Tough lessons Featured

8:00pm EDT April 25, 2008

After the first set of case studies detailing the missteps of the banking industry prior to the recent avalanche of problems, there’s already one key lesson from the in-depth reviews of the industry’s sales management practices that should gain the immediate attention of all CEOs, says Scott Barton, Senior Consultant for the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Barton’s top observation: Don’t wait until revenue growth stalls to review the ROI of your sales force.

“When the banking industry was in the midst of an unprecedented growth cycle, there just wasn’t much attention paid to sales force effectiveness,” he says. “Management was adding people and not caring about the return it was getting for its compensation expenditures, until net income plummeted. Now, there’s renewed interest in looking at what caused the disconnect between revenue and compensation expenditures.”

Smart Business spoke with Barton about learning from the banking industry’s renewed rigor around sales force effectiveness.

What was the first problem you found?

The first issues that created sub-par sales performance in the banking industry were poorly defined sales roles and a general lack of discipline in reviewing how the sales team was spending its time. We know from our research that top performing sales teams spend 20 percent more time in new business generation activities when compared to the time spent by average performing teams. This produces a much greater return for the associated compensation expenditure when compared with the cost for client maintenance or administrative duties. Management should review the sales staff’s time allocation between hunting and farming activities and make certain that variable compensation is calibrated to reward more generously for growth, and limit the staff’s activities that don’t directly correlate to new customer development and revenue growth.

Did adjusting the sales structure help?

Some banks are now breaking out their sales positions into roles that are strictly dedicated to either new business development or customer maintenance. What they found is that one person can handle larger volumes of existing customers, so the company achieves better revenue leverage for the allocated expenditure. Banking executives also found they could hire for specific attributes when hiring strictly for hunters or farmers, instead of hiring for a composite profile for blended roles, and they achieved better results from dedicated business development and customer maintenance personnel simply because of increased focus. This type of functional realignment also affords management greater visibility into the disparate cost detail and performance of the two groups.

Was there sufficient accountability for profitable business generation?

Many organizations wind up with a poor sales compensation ROI because the basis for variable compensation is business that does not contribute to profitable growth. Last year was a tough one for many commercial lending organizations, but you wouldn’t have known it by looking at some of their relationship managers’ pay checks. Relatively high base salaries and incentive metrics tied to overall asset volume meant a portfolio could be flat and unprofitable, but the relationship manager made good money. Similarly, new business development officers were paid on new loans, many of which ended up being bad bets for the bank. Management should ensure each sales person carries a goal that covers a portion of the company’s revenue or margin objectives. Commission-only plans, based purely on volume, are appropriate in some instances. But too often we see this disconnect between company objectives and sales rep pay, where goal-based plans at the rep level would have closed the gap.

What’s the best way to align sales compensation with company profitability?

Start by understanding how each sales role impacts revenue or margin. Establish individual goals based on these measures. For example, if a business development rep has considerable influence over revenue volume in an assigned territory, base the goal on revenue volume and the forecast of growth for the territory. Setting the goal on measures that do not impact revenue or margin, or financial measures over which the rep has little influence, won’t help the bottom line. Similarly, setting the goal too high, or providing only limited variable compensation opportunity, won’t sufficiently motivate the rep.

Does sales turnover impact profitability?

Some critical client-facing employee groups still churn at an alarming rate, which in turn creates customer churn. Low pay often results in poor morale and disengaged staff; we know from our research that profitable revenue growth is a function of having engaged and skilled staff. Develop and maintain an effective communication strategy that reinforces the alignment of business change with changes in customer preferences; offer junior-level employees career development and training to foster a longer-term perspective. Also, calculate the cost of lost customers and review your sales compensation levels to make certain it’s adequate for your exposure. It can be very expensive if a sales person leaves, taking a customer with him.

SCOTT BARTON is a Senior Consultant in the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Reach him at (415) 733-4263 or scott.barton@watsonwyatt.com.