”; other topics like customer segmentation, deployment strategy, job role definition, quota setting, training, and communication can often matter as much if not more than sales compensation alone.

Fourth and most dramatic, finance stakeholders start with the logical mathematical assumption that creating either a soft threshold (reduced payout rate at low performance levels) or a hard threshold (no incentive pay below some level of achievement) will save the organization money. If you pay less, or don’t pay at all, for low levels of performance, then yes, you’ll pay less to that individual and less in forecasted total. We recently had a client over-rotate about slight variations in the under-performance pay line. Last year’s plan had a 0.5x rate from 0-60%, with a true up rate to deliver 100% of target incentive at goal. The “new and improved” line added a 0.75x rate from 60-80%, with an even bigger true up required from 80-100%. When applied to a sales force of around 1,000 reps, that slight change yielded a forecasted savings of $3M. Finance was happy, the pro forma bottom line was happy. Those concerned with building sales force morale, retaining strong talent, and keeping everyone focused on growth were less than enthused.

The challenge with over-engineering the underperformance curve is that these changes hit everyone. Even the top performers, who should be above goal by year end, have to achieve and earn through those lower achievement tiers. To address a company’s concerns with underperformers, this “fix” chooses to punish everyone. It is a peanut butter solution to an individual problem. If the star reps see a change like that as the company “once again hurting the sales force”, negative energy is created and the motivation to find a more sales-friendly organization may finally lead to attrition.

In this client example, the sellers averaged approximately $200,000 TTC. Based on conventional wisdom and WorldatWork turnover studies, the turnover of a single employee often costs a year’s worth of pay in term of direct expenses, indirect expenses, and opportunity costs. So if even just 1.5% (15 of 1,000) of sellers decide to set sail, the celebrated $3M in cost savings are out the window. If some of those 15 reps are your best and brightest, the damage is likely even higher.  Production goes down, profit goes down, and in some cases, large accounts turnover as well thus creating the potential for very negative long-term consequences.

Okay, so sales compensation is not great solution for managing under-performers, but what is? The answer is active talent management. In some cases, C performers can be coached or trained to turn into B performers. In other cases, C performers are what they are – bad hires or folks unable to adjust to the evolving needs of a sales organization.

If coaching and training do not yield results, or when it is simply clear that C-level performance is the best one can accomplish, then it behooves the organization to performance manage the person out. That is not a heartless outcome but a logical one. The sales organization and company can find a more productive salesperson, while the salesperson can be unburdened by the negative feedback cycle of underperformance. They can meet the challenge of finding a position better suiting one’s makeup and skill set, without having to struggle and strain under the weight of expectations they simply cannot meet. One would argue, both individually and collectively, that successfully confronting a dose of reality is better than failing in a fantasyland. At one of our prior consulting organizations, “coaching someone out” came with a notion of encouraging them to find a better “place in the sun” for the individual. We all have that sunny spot and should be encouraged to find it! Simon Cowell was correct – some people just can’t sing… and that is okay.

We should make a few final points about active talent management. First, you need to understand your company approach and the legal requirements required to remove an employee. It is certainly easier to handle underperformers in some states and countries than in others. Second and of key importance, you have to commit to replacing that person! In many environments, organizations institute hiring freezes so a sales manager can’t replace any resource, even an energy-draining underperformer. In such cases, a sales manager would rather have a warm body in the role versus no body at all. Rehire for the role. The return is well worth it in replacing an underperformer with even just an average performer. Especially when economic times are tough, cutting heads in the sales force is a no-win approach to protecting or growing your business. And down economies are a perfect time to pick off top reps as your competitors mistakenly implement the negative compensation tactics described in this article!

Answering the “Better Question”: Acceleration Rates

Tuesday, July 24th, 2012

By Clinton Gott

As a boutique sales effectiveness and sales compensation consulting firm, we at Better Sales Comp Consultants often are asked well-intended questions through our website, in business development meetings, or during active projects from senior level people in leading companies.  Often times, these questions are asking for benchmarks or specific compensation practices that are out of context and lack a clear answer without digging more into the situation and background. To best address these questions, we often need to consider the real or what we call the “better question”, which helps ensure the answers have real meaning and offer true solutions.

Common Question: “Our sales compensation plan acceleration rate is 3x. Is that the right number?”

This question is directionally correct, although it overlooks the true underlying topic and does not have a true black-and-white answer for which many may hope. To help answer it, we need to step back and translate the question into something that better addresses the real issue:

Better Question: “Do our acceleration rates offer enough market appropriate upside to our top performers?”

Companies like benchmarks. Identifying a 3x rate would seem like a simple number to compare to those found at other companies to see how one measures up. While seemingly logical, I think most would agree that the comparison itself isn’t all that valuable. Roles may be different, metrics are often different, goal setting methodologies are not universal, and achievement results can vary highly. The question really looks at each sales job and seeks to provide appropriate upside based on our potential achievement for each sales job.

Take two extreme examples. Company A is considering Account Managers with large revenue quotas who primarily manage current accounts with recurring revenue while looking for incremental penetration opportunities. Company B is considering new Business Developers with smaller quotas based on contract value (orders) who primarily focus on acquiring new accounts. If we consider that 135% achievement is stellar performance for the rep in Company A, while 200% achievement is possible for high performers in company B, we can start to sensibly consider the question, “Is our 3x accelerator the right one?”  The Company A “star” rep would earn 205% of target incentive, approximating a moderate 1:1 upside. The Company B “star” rep would earn 400% of target incentive, representing a more significant 3:1 upside.

As mentioned, the Better Question focuses on the notion of upside and whether our star performers are able to earn enough to keep them motivated, properly rewarded, and satisfied enough to stay as a member of our sales team versus trying to find greener pastures.

There are market and best practice upside targets that companies typically try to align to. Direct sellers often can earn 2:1 upside or greater. That’s the upside payment a company would want to target when setting the accelerators, and one can use historical achievement levels to help guide the design. Upside targets and trends often vary by role, and somewhat by industry, and can be supplied by those who consult on the topic, studied uniquely through industry networking, or gleaned from market pricing data (through analysis involving the 90th percentile of actual pay).

In our simple examples, let’s assume that both companies want to target a 2:1 upside. In the Company A example, the accelerator would actually need to increase to a right around 6x. At 135% achievement, a 6x accelerator would deliver 310% of target incentive and just over the intended 2:1 upside. In the Company B example, the accelerator should actually decrease to 2x. At 200% achievement, a 2x accelerator would deliver 300% of target incentive and the intended 2:1 upside.

In a large sales team and using a more robust exercise, a company should consider looking at achievement percentages by quota size, by specific sales roles, and by country/region. We would want to look at historical achievement data for the last two to three years, while also taking an educated guess on whether those achievement levels are logical and likely in the upcoming plan year. And then for a given accelerator option, you should do a sanity check on how much a top performer would earn compared to the incremental revenue results being driven. While upside is considered “self-funding”, you’ll inevitably need to defend the affordability of the acceleration rates to your finance department! Ultimately, setting the final accelerators combines a bit of science (the upside theory, the actual achievement results, the return on spend for incremental results) with some art (strategically identifying the preferred upside amounts, consideration of future achievement results).

When faced with common questions, reframing them into better questions can help shed light on the appropriate answers. In this case and on more than one occasion, I’ve witnessed intense benchmarking debates around topics like the 3x question above. That usually comes then with splitting hairs on whether the rate should be 2.9 or maybe 3.1, or some such nuance. End of day, the focus should be on creating a simple solution that offers the right amount of upside opportunity, which motivates, retains, and attracts top salespeople while inspiring average performers to reach for the stars.