How to update compensation plans to drive sales performance in 2010 Featured

8:00pm EDT July 26, 2010

Facing a severe and protracted economic downturn, chief financial officers are worried about controlling costs, sales executives are worried about retaining and motivating sales staff, and everyone is worried about declining revenues, customer defections and eroding market share.

To alleviate the concerns, seasoned sales executives dipped into their stash of proven recessionary tactics to set interim sales goals and revise compensation plans before hunkering down for the duration. Now that the economy is stabilizing, those recession-induced plans may yield unintended consequences such as over-rewarding lower-tier performers while shortchanging their hard-charging counterparts. Employers must take steps to recalibrate sales compensation programs and revise performance expectations to comport with 2010 market conditions.

“Companies don’t want to be stuck with a 2008 sales compensation program in 2010,” says Matthew Lucy, senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. “Companies are realizing it’s time to reassess their incentive plans in light of the new economy and build for growth.”

Smart Business spoke with Lucy about the hazards of latent sales compensation plans and the best ways to motivate and reward top performers in a recovering economy.

What should employers consider when reassessing sales compensation programs?

Start by reviewing your company’s revised go-to-market strategy and ensure sales rewards and compensation plans are aligned with the company’s current goals (as opposed to the goals of a few years ago). For example, companies may choose to scale back heavy discounting practices in order to bolster margins, after bowing to market pressures for nearly two years. Include profit elements in revised sales compensation plans to encourage representatives to raise prices and sell value over cost. And though there’s rarely a shortage of opportunities for competent business developers, expect increased competition for their talents in 2010. It will be critical to compare your company’s compensation plan against competitors to ensure you can stave off turnover or acquire additional sales talent to meet post-recession business objectives.

Which additional design elements drive performance?

Employers need to ensure that their plan mechanics (for example, thresholds and targets) are set appropriately for the new economy. Companies often lower bonus thresholds during a recession to motivate employees, or they link sales bonuses to company results in order to control costs. But those tactics may simply increase total compensation without increasing revenues and, worse yet, they may benefit poor performers at the expense of top performers. Additionally, payouts for meeting team goals or MBOs can fail to encourage personal performance, which is fundamental to healthy revenue growth. Consider modifying quotas or individual performance goals to benefit sales representatives at all performance levels without compromising plan integrity; use contests and spiffs to help fill the gaps if the recovery sputters.

How can sales managers establish realistic measures and quotas in an uneven economy?

Accurate quota setting is the most overlooked way to reduce costs. Simply setting accurate quotas may reduce overall compensation costs by 10 percent to 20 percent without altering plan designs. Use these tactics as part of a comprehensive quota development methodology.

  • Shorten time horizons. Setting quarterly quotas or allowing midterm adjustments on annual goals will enable more accuracy in a shifting economy.
  • Bottom-up quota development. Individual sales goals are often apportioned from full company objectives, which can lead to unrealistic targets. Quotas need to be a collaboration of top-down and bottom-up quota development. This process should uncover territories that can shoulder more of the growth burden as well as those that may be tapped out.

What’s the best way to use contests and spiffs?

Competitions are the perfect tool to launch new products and services, bolster eroding margins or ease the sting from a temporary setback in the economy. Contests should last three to six months and offer winners a modest reward, because they should not be used as a substitute for effective sales compensation plans and quota setting practices. In fact, set aside no more than 5 percent of the total incentive budget for contests and spiffs at the beginning of the year and consider limiting awards to representatives achieving most of their sales quotas or exceeding performance thresholds to reinforce the importance of meeting goals. Drive the point home by centralizing contests to keep renegade managers from offering rewards that deviate from the company’s core strategy or diminish fundamental sales achievement.

What other tactics drive sales performance?

This is the perfect time to revisit the productivity of your sales force. Finding ways to force sales personnel to decrease administrative tasks and increase face-to-face selling time and other revenue-generating activities is a sure method of driving sales. Companies may have eliminated sales support personnel during the downturn or delayed investments in tools like CRM software, mobile devices or lead databases, but it’s easy to assure the return on these investments as long as sales quotas are increased proportionally.

Matthew Lucy is a senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. Reach him at (310) 551-5603 or matthew.lucy@towerswatson.com.