Thursday, November 24, 2005

Is your Sales Compensation Plan aligned with the times?


At a recent business meeting I was seated next to the president of a local business sharing information about our respective companies. My tablemate explained that his firm had no need for the services of a sales incentive plan consultant, as he had not changed his sales compensation plan for ten years. He felt this was a major accomplishment. Imagine his surprise when I advised him that a sales compensation plan has a three- to five-year life and then requires major overhauling! Using a ten-year-old plan could be costing him significant sales volume and encouraging employee turnover, as sales employees may not be focused on the organization's strategic goals and may not be rewarded appropriately for their efforts.

In today's fast changing world, the three to five year rule may be too long. More and more companies are reviewing their sales compensation plans annually. With the rapid changes in technology, changes in the competitive arena, and changes in strategic planning, presidents and owners of businesses need to review sales plans more frequently to determine if the plans are aligned with the company's objectives.

In the past, product innovations took several years of design and development before coming to market. Chrysler recently developed and brought a new car to market in just eighteen months using computes and other advanced technology. Some products, such as personal computers, are almost out of date by the time they are installed. As product life cycles and innovations change more rapidly, the methods and degree of persuasion change thus the job of the sales employee changes. As the job changes, the method of compensation needs to be reviewed to align the employee's goals with those of the organization. Offering rewards based on a set of selling skills for one type of selling may not provide the appropriate reward, as new and different skills are required as products change.

A review of the sales plan is needed to confirm that the rewards sales employees receive are commensurate for their efforts and skill sets utilized to achieve their sales goals. The Internet has opened new markets and new methods for marketing and selling products. A sales plan designed to pay a sales employee for calling on customers and presenting the product or services in a traditional manner does not pay appropriately for a sales employee who is able to generate sales using the Internet. Companies could find themselves overpaying sales employees if the earnings formulas are based on personal selling while the employee is able to sell significantly more using new technologies. One could argue that more sales result in more profit for the company, but most plans accelerate the earnings rate once the sales target has been achieved. If the target or quota does not reflect differences in selling strategies, sales employees who are able to utilize new technologies will prosper and other sales employees will become de-motivated and possibly leave the organization.

The competitive marketplace is constantly changing. Products once sold by specialty retailers are now appearing in discount stores. The sales employee selling to large discount chains has a different selling job than the sales employee selling to specialty stores. Sales plans should be designed to reflect this difference.

Today, businesses find themselves constantly revising their business plans to be successful in this fast changing environment. The "most important" product this week may not be the same "most important" product from last week. Sales employees tend to sell the products they know best even if they do not exactly align with the company's objectives. A ten-year-old sales plan may not be flexible enough to provide focus for sales employees in these times of product emphasis change.

There may be sections in sales plans which are "bombs" waiting to explode. A few years ago the sales plans for cellular telephone salespeople in Southern Florida provided commission earnings based on units sold. There were step levels where the commission rate increased as sales volume increased above target or quota. Along came Hurricane Andrew and cell phone sales skyrocketed. There was no other means of communication; people had to purchase cell phones to handle daily activities and to communicate. Sales incentive payments also skyrocketed but through no increased effort on the part of the sales employee. That plan was later changed to exclude an amount of sales generated by actions beyond the sales employee's control.

We've found that the director of sales or the president designed most sales compensation plans in smaller companies. The plans were biased toward the designer's interests. Plans often had unrealistic quotas, payment schedules and product goals that focus the sales employee on the designer's interests, not necessarily the interests of the organization.

A sales compensation plan is not a "one size fits all" proposition. The organization needs to review the goals for the organization, each product line, each sales employee's abilities, and desired profit contribution for each product line. Sales compensation plans should align the employee's goals and rewards with the achievement of the organizations goals and strategic objectives.

Companies tend to think of summer as a time for reflection and vacation, but this is the time to review the sales compensation plans. By beginning now, companies can review the plans, model possible changes, cost out changes, design new plan components, and prepare communications programs so that revisions will be ready for introduction before the new year begins. Waiting until November to begin a sales compensation plan review usually results in a quickly formulated, untested, poorly communicated plan, which is not accepted readily or favorably by the sales force.

Craig N. Clive, CCP is a resource to organizations designing and implementing strategically focused, performance based employee pay and rewards programs and is a Principal at Baylights Compensation Consulting, LLC in Ellicott City.

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