Paying for performance

For CEOs, success is predicated on the
growth of the organization’s top and
bottom lines. The sales force is usually accountable for the lion’s share of the
required revenue increases, and they are
often motivated toward the goals that are
outlined in the variable compensation plan.

Although sales compensation needs to be
considered a strategic endeavor, it becomes a tactical one when CEOs quickly
attempt to fix the compensation structure
if they find that it is not producing the
desired results. So says Scott Barton, senior consultant with Watson Wyatt
Worldwide. He says that there are three traditional reasons behind a CEO’s quest to
find a better sales compensation structure:
incentive expense is too high in relation to
revenue growth; plan designs are inconsistent, fragmented or unclear across the
organization; and sales management
believes cash pay-out opportunities are not
competitive.

“Our research shows that a number of
factors define high-performing sales teams
versus low-performing ones,” says Barton.
“As we start to look under the hood at sales
compensation, we often find a disconnect
between the desired performance and the
financial incentives.”

Smart Business spoke with Barton
about the current trends in sales force
compensation and how CEOs can align
financial rewards with the company’s
business strategy.

How can CEOs structure global compensation
for sales?

Find the appropriate balance between
global consistency and local specialization.
A global structure should include a common comp philosophy and set of metrics
for monitoring plan effectiveness. Local
managers depend not only on competitive
total pay opportunity for finding and keeping sales talent, but also a plan structure
that fits with regional norms. Local attitudes toward at risk pay and tax policy are
common differentiators.

Getting a handle on how each region pays
its various sales roles is a huge endeavor in
a fragmented, global sales organization.

Ultimately, though, the CEO needs to
measure and compare the sales comp ROI
from each geographic region. What matters for most companies is growth —
growth in revenue, profit and acquisition of
new customers.

CEOs need to understand what’s limiting
growth. Sometimes it’s the company’s best
customers. Watson Wyatt research shows
that salespeople in poor performing companies spend much less time acquiring new
business than their high-performing counterparts. Companies with a culture for
business development have an edge for
growth. The energy of high-growth sales
teams and cultures contrasts sharply with
that of organizations engrained in account
management.

By comparing key growth stats, monitoring pay and performance results and experiencing first hand the sales culture in each
region, the CEO should have a good foundation for building a global sales compensation structure.

Are CEOs including a broader base of
employees in variable compensation?

We are seeing a trend toward inclusion
of staff not traditionally eligible for variable pay plans. Drivers include creating a performance-based culture, greater sense
of urgency and teamwork. For example,
operational teams and IT project managers might now have a portion of their
pay tied to goals that contribute to sales
productivity.

There’s also a movement toward team-based compensation that includes employees who have a direct effect on customer
retention and the overall customer experience. In the past, sales and those responsible for customer satisfaction were measured and compensated separately; now,
some plan elements cross over, creating
greater focus, accountability and synergy.

How can CEOs align sales compensation with
the company’s goals?

Make certain the salespeople can influence and are accountable for the company’s
goals. A common disconnect is to include in
the incentive plan measures for which the
reps have limited influence, such as profitability or product mix. The goal is to pay
salespeople for what’s important to the
company. To hold back pay from otherwise
productive salespeople because of poorly
performing lines of business is a dead end.
Effective salespeople go to where they can
influence their results and income.

What’s the best way to structure a plan to
drive sales force effectiveness?

Plan design should be centered on how
you want the sales people to spend their
time. Compensation should be directly
connected to results. Quotas are the
bridge. Putting sufficient pay at risk into
the plan — on average about 30 percent of
the target pay should be variable — helps
keep employees engaged and contributes
to meaningful pay-for-performance relationships.

SCOTT BARTON is a senior consultant in the Compensation
Practice of Watson Wyatt Worldwide’s San Francisco office.
Reach him at (415)733-4263 or [email protected].