Underperformers – Why Sales Compensation Rarely Offers the Best Solution

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!