The economic downturn and the pressure on costs have made many organisations review their sales compensation plans
There is opportunity in simplifying and increasing the frequency of performance linked compensation targets and goals
Like the Mad Hatter’s “Why is a raven like a writing desk?” in Alice in the Wonderland, I couldn’t help thinking that the usual approach to Sales Compensation often makes Sales staff ask this question – “How is my performance linked to my compensation?” And for most, the answer is similar to the Mad Hatter’s response: “I haven’t the slightest idea!”
In a sales organization, a discussion on sales compensation is usually a discussion based only on the incentive plan! The typical approach is to set the fixed pay closer to the median of the market with incentive as the avenue to attain better mark-to-market percentile positions. The ratio of fixed pay to variable is sometimes at a low of 80:20 and sometimes as high as 40:60. Most managers desire to automatically weed out underperformers through lower compensation and keep their performers on their toes always with a significant variable element. Depending on the industry or the product, incentives are mostly paid out monthly or quarterly and occasionally half-yearly. Annual payments are rare for field staff but seen as a practice for regional sales roles as annual payments end up being considered as a bonus and runs counter to the philosophy that reward should be as close to the actual performance to be effective and drive performance.
Dangling the proverbial carrot is a skill that sales managers vie to attain excellence in and sales compensation is heavily biased by this philosophy. The key objectives of sales compensation should be:
- To drive higher sales measured most often in units of sales in order to create good performance and sustained growth over the long term.
- To promote customer stickiness by cross selling additional products with product wise thresholds.
- To create guidelines and rules that prevents staff from “gaming” the system.
- To drive prudent credit decisions in case of financial services with hold backs of payments earned.
- To drive higher participation in the incentive plan
Unfortunately, the intention to be comprehensive, balance all products, set detailed guidelines and encourage participation often ensures that many plans suffer from the following issues:
- Targets set at the head office and assigned to regional/local offices out of sync with actual potential.
- Complex plans with too many targets - thresholds are either easy and do not change behaviour or too hard
- Sales Contests over and above the incentive plan run to cover short term dips in performance in specific products resulting in sudden increases in sales (often with mis-selling) and drop in performance after the contest – almost like withdrawal symptoms!
- Managers goals often not aligned with the sales staff goals – objectives of profitability often conflict with the ‘more sales units’ goals of the sales staff.
- Too many caveats leaving staff frustrated or unclear on how much they will earn or lose.
- If performance trend is below minimum threshold during a particular month, many stop trying. Once threshold for earning is achieved, some stop trying to achieve beyond the threshold and instead hold sales leads and postpone to next month to help attain the minimum.
- Low performers continue in the system while strong performers get disenchanted with the tougher targets and new rules.
- High fixed variable ratios make financial coping difficult for the strong performer who has a couple of bad months – the drop in incentives hurt quickly and keep people on a constant treadmill.
The economic downturn and the pressure on costs have made many organizations review their sales compensation plans. Employers have had, on the negative side, to deal with employees mis-selling resulting in losses, lack of adequate customer due diligence and outright fraud. In many companies, lower sales across all sectors have automatically lowered incentive earnings. Coupled with higher inflation, the lower earnings were a double squeeze for employees.
As organizations try to address these issues, they have created some new trends, which are:
1. Balancing fixed and variable pay with a bias to reduce the variable or ‘at risk’ pay.
2. Organizations particularly in financial services hurt by the credit crisis are focusing more on ‘responsible selling’ with an increased trend to back end part of the payments to be released after confirming that no mis-selling or poor credit performance has occurred.
3. Tighter performance management metrics to ensure that sales plans are more closely intertwined with organizational objectives – a closer link with indicators of profitability.
4. Reworked communication to ensure greater comprehension.
5. Increased focus on audit and due diligence of construction and payments of Incentive Plans.
However there are clearly several ways to improve overall sales management and align compensation more closely to longer term objectives.
Balance Short Term & Long Term Parameters
Move the typical short term bias on objectives and targets towards a balance between the short and long term. This needs to be clearly specified in goal sheets and shared through levels of management. The reward could be through a pre-defined amount as a bonus if long term parameters are met. While this approach clearly puts money behind the organizational objectives versus individual objectives, a defined sum could also promote retention.
Performance Management reviews tend to be an accumulation of monthly target achievement and people issues often don’t get adequate focus. As these reviews lead to the annual compensation review, a balanced scorecard approach with equal weightage to people, process, customer, business and financial goals would be a useful method to temper sales at any cost. This will support both audit and team objectives, help identify the individuals with potential for sales and business management and avoid making bad managers out of exceptional sales officers.
There is a huge opportunity in both simplifying and increasing the frequency of performance linked compensation targets and goals. Consider replacing complex policy documents and caveats with ‘Earning Tables’ which show the actual rupee value that will be earned for every unit of performance. Clearly specify deductions or take outs and leverage technology to keep employees informed on a daily basis if possible of where they stand on the earning table or what additional effort is required to move to the next slab. Earning tables should be easy to understand and there should be no hesitation to put these on notice boards or to provide a sales compensation payslip on a monthly basis just like a monthly payslips.
It is often said that people join a company but leave their supervisors. Lack of recognition is often cited as a key reason for disengagement and ultimately ‘surfing the thresholds’ performance and attrition. Many organizations do a great job of a structured recognition program that transparently identifies/ classifies performers into groups with clear benefits to graduate into the higher category. One retail organization has a guaranteed overseas trip with recognition from the CEO for their ‘Club 100’ each year. A pat on the back, an appreciation card, small awards, dinners, et al, have a big impact when delivered with a personal touch.
Transparent Career Paths and Development Plans
Slightly obtuse perhaps, but better compensation can be delivered if a structured and transparent career path is published that allows employees to see what they need to achieve both in terms of performance and skills to get promoted to the next level in the organization. The next level should represent a higher compensation level and with a clear enhancement of responsibilities that justify the higher compensation. It is essential that these steps are not just sales target achievement steps but include, for instance, certified skills relevant to the next role like managing through metrics, advanced product expertise and coaching for performance. Focused development by design is often a cherished reward!
Design for loyalty and retention
Appropriate elements in the compensation structure that support retention both in the same role and in the organization linked to performance can be added. Reward a sales officer to remain a sales officer if that is what he is best suited for rather than try to make him a sales manager and setting him up to fail. Some innovative methods have included a role specific retention of part of the monthly incentive with a matching contribution from the Company that is paid out if the employee remains with the organization for between three to five years. Another innovation is share of branch level profitability on an annual basis provided one remains part of a particular branch for long.
In summary, the clear direction fuelled by the downturn is a focus on responsible selling with rewards spread over the lifecycle of revenue from the product with a balance of audit and compliance. Recognition and developmental focus are useful non-cash high impact rewards that can help align heart and mind with the organizational objectives.
K.S. Kumar is Executive Vice President, Human Capital, Fullerton India