How Incentive Compensation Has Failed to Evolve

(1)

[ in-'sen-tiv ]

noun:

something which encourages a person to do something

1

An Outdated Compensation Strategy

We have analyzed many sales incentive compensation plans during our careers, and the question that

executives always want answered is whether or not the incentive payouts are appropriately rewarding their top performers. This is an exceedingly good question, because little will demoralize a top salesperson faster than a sense of unfair compensation. However, it also begs another question: Doincentive compensation plans exist primarily to promote certain behaviors or to reward successful outcomes?

To be blunt, most incentive plans simply reward financial outcomes. In fact, a recent study of ours found that

Revenue is a key metric in over 80% of sales incentive plans. Next in line was Profit, with 40% of respondents using that measurement to calculate incentive payouts. What is wrong with that, you might ask?

The problem is that sales management has evolved into a sophisticated discipline, but outcome-based incentives remain a blunt management tool. Gone are the days when we would hire a new salesperson, hand them a phone book, and tell them that we

didn’t care how they got the deals ... just get them! In those days, incentives based on revenue made perfect sense, because there was no meaningful attention given to how the person sold.

Today’s sales forces are very different. We now execute very focused go-to-market strategies that include highly targeted customers, complex solutions, defined sales processes, external business partners, and other intricacies that are deliberately architected through extensive business analysis and planning. Why then do our ‘incentive’ plans ignore all of the specific things that we want our salespeople to do and simply

How Incentive Compensation Has Failed to Evolve

81%

40%

24%

Revenue Profit Sales Objectives Use of Selected Metric Types in Incentive Plans

(2)

Our research did reveal that 24% of the companies had some form of business objective in their incentive plans, most commonly for selling specific types of products or winning certain types of customers. While this is a good start for providing salespeople with guidance, we believe that a robust system of

measurements and incentives must go even deeper. A world-class incentive plan would actually provide direction at the activity level, to ensure that your salespeople are executing your go-to-market strategy as it was intended. This new generation of incentives would truly encourage people to do something.

This is of course not a new concept. Over the years we have had many debates with executives over whether it is appropriate to compensate their salespeople for their actions. Generally, we find people like the idea of exerting such influence over their sales force’s behavior, but compensating salespeople for doing the right things requires a leap of faith. The naysayers that have won the debates in the past typically cite two concerns about activity-based compensation:

1) Activities cannot be reliably measured and reported

2) There is no predictable link between activities and outcomes

We believe that the ground has shifted under the naysayers’ feet, so let us examine each of these objections in the light of our 21st century sales environment.

A New Generation of Technologies

A longstanding objection to compensating salespeople for their actions is that their activities cannot reliably be tracked and reported. This was probably a fair assertion in the days before pervasive information systems – back when salespeople left the office in the morning with products in their cars and came back in the evening with contracts in their hands. What those salespeople actually did during the day could be documented with little more than word-of-mouth or conjecture.

However, sales force automation and other enabling technologies have rendered this objection nearly indefensible. Want to know many calls a salesperson made? No problem – just run a report from the sales force automation system. How many customer sites they visited? Download their GPS data. When they last updated their account plans? Just run another report.

Business Results Sales Objectives

Salesperson Activities

>80% are Compensated for

What the Company Gets

<25% are Compensated for

What They Accomplish

Few

Salespeople are Compensated for

What they Actually Do

How Salespeople are Currently Motivated, Measured, and Compensated

But THIS is what determines

success

(3)

Copyright © 2010 Vantage Point Performance, Inc. 3 Today, if there is any piece of data that sales management wants, there is probably some means to get it. Will it be easy? Not always. But if you want to ensure that your sales force is doing the right things to succeed, then it’s certainly worth the effort. As our sales forces become increasingly “2.0”, our ability to track and report their activities is no longer in question. The only real question is how we choose to use the data.

A New Generation of Metrics

The second common objection to activity-based compensation is that there is no definitive causal link between the activities and the results. This concern should also be relegated to history, since our level of sophistication regarding sales processes and metrics has taken giant strides forward in recent years. A separate Vantage Point research study demonstrated precisely how dependable linkages between activities and outcomes can be achieved. 2

The study revealed that there are actually three discrete levels of sales metrics that relate to each other in highly predictable ways. First,there are metrics ofBusiness Results. These measures such as revenue, profitability, market share, or customer satisfaction are reported at a company level and are used to assess the overall health and success of an organization. Business results are, of course, the eventual outcomes of sales force activities, and these are the metrics most commonly found in incentive plans.

One level down,there are metrics ofSales Objectives. These are measures such as customer retention, new product sales, market coverage, opportunity win rates, or sales force turnover that constitute the sales force’s success at achieving specific goals. These measures provide guidance for what the sales force should hope to accomplish. They are, as named, the objectives that sales forces pursue, and they will ultimately lead to the achievement of Business Results.

At the lowest level, there are metrics ofSales Processes. These are measures of activity such as the volume of sales calls being made, percentage of salespeople using CRM tools, or the allocation of effort across different types of customers. These metrics are directly manageable and ensure that salespeople are doing the correct things correctly. And if the correct things are done correctly, the Sales Objectives and Business Results are more easily attained.

The key insight here is that there are direct cause-and-effect relationships between the three levels of metrics. That is, Sales Processes drive Sales Objectives, and Sales Objectives drive Business Results. For instance, if your salespeople are instructed to begin preparing account plans for their major accounts (a Sales Process), then they should be able to obtain a higher share-of-wallet with those customers (a Sales Objective). All other things being equal, higher share-of-wallet with your major accounts should lead to greater revenue (a

Salesperson Leaves

?

Salesperson Returns

Old World Technology-Enabled World

Salesperson Leaves Salesperson Returns • Sales Force Automation • Customer Relationship Management • Smart Phones • E-mail • Company Intranets • GPS Devices REPORTS!

(4)

The reason that the link between activities and results has been so mistrusted is that organizations typically do a poor job of reverse-engineering this chain of events during their strategic planning process.3_{Thought leading}

companies have started to ask themselves the right series of questions to devise a plan of action:

• What Business Results do we want to achieve? • What Sales Objectives will lead us to those results?

• Which Sales Processes need to change in our sales force to achieve those objectives?

When these three questions are carefully considered, the link between activities and results is clear and the metrics become dependable enough to include in incentive compensation plans.

The Next Generation of Incentive Plans

With the two most common objections to activity-based incentives now in our rear view mirror, how should our incentive compensation plans evolve to reflect our new capabilities? They should be

redesigned with a new goal in mind – not just to reward success, but also to direct the behaviors that create it. To accomplish this, incentive plans need a new generation of performance metrics that are derived from a thoughtful planning process and incorporate a mix of measurement types. They should be highly instructive in nature and provide guidance for the sales person on:

• The Results you expect

• The Objectives they must achieve • The Processes they must follow

For example, if you determine that your best chance for increasing revenues next year is to gain a higher share-of-wallet from your existing customers and that account planning activities will you lead to that objective, then you should include three associated metrics in your salespeople’s incentive plans - Revenue, Share-of-Wallet, and Account Plan Usage. This communicates to the sales force both what you want and how you expect them to get it. We contend that this approach is much more powerful than rewarding your salespeople for

generating revenue, yet providing them with no incentive to pursue the right objective or use the sales process that you know will help them attain it.

3_{To receive our article Use Your Planning Process to Ensure Sales Results, please e-mail us at}_{[email protected]}

Business Results Sales Objectives Sales Processes 3. Make changes in your Processes that will lead to those Objectives 2. Select Objectives that will ensure those Results 1. Identify the Results you want to achieve

Designing a Predictable System of Causal Metrics

(5)

achieved because your salespeople do the right things. In the past, there was little choice but to use high-level financial outcomes as the basis for incentive compensation, because we couldn’t measure behaviors and we didn’t trust that they led to results. But now we have the technology and the knowledge that will enable us to direct, measure, and reward sales force behaviors. Incorporating measures of Results, Objectives, and Processes into incentive plans will not only bring our compensation strategy into the 21st

century, it will also provide sales leaders with a precision management tool that is up to the challenge of managing the modern sales force.

The next steps

to implementing your next generation of incentive compensation plans are to identify the right set of performance metrics and to carefully redesign your plans. Vantage Point Performance can help you

through

Training

,

Consulting

,and Workshopsthat incorporate the latest sales management best practices.