Sustainable behavior change as a strategic imperative
Defining The Riverbanks Cygnal Synygy April 2008
1. DEFINING THE RIVERBANKS:
Balancing Consistency &
Flexibility in Plan Design Across
Roles, Divisions & Geographies
Beth Carroll
The Cygnal Group
2. My goal for today . . .
• To help you bring order to the chaos that is
otherwise known as “sales compensation
design and management”
3. Re-designing, developing or simply having
sales compensation plans creates “noise”
IT: We need to keep this SALES MGR: I need a
simple! How can we track better comp plan that
this data? I don’t have will pay top dollar to top
HR: How can I enough resources! reps. I can’t hire
support the line
anyone with the current
and yet keep a
plan and my best rep is
handle on how
threatening to leave!
the sales reps
are being paid
CFO: We’re paying
when the sales
the sales reps too
manager wants
much as it is. Now
each rep to
they want a NEW
have his/her
comp plan?!
own plan!
SALES ADMIN:
Can we try an
annual payout with REPS: We have a hard
one measure this enough time making
year? quota as it is! Now they
want to change the
plan? Get ready for
more work for less pay!
MARKETING: I need to
really drive sales of my
products – can’t we have a REPS: I hear XYZ
REPS: There
different commission rate Company pays 12%
goes college
for each product? commission – maybe I
tuition!
better give them a call!
4. Which can quickly become deafening with
several roles, LOBs or geographies involved
• Increased potential interactions between roles
• Increased number of performance measures and ways they can be
calculated
• Increased number of business objectives, which often times are
conflicting or contradictory across LOBS or geographies
• Different compensation structures for different geographies which can
create problems using a standard target incentive
• Different legal requirements for different countries in regard to
incentive pay management
• Different data systems and the inability to pull data from a single
source
• More complicated selling roles requiring more sophisticated designs
• ETC., ETC., ETC.
5. In trying to satisfy all constituents
plans can become so complex that. . .
• Plan administration, management and redesign may take an
inordinate amount of time
• The reps and sales managers may not understand the plans and
there is no one who can adequately explain them
• The plans may be inconsistently administered, with rules being
misinterpreted or missed
• The plans may be inequitable and misaligned with the selling
roles
• There may be errors in pay calculations
All of which can destroy any value being
created by the plans
6. With all these risks, you may think a “one
size fits all” program sounds appealing
• And you are not alone -- one of best
predictors of what a sales compensation
plan will look like within an organization
is. . .
. . .what OTHER sales compensation plans
look like within the same organization
7. So, how can you balance the need for
consistency and flexibility in plan design?
1. Understand your organizations’ need for and ability
to handle complexity (know how big your boat needs
to be and be sure you can afford it)
2. Define the parameters that you are comfortable
operating within (define the riverbanks – what must
be consistent and what can be customized)
3. Limit the use of factors that increase the complexity
of plan designs (“boat swampers”) to only those roles
where absolutely necessary (or buy a bigger boat!)
4. Avoid hurricanes
8. 1. Understand and be realistic about your
organizational needs and resources
LOW HIGH
YOUR NEEDS
< 10 How many sales reps do you have? 1,000’s
One or two How many different selling roles do you have? More than 50
Simple – single point How complex is your selling model? Complex – channel sales
direct sales and/or multi-rep selling
YOUR RESOURCES
First Time; reps How many times have you designed or Too many to count
were on AIP prior redesigned a sales compensation plan
No Do you have an automated incentive calculation Yes
system already in place?
No Do you have an automated CRM system already Yes
in place?
No Do you have a resource (either internal or Yes
external) dedicated to managing your sales
compensation programs?
9. 2. Define the riverbanks – increase
consistency to decrease complexity
LESS MORE
COMPLEXITY YOUR OPTIONS COMPLEXITY
Max of 3 with Leverage Number of Pay Mix/Leverage Choices Unlimited with Leverage
pre-defined options open
Fixed $ Target Definition of Incentive Target Mix of Fixed $ Target and %
of Salary
Consistent Rules Use of Caps No common guidelines
Consistent Rules Payout Curve Parameters & Relationship of No common guidelines
Manager Curves to Rep Curves
2-3 Number of Performance Measures Open*
*Still should be <=4, min 20% weight
Annually Most Frequent Pay Period Weekly
Consistent Rules Timing of Sales Crediting Defined by Measure by LOB
Consistent Definition of Financial Metrics Defined by LOB /
Geography
Consistent Rules Transfers, Terminations & New Hires Defined by LOB
10. What would consistency look like for a
moderately complex sales organization?
Design
Possible Applications Pre-Defined Choice
Parameter
Account Manager (and all
80/20 with 2.0 leverage
Manager Roles)
PAY MIX AND Territory Manager or Channel 70/30 with 2.5 leverage
LEVERAGE Sales
Contract Seller 60/40 with 3.0 leverage
Transactional Hunter 50/50 with 3.5 leverage
Individual Contributor, Team
TARGET Fixed $ target
Leader and 1st Level Mgr
INCENTIVE
AMOUNT Second Level Managers and % of Salary aligned with AIP
Sales Executives guidelines
Uncapped for all IC, TL and
USE OF Financial Measures
1st Level Managers
CAPS
Strategic Measures Capped
11. What would consistency look like (cont’d)?
Design
Possible Applications Pre-Defined Choice
Parameter
Pay at Threshold 50% of target incentive
Over-Excellence Slope reduces by 50%
PAYOUT 10th and 90th from Historical data (if
Determinant of Ranges
CURVES reasonable); 80% to 120% if no data
At least 5% points narrower at both
Manager Ranges
ends
Preference is for one financial and
Minimum
NUMBER one strategic
AND TYPE Maximum No more than 4
OF No hurdles and no linkages between
MEASURES Use of hurdles or linkages measures; can use modifiers as
secondary measures if desired
MOST Highly Variable Mixes (50/50 or 60/40) Monthly
FREQUENT Less Variable Mixes (70/30 or 80/20) Quarterly
PAY PERIOD 2nd Level Managers and Executives Annually
12. For the last 3 choices, you will likely have
“guidelines” more than rules
• Timing of sales crediting
• If you do not have an EIM system, be very careful about allowing too many
different crediting options that are not aligned with your accounting
systems’ normal reporting cycle
• Explaining numbers that don’t “match” can be a big drain on accounting
staff, sales managers, and sales reps as they try to line everything up
• Definition of financial metrics
• This is often an issue for global companies as different geographies may
define “Gross Profit” to include or exclude different things
• Transfers, terminations and new hires
• Typically companies will have standardized rules for calculating payments
for transfers or terminations
• New hire policies may need to be customized by line of business and/or
by selling role to allow for appropriate cash flow during “ramp up” time
13. But, one size will not fit all, and well-
designed plans still must allow for flexibility
• Allow design teams freedom to select:
• Performance measures
• For more control, you can use a predefined menu of choices and
stipulate the use of financial and strategic measures
• When designing for common roles across geographies, allow for a
choice in secondary measure selection to fit the needs of the region
• Mechanics
• Again, you can use a predefined menu of choices or at a minimum
review the measures and eliminate unnecessary differences
People tend to gravitate toward what is comfortable or known, so it’s
a small modification from one plan to another that will ultimately get
missed or forgotten six months from now
14. 3. Boat Swampers – small boat owners should use
these options with extreme caution
• Draws
• Charge backs/claw backs
• Credit splitting
• Manual adjustments or “fine print/exception”
rules (commonly done for sales from inside lead
sources)
• Manually tracking POS data
• Strategic Objectives tailored to the individual
15. Dealing with the objections – “but we
MUST have this (complexity)!”
• The complexity at issue will certainly fix a
real issue (the objection is likely valid),
but the problem to be addressed is not the
validity of the issue . . .
. . . but the cost required to deal with it
in the plan design
16. Be sure to consider all costs
when weighing the choices
Cost of not Cost of
addressing the addressing the
issue issue
• Often the costs of not addressing • Conversely, the costs of addressing
a unique circumstance are an issue may seem insignificant
presented as being nearly life or until you actually try to implement
death, for example: the plans:
• Lost revenue • Cost to develop and document
• Lost customers new designs
• Reduced motivation • Additional administration costs
• Increased turnover • Costs of misunderstanding and
• You will need to help misinterpretation
management pull back from the • Loss of trust and cost to correct
emotion involved and put real errors in plan calculations
numbers to the cost so you can • You will need to ensure you are
compare apples to apples considering all of the hidden costs
before making a decision that
allows for increased complexity
17. Doing a quick 2 x 2 can often help the
design team come to a balanced decision
HIGH
•If the issue of charge
• Change crediting point to
backs (aka “claw M later in cycle to catch
• Process manual majority of charge backs
backs”) has been raised A adjustments with • Change measure used
as an important “rule” G defined process and
audit checks
• Decrease weight on
measure & ignore or do
to be written into the N bulk processing 1x per
qtr
plan designs but it will I
require manual T • Ignore
adjustments, use a U • Ignore
• Do adjustment once or
• Change sales crediting
point
table to determine the D twice a year • Bulk process adjustments
1x per quarter
best approach E
LOW Frequency of Occurrence HIGH
18. Another solution is to increase
resources to allow for increased complexity
• Hire (or outsource) a dedicated sales compensation manager to
have oversight of all of your sales compensation plans
• Centralizing the governance and management of plans can greatly reduce
unnecessary complexity
• However, the person in this role should be a sales compensation expert
who understands the needs of different selling roles or you may end up
with a misapplied “one size fits all” approach
• Buy (or develop) an incentive management system that
integrates with your company financials to eliminate the manual
processing required for most spreadsheet farms
• Recognize that there is organizational learning that will occur
with each change to your sales compensation plans
• Take small steps when making changes, to gauge the ripple effect on your
resources (there can be many unexpected effects of the smallest change)
19. 4. Hurricanes – to be avoided at all costs,
no matter how big your boat is!
• Using any of these measures can destroy
the benefits you might have gained from
an otherwise well-designed and well-
managed sales compensation plan
• Subjective measures allowing manager discretion
• Measures that require reps to self-report results
• Activity based measures (e.g., # of calls)
• Front-line managers developing their own and their direct
reports’ incentive plans
• Un-monitored and un-checked plans (sales managers calculate
and submit to payroll without audit process)
20. Concluding Thoughts
• While just about anything is possible from a
design perspective, many things are not
practical
• For a number of design parameters (e.g., pay
mix, payout curve mechanics, pay frequency),
there is little justification for allowing unlimited
choices no matter how complex the organization
• Sometimes the cure is worse than the disease –
always compare the value gained to the cost of
implementation and administration