Archive for the ‘Quota Setting’ 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.

It’s Quota Setting Time – Beware of Irrational Exuberance!

Monday, September 22nd, 2014

By Per Torgersen

In our line of work we get to spend a lot of time with salespeople.  We hear the good, the not so good and everything in between.  One of the topics that always seems to fall in the “not so good” column is quotas.  There is never a shortage of strong opinions, but generally, the themes are a sense of unfairness, lack of achievability, and no transparency of the process.

We always like to dig deeper into these issues as in many cases the quotas directly impact the reps’ pay.  In our discussions, many of the salespeople volunteer detailed spreadsheets they have kept regarding their productivity in past years, major wins, number of accounts growing and declining, new products introduced each year – you name it!  The good ones really know their metrics and are not afraid to put forth their arguments against irrational numbers.

Common stories we hear include:

  • Revenue growth has been steady at 3-4% per year the past few years, but suddenly a rep receives a quota for the next year representing 15% or more growth, with no new products being launched, no new customer segments being targeted, and no explanation provided.
  • A “bluebird” sale landed in a particular year, with the expectation for the next year anticipating another one, thus slapping a percentage growth objective on an already likely inflated number.
  • Misalignments between field reps’ quotas and that of management/the company, with the end result that the majority of reps don’t make their quotas but the company hits its overall targets as do many of those in management (leading to the morale killing situation where management and leaders head on incentive trips with the vast majority of salespeople left behind!)

To that last point, in a recent Quota Practices Studies (performed by BSC and the WorldatWork), we found only half of the participants over-allocated quotas and usually no more than 5-10% levels. The over-allocation was generally held to just front line manager to sales rep but not at higher levels in the sales organization.  If you want the Executive Summary, e-mail us at info@bettersalescomp.com.

The implications of these situations are quite predictable:

  • Diminished morale, and salespeople just giving up because they have no confidence they can hit their number.
  • Swings in performance, with reps gaming the system, and looking at their incentive pay over a two year cycle, with a great year followed by a lousy year, which then gives them a lower quota the next year and a good payout again.
  • Diminished incentive payouts, leading to a higher number of salespeople keeping their eyes open for other opportunities and increased turnover and open territories for the organization.
  • Resentment and distrust of management and leadership, again potentially leading to turnover and business disruption.

When we talk to management and leadership about what we hear from the sales force, we often don’t get the best answers – “Wall Street is expecting 15%”, “We think we may have the new product out by the end of the year but it’s been delayed a few times”, or “We always have to grow by a double digit percentage, but you are right, the last few years the actual growth has been around 1-2%”.  We tend to believe the long term pains of over exuberant quota setting far outweigh any short term or perceived gains.  In fact, we’ve had two recent clients who over-allocated quotas by 15-20%. The results were both organizations consistently had only 30% of reps hitting goal while the organizations themselves still managed to meet overall objectives. Morale sank, turnover increased, and no amount of quota over-allocation could keep the organizations’ future results on track! The perceived overall near-term success could not be maintained, and each had to rebuild the sales organization and resulting growth engine.

So when you set or get that number for 2015, use some common sense, and ask the “why” and the

You Can Set Better Quotas by Focusing on Better Sales Planning

Monday, May 13th, 2013

By Clinton Gott and Ted Briggs

Quota Plans are Plentiful but Good Quota Setting Processes are Not

Quota based plans are very prevalent today and with good reason.   Quotas allow for customizable plans taking into account the unique qualities and potential of each territory.   They promote “fairness”, are easy to understand, and are relatively easy to administer.

However, the most common complaint that we hear  when working with clients that use quotas is “we are not good at setting quotas” followed by “ can you help us set quotas better”.   As sales compensation and sales effectiveness consultants, we at BSC most certainly can and do help our clients set better quotas by employing a tried and true process that includes both top-down and bottoms-up forecasting along with a mathematical approach to allocating national and regional forecasts to territories.  A basic quota process methodology often looks like Exhibit 1.

That being said, we often encounter overly simplistic approaches to allocating quotas to individual territories such as the “peanut butter” method where the national goal or growth goal is equally spread out over all territories.  Some augment this approach using a “chunky-style” peanut butter method (if you will) that includes territory size as a modifier for allocation (e.g., larger territories have to grow less as a percentage than smaller territories).

Quota Setting is a Direct By-product of Sales Planning

However, what these simplistic approaches ignore or gloss over is that quota setting is really just a by-product of good sales planning.  The best methods for sales planning include taking into account both “internal” factors such as financial data and “external” data such as market opportunity and access.  This type of approach allows each territory manager to take into account the key drivers of sales potential.  That includes not only territory size but characteristics such as customer population density, competitive threats, access to customers, regional cultural norms, and regulatory differences, to name just a few.

The good news is that companies are already capturing data on most of these characteristics in the ubiquitous salesforce automation systems that have been increasingly deployed over the last few years.  And even if at headquarters, some characteristics like customer access lack hard quantitative data, we  can use these tools to get directionally accurate information from the people who should have the most insight, namely the territory representatives themselves.

Set Better Quotas and Improve Sales Planning

That is why we encourage our clients to use a Quota Setting Framework that utilizes both internal and external factors to set quotas (see Exhibit 2).

A simple such framework would involve picking the 3 or 4 factors that impact sales potential for each territory and for which you do not have hard data (such as sales volume) and have the territory reps and their managers rate each factor on a scale of 1 to 3.  These ratings can be aggregated and translated into a growth or allocation factor for each territory that leads to better quotas that reflect a truer picture of territory potential. While not a perfect mathematical solution, these inputs can represent “the art” element in the art and science nature of quota setting.

Of key importance, these same factor ratings can then be used for more meaningful and impactful sale planning discussions between territory reps and their first line managers.  These strategic and tactical coaching opportunities can have a great impact on overall sales results.

In summary, using a better quota setting process is really using a better overall sales planning process, which can help you to recognize the true value of a great sales incentive plan – increased sales performance!

BSC’s Inaugural Quota Practices Study

Saturday, May 11th, 2013

Quota-setting. If that phrase causes a twinge of pain, you are not alone! Over our many years of working with sales organizations, quota-setting has been a topic that causes consistent concerns across both the sales force and those concerned with their performance. The stakeholders we talk to often label it as the most challenging issue when describing their key sales effectiveness and compensation pain points.

Recently, we partnered with WorldatWork to conduct a comprehensive study on quota-setting practices that included over 80 leading companies across a wide range of industries. Only 21% of respondents rated their quota setting process as “very effective” or “effective”, so clearly, there is room for improvement. Of equal concern, only 25% of companies felt their quota-setting accuracy was “very accurate” or “accurate”. And maybe worst of all, we found that many companies were still doing things “the same old way” in terms of tools, processes, and data inputs. Yet there is good news as well; companies express a desire and intention to invest strategically and tactically to find better solutions for this important topic.

You can find all the latest trends and learn more about how you compare by downloading our executive summary report here: Quota Practices Study – Executive Summary from BSC & WorldatWork

And for the full report, please email us at info@bettersalescomp.com.