Posts Tagged ‘upside’

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.