Posts Tagged ‘Per Torgersen’

Practical Sales Compensation – Wrapping it Up

Friday, April 15th, 2011

By Per Torgersen

Modeling – Once the foundational components and structure are decided, the next step is to conduct some financial modeling to confirm economic feasibility of the plan.

Entire chapters and articles have been devoted to this subject. Bottom line, modeling is a critical part of the process as it enables the team to understand the aggregate and individual impact of the decisions and changes made to the incentive plan.

If the changes are relatively minor it is relatively simple to create a comparison of each sales person’s pay the previous year and what it would have been if the new plan was in place with the same performance. In the comparison analysis, there are three questions to focus on:

1) What is the amount and percent of pay displacement in either direction? – This absolute figure should not be too high on an aggregate basis (say beyond 20%), or the new plan could de-stabilize the sales force and there could be issues with launching it.

2) Are the right individuals winning or losing? – As the results are reviewed, is there consensus that the individuals who are exhibiting the right behaviors, concentrating on the right accounts and products in a productive way winning in terms of additional compensation? Are those who are not realizing a compensation haircut if they do more of the same?

3) How do aggregate payouts appear between the two plans for the given year? – If there is a large drop-off or increase in payouts, there needs to be an understanding and acceptance of why this is happening and that the finance budget for incentive compensation is aligned. This benchmark – compensation cost of sales (CCOS) – can be observed over multiple years to understand trending and how changes to plans affect this metric.

If plan changes are significant, with many new components and formulas, the optimal approach is to methodically map out the payouts at various levels of performance (e.g., if the overall organization performs under, at, or above expectations). This is important to understand to ensure budgeting is accurate. For example, if your plan has thresholds, decelerators, and high accelerators the impact of varying levels of performance can be material. It will be important to ensure the company is willing to pay that amount for overperformance. And, on the flip side, penalize for underperformance.

o TIP – Devote an entire Design Team meeting to review outcomes. Also make sure there is a Finance representative involved so there are no surprises for them. Also, remember, this is the final iteration of the design process! Expect there to be at least some modifications to the mechanics as the team starts to see the actual expenditure expected from the new plan design.

• Even more communication – At this point in the process, field sales and management will likely be wondering how everything is progressing unless there has been an interim communication. Make an effort to send out another communication from the team. The communication does not have to be very specific, just an upbeat update on progress and perhaps a date when you expect to be launching the new changes (e.g., national sales meeting). Ideally, the communication can come directly from a stakeholder that is part of the group needing an update. It increases the chances of ‘buy in’ since the communication is coming from ‘one of us’.

It makes sense as well to create a comprehensive communication strategy at this stage. This should include an outline of all the key stakeholders that need to understand and approve the changes, the message and main points that should be made, as well as sequencing and ownership of any communication events.
Even though compensation design fatigue may have set in, the importance of seeing the process through to launch and beyond is critical.

o TIP – Bring in an outsider, e.g., someone from the communications department if one exists, or a person particularly adept at wording and PowerPoint. This individual(s) can create materials, giving the team something to react to, and lessening the workload for them. Further, the individual’s objectivity will help to ensure the details are simplified appropriately for your target audience.

• Updating systems and reports – Preparing IT and/or HR’s compensation system leaders for what’s to come is never a bad idea. In fact, as soon as there is initial consensus around issues like performance measures, pay structure, and such, sharing that information enables those functions to begin tackling how systems will be able to track and report results and payouts accurately. This is particularly important if there are new measures being introduced, or there are a number of moving bits and pieces that increase the complexity.

If tracking and reporting activities have been a problem for the organization, articulating the process for how data will be captured and proactively laying out what the ideal report the sales person and sales leadership will receive, is worth the investment of time and effort.

o TIP – If possible, review other companies’ payout report layouts to get ideas for how yours could look. Also, survey or ask for input from the sales force about what information would be most helpful to them, and how they would like to see information presented. They often will have very specific advice.

• Plan Launch – Team Presentations and One-on-one discussions – Launching the new incentive plan is a critical step to ensure that all the efforts expended in all the other steps are not in vain. Updating documentation and putting it on the intranet site is not going to cut it. Slightly better but not satisfactory either is an e-mail announcing the new plan and telling everyone to read it. Even so, both of these approaches are not uncommon, but generally lead to confusion, misunderstandings, and all kinds of other undesirable outcomes.

An ideal approach is getting all the sales people together either in one group if it’s manageable, or alternatively on a webcast, with separate follow-up live sessions with their direct manager, most preferably, one-on-one. This way, they are most likely to get a thorough understanding of the program and how they can maximize their earnings, and they also get a chance to ask specific questions in a less daunting situation. With larger sales forces, it can also make sense to create an e-mail address where they can address inquiries, with answers being shared with the broader population. .

Any communication materials created should be as clear as possible with numerous examples showing payouts at various levels of performance, as well as a section covering anticipated questions or points that should be particularly emphasized. If Managers are going to lead sessions on their own, they should have concise talking points and preferably some pointers beforehand to ensure they are consistent and don’t provide any erroneous information. This is also an opportunity to share or reiterate the objectives of the sales organization in the coming year, so be sure to include slides and information on this topic segueing into how the sales incentive plan aligns with these goals.

o TIP – If you included one or more field sales management/leadership on the Design Team, have him/her be one of the presenters in the broader presentation. Also make sure the process utilized is communicated, with a heavy emphasis on inclusiveness (if the “inclusiveness” portion of the Getting Started section was followed!)

Parting Words:

Sales compensation design and implementation is rarely smooth and easy, but given the importance of this tool to motivate a sales force and ensure they are focused on the right behaviors and results, it is well worth the effort to get it right. Best of luck!

Practical Sales Compensation – The “Sausage Making”

Friday, March 11th, 2011

The “Sausage Making” stage requires creativity coupled with discipline. The Design Team needs to discuss and evaluate different options against various criteria, yet not get led off track by particularly vocal members or endless discussion meetings. Key tips to consider here include:

• Establishing Core Decision Guidelines / Philosophy – Investing some time on establishing core guidelines and a basic compensation philosophy at the start of the first Design Team meeting can pay dividends further along the line, and ensure the team stays true to the original objectives of the endeavor. From my observations, many teams like to visibly post these guidelines at each meeting, and many even do a quick review before every meeting and before any final decisions are made. The guidelines should include verbiage around topics such as:

-What business objectives you hope to achieve (e.g., more customers, higher margins, successful new product launch, increased customer penetration)
-What behaviors you want to drive in the sales force (e.g., teamwork/cross-selling, solution selling, focus on specific product mix, etc.)
-Whether you want to provide a clear differentiation in compensation for high versus low achievers and reward handsomely for overachievement
-How the team will agree on final decisions (e.g., vote, unanimous, etc.)
-Clarity, simplicity, and compatibility with existing systems capabilities (i.e., a solution that can be feasibly implemented)

TIP – Don’t go overboard! Keep the rules simple.

• Starting the “selling” process – As the team starts to coalesce around plan philosophy, structural fundamentals, initial performance measures, etc., it is time to consider other key stakeholders who should be informed of the progress and team ideas to date. There is nothing worse than investing a great deal of time and effort and then being shot down by a high level executive who disagrees with the team’s direction. Key roles tend to be the top level sales and/or marketing, the CFO or Controller, Sales Operations, and even the CEO in smaller to medium-sized organizations. Communications should be kept simple and swift but allow the stakeholder to understand enough to provide an initial approval. If they are “fed” the information in bite size chunks and understand the logic and flow of recommendations, they are more likely to buy into and support the final plans. This means multiple meetings to ensure there are adequate check-in points which will avoid the potential of them feeling “blindsided” in the end…

TIP – Identify stakeholders early in the process and schedule the meetings well in advance so time is not lost due to lack of availability. This also ensures the team works towards specific milestones / deadlines in the process.

• Creating a check list of decisions and make sure each one is covered – Right at the start of the process, it is a good idea to create a check list of all the various elements of sales compensation design and related implementation topics to ensure the team makes an informed decision about each. Per an earlier point about educating team members, for each topic there are leading practices out there that can serve as a reference point. Some of the more technical aspects of design and implementation that should be covered include:

-Eligibility and Role Clarity
-Goals of Role
-Appropriate Market Positioning – Total Compensation
-Salary vs. Incentive Mix and Upside
-Type of Reward Formula, e.g., Commission, Bonus, Management By Objective (MBO), or mixture
-Performance Measures – Selection and Weighting
-Crediting (Timing and Split vs. Multiple)
-Payout Cycles
-Incentive Structure, e.g., thresholds, upside, caps, etc.
-Individual vs. Team
-Draw (Recoverable and non-recoverable)
-Target Setting
-Administration – E.g., calculations, reports
-Administrative Guidelines – E.g., leave, mid-year new hire, windfalls, etc.
-Communication (Implementation)

Although it looks extensive, this is not an exhaustive list and there may be other issues unique to a particular organization, but it is a good start.

TIP – Check off each item as decisions are made. This will provide a sense of accomplishment for the team and indicate the progress made. Also, review the decisions from time to time to serve as a reminder and bring anyone who missed a session up to date.

• Ensuring entire Design Team is onboard with any decisions made – Once the team has worked its way through the entire checklist, and perhaps reviewed some outcomes from modeling as well, do a quick check to make sure everyone is on board and can support the decisions made. Someone talking behind the scenes about how they did not agree with this or that can be extremely undermining to the successful implementation of a new incentive plan. A verbal commitment in front of the group can help avoid those situations and can also provide a sanity check to ensure everyone understands what is being agreed to and the associated implications.

TIP – If a formal recommendation is being presented to company leadership have each team member personally sign the document and solicit their involvement if there is a presentation to be made.

Practical Sales Compensation
– Getting Started (Part 1b)

Friday, February 25th, 2011

Last time we talked about securing exec sponsorship, creating the right design team, and inclusiveness.

On to communication and educating the team members!

• Communication – A whole separate article could be written about the communication aspect of sales incentive design alone (in fact, click here to see my colleague’s article on this topic). Needless to say, it is extremely important and unfortunately, tends to get neglected in the process as other elements overshadow it. Just ask yourself how you would feel if you knew someone was fiddling with a part of your overall compensation. You would want to what was happening on a regular basis! A good approach here is to structure a communication plan that ties in with the overall project plan, key events and dates. Even if there is nothing particularly new or exciting to report, send a communication out that the team is still working through details, and some idea as to when more information will be available. There is nothing more detrimental to productivity than an endless stream of hypotheses and guesses as to what will happen and when. The more you can do to help sales people understand their pay, the better.
TIP – Create an e-mail address where questions can be addressed – Compile questions with answers and e-mail out to sales force and other parties on a bi-weekly basis.Securing accurate data – During the course of the project, data will be important for a number of things. It can be used to perform historical analyses such as understanding the correlation between pay and performance, the distribution of performance and income within the sales force, and which incentive plan elements are actually driving pay versus what may have been the original intent. Needless to say, the accuracy of data is imperative to ensuring you are making the right observations and drawing correct conclusions. Finally, as modeling is executed upon final plan design, you need to be sure you are comparing apples to apples, past versus anticipated future pay. The most common mistakes I have encountered include:
o Not eliminating partial year sales people (new hires and terminations) – this will usually widen the payout range on the lower end which skews conclusions;
o Using figures from different data bases – use figures that the compensation or sales operations department has used for past pay calculations.
o If you are changing definitions of measures make sure everything is very clearly stated and you run the numbers looking both backwards and forward in time to be able to do those apple to apple comparisons that are critical.

• Educating Team Members – If you have a strong, diverse Design Team, you will get a number of different perspectives, which is a positive. However, the team will likely have varying levels of exposure to sales compensation fundamentals. Having that base understanding about why you would choose a more conservative or leveraged pay mix, the rules around selecting performance measures, and why to have a commission versus a quota/bonus or MBO oriented plan, can make all the difference when it comes to driving consensus around optimal solutions. Keep in mind it is critical that all team members stand behind the final product that results from weeks (sometimes months) of analysis, interviews, and meetings that occur. There is nothing more detrimental to a successful plan launch than individuals disparaging various parts of the plans to the sales force behind the scenes.

TIP – Schedule one session with the Design Team at the start solely devoted to sales compensation fundamentals (a Sales Compensation 101, if you will) – This will create a strong foundation for a successful initiative.

On to the “sausage making”….

Practical Sales Compensation
– Getting Started (Part 1a)

Monday, February 14th, 2011

-By Per Torgersen

To see my preview to this blog series please visit:

So, now…

Getting Started:

The initial flurry of activity should be about building a foundation for a successful effort.  Some of the key elements to focus on include:

  • Securing Executive Sponsorship – Prior to kicking off a project, a high level executive (e.g., VP of Sales, Division/Business Unit President, etc.) should be identified as the primary sponsor for the initiative.  This individual needs to be at a high level within the company and is, ideally, respected and well-regarded as he/she will lend stature to the project, ensure access to and cooperation from the right players, as well as the necessary commitment to get the work completed.TIP – Once you identify the right individual, make sure you spell out the expectations around their role in driving success. Establish a regular schedule to provide them progress updates so they know what is going on, and reference them and include them in communications that go out to the Design Team and the broader organization.
  • Creating the “right” Design Team – There are a number of variables to consider  when selecting an effective Design Team. Decisions around how many and who to include could depend on the level of openness desired regarding the review and redesign of the incentive program.   In general, the Design Team should not be too large so as to make it unwieldy in terms of scheduling and full participation – less than ten is good, seven or less is even better.  Additionally, what I recommend is to include representatives from multiple functions that have a vested interest in the components of the program and its execution.  This typically includes Sales Leadership, Marketing, Sales Operations, HR, and IT (especially if there is a great deal of data accuracy or complexity involved). Additionally, representation from the sales force itself is important for ‘buy in’ – don’t forget you’re ultimately impacting their paychecks!  (I talk about this a bit more below.) Another area of decisions is around personalities.  If there are strong ones (and invariably there are in almost every design team!) whoever facilitates needs to make sure discussions are not dominated by one or two individuals. Otherwise, the end result can be that other team members feel excluded which can then come back and damage support for the final decisions during an eventual rollout of the plans. So, make sure you have a strong facilitator who can ensure an objective, fact-filled, and observation-driven process!
  • Inclusiveness – Although this issue was somewhat addressed in the Design Team topic above, let’s address the broader question of including sales people and others impacted monetarily by the incentive plan.  While it’s true that everybody cannot be on the Design Team, functions like sales, marketing, and sales operations should be tapped into for input, either through one-on-one interviews, focus groups, or surveys (online ones work great!).  Some organizations are uncomfortable with this as problems are raised about other areas like manufacturing quality and supply chain management, which impact a sales person’s ability to sell which, in turn, impacts their ability to surpass their objectives and obtain a high incentive payout.  Organizations often want to keep any and all activities associated with incentive plan design confidential.  My personal observations on this issue are that sales people invariably find out about anything going on concerning their incentive plans, and it can provide leadership with much more credibility in a roll-out situation, if they can highlight that they have been listening to the sales force and other functions, and incorporated commentary into the newly developed plans. This limits the bad ‘surprise’ element!

Next time, I’ll finish this section of “Getting Started” by discussing  Communication and Educating Team Members…

Practical Sales Compensation – An Upcoming Series of Three…Practical Posts

Thursday, February 3rd, 2011

-By Per Torgersen

Anyone who has been through a significant sales compensation design project can attest to how much effort it takes to do it well.  It’s not just about following leading practices in design, like having three performance measures or less, or making sure the sales role in question has some control over a particular measure.  There are so many other factors to consider and manage throughout the process, from selecting the right design team, to securing the necessary approvals. Perhaps the most critical part is effectively “selling” to the sales people you are trying to motivate.  In addition, you may need to navigate around distractions and issues that often come up along the way — big ones, like a re-structuring, or smaller ones like revised forecasts from finance or new product launch dates from marketing.  Maintaining awareness and staying focused is imperative to ensure everything stays on track.  Indeed, you can argue that the process never stops; even after new plans are in place there is a need to monitor how well they are working while also preparing for any changes to incorporate in the following year’s plans (hopefully, however, the level of activity is significantly less intense!).

A great amount has been written about the technical aspects of sales incentive compensation.  Although technical aspects of incentive design are absolutely important and must be heeded, this series is not about those specifics.

Instead, the spotlight will be on the process itself and some of the lesser known success factors – from how to get started, the “sausage making”, and finally wrapping it all up.  As noted in the title, the emphasis in this series will be on the practical activities that need to take place, how to avoid the many pitfalls along the way, and ensure a motivational, fair incentive program that limits leadership and sales force distractions from selling (which is, after all, the name of the game).

A quick preview on what’s to come:

1. Getting StartedSecuring Executive Sponsorship, Creating the Right Design Team, Inclusiveness, Communication, and Educating Team Members

2. The “Sausage Making”Establishing Core Decision Guidelines, Starting the “Selling” Process, Check Lists, and Design Team Socialization

3. Wrapping it All UpModeling, (Even More) Communication, Systems and Reports, Plan Launch, and more!

Stay tuned!