August 3, 2012

Incentivized to Win

By Henry Canaday

While the recession has technically ended, the economy still presents a tough sales environment, and sales reps still need incentives to get out there every day and face the bruising world of delayed decision making and rejections. Cash and noncash incentives continue to play a critical role in maximizing revenue and profit.

But managers have also learned important lessons from tough times. Software vendors are allowing economical implementation and precise targeting of incentive plans and faster payout of rewards – a real plus for motivation. Further, some companies are taking another look at long-term sales incentives to hold on to the best reps they kept during the downturn but who may now be looking at other employment options.

“Chief sales officers are doing it right coming out of the recession,” argues Dennis Spahr, vice president of sales effectiveness practice at Sibson Consulting.  They are looking to grow profitably.

Spahr sees several trends in sales performance compensation. First, firms are simplifying sales roles and the compensation plans that go with them. “There are no unique salespeople,” explains Spahr. “All are assigned a sales role and a compensation plan for it.”

Instead of just controlling the total cost of sales at a fixed percent of revenue, managers are paying more for new business and less for account management. “The increase will be in variable comp, and base will grow at inflation or less,” Spahr predicts.

In general, metrics will remain the same. There is a bigger focus on customer satisfaction, but that is hard to measure. Spahr says, “[Customer satisfaction] must be measurable, strategic, and controllable by the rep. Surveyed customers will praise their reps or simply not respond, so firms are looking for other measures, such as repeat business or recurring revenue.”

Spahr is seeing firms start to put money back into spiffs and noncash rewards. Of the companies he’s reviewed, 72 percent use spiffs, and most of those companies spend 3 to 10 percent of total incentive dollars on spiffs.

Fully 80 percent of Sibson-surveyed firms use revenue as a performance metric. Almost as important is the measurement of profit margin and company objectives. Only 20 percent of firms used margins in an earlier Sibson survey. Most recently, however, 46 percent do. A minority of firms use long-term incentives, mostly for top execs in high tech.

Firms are paying more attention to who designs and controls performance compensation: top management, regional managers, or line managers. Spahr predicts firms will practice tighter management of target pay levels and move money to top performers and away from those who fall behind.

Robert Bentley, associate partner at Aon Hewitt, estimates that about 20 percent of firms use long-term incentives for sales. But in recent roundtables, Bentley is seeing increased interest in long-term incentives.

“Lots of sales reps got beaten down during the recession, and if another company wants to take them, they could go,” Bentley says. “So we may want to make them feel better and give them ‘golden handcuffs.'”

Bentley is seeing anecdotal evidence that firms will move in this direction and thinks it is a good idea. “You could hold on to your best reps and also differentiate yourself in attracting new reps.”

Long-term incentives include restricted stock, stock options, or phantom stock. Phantom stock is based on an estimate of company value for firms without public shares. Long-term incentives can also be cash that’s deposited into an account but not paid out until later.

Recognition at award ceremonies and at trips and conferences are also long-term incentives. Bentley distinguishes these rewards from spiffs aimed at hitting short-term goals or selling new products.

“We are looking at long-term incentives, but not stock or stock options,” says Ben Torres, leader of global sales compensation at D&B. Rather, the business-intelligence giant is considering using deferred cash rewards based on recent years’ performances.

“It would vest and pay out over no more than three years,” Torres notes. “We want to reward our most consistent performers, who tend to be our top performers, because we want to keep them.” D&B plans to implement the scheme late in 2012 for application in 2013.

D&B also wants to get more reps making commission. “We have not had the growth we had in past years, but if people are working hard, we want to reward them,” Torres says, “so we may lower thresholds.” Incentive thresholds of 130 percent of quota might thus be lowered to 115 or 120 percent.

Amit Gupta, regional vice president at Synygy, says he is seeing greater adoption of margin-based metrics for incentive compensation and more targeted goals that combine specific accounts and channel mix.

David Cichelli, senior vice president at The Alexander Group, says many changes in performance compensation occur simply because companies change: “Some companies start with commission because they want to grow fast. Then they get national accounts and midlevel salespeople and managers who have to be paid differently. Then they get bigger and need profit, so they have to pay for profit. Then they have a mature market and have to sell solutions, so they have to pay differently.”

Performance metrics change most frequently. Most companies make some change in sales compensation each year, but firms generally overhaul their entire compensation plan once every five to seven years when business objectives have fundamentally shifted.

Cichelli predicts commissions will increase 3 percent in 2012, as will base pay. Fast-growing companies that do not have much cash tend to use long-term incentives, he says. When growth slows to less than 20 percent, boards worry about stock dilution. He argues that stock and deferred compensation are a negative way of paying long-term incentives. “Why not increase the accelerators based on how long employees have been with the company?” he asks. “That is a positive long-term incentive.”

Cichelli sees many firms struggling now with whether to pay international reps according to global standards or match local cultural habits. He believes global best practices are generally the right guide, except in such countries as Russia, China, and Japan, where teaming is very important.

Automating sales compensation has been very helpful, Cichelli thinks. “It improves effectiveness, reduces errors, makes comp more credible and correct, and allows much better analytics.”

Xactly, a top compensation-automation company, sees small companies as very similar to larger firms in their incentive programs. But Steve De Marco, vice president of corporate sales, notes that small companies tend to have multigenerational sales teams, and many of those salespeople are Gen Y. With baby boomers coming back into the sales force and joining salespeople from Generations X and Y, firms must pay close attention to the ways in which different generations are motivated by noncash incentives.

“Generation Y likes team-building events and technologies like iPads,” De Marco explains. “Generation X wants a balanced life, for example the ability to work from home two days a week. Boomers like prestigious rewards, such as special parking slots and their name on a plaque.”

Xactly CEO Chris Cabrera says all firms must ensure that their incentive-compensation plans are fair, because now every salesperson knows what everybody else is making, both in their own firm and at rival firms: “The plan must be competitive in the marketplace.” Cabrera  is seeing more variable pay for reps and firms now using the variable components, even for nonsales roles.

Reps are getting performance pay for different metrics, such as customer payments made up front, discounts given, and other payment terms. This is due in part to compensation automation, such as the solution Xactly provides. “In the old, manual systems, [customizing payment terms] was too hard, so payments ran at a flat rate,” Cabrera observes.

For example, one Xactly client wants five-year deals instead of two-year deals, so this client pays salespeople incentives on that basis. “You can fine-tune incentive complexity now. That would run amok in Excel,” Cabrera explains.

Cabrera sees long-term incentives used mostly by young companies. Presidents’ Clubs are making a comeback after declining during the recession, and some firms are giving stock options to reps who become members of these clubs.

Xactly manages cash performance compensation and tracks metrics for noncash incentives. Cabrera says use of noncash rewards varies partly according to the tax status of the company, and these incentives are used chiefly to drive short-term behavior.

For all incentives, “metrics are getting subtle,” Cabrera notes. “Many metrics are activity based, and gaming is very popular.” For example, Hoopla offers a scoreboard of deals, revenue, and activities, all tracked in real time and displayed in sales departments on a 46-inch plasma TV. “It’s like ESPN,” Cabrera says. “They like to see their names and pictures up there.

“Small companies want the same things big companies want in sales compensation: to pay for exactly what they need,” Cabrera summarizes. “Now with an affordable service, they can do it.”

CallidusCloud can now motivate reps with compensation and rewards and help manage and coach them, notes Eric Brown, CallidusCloud’s vice president of North American sales. To motivate reps, CallidusCloud tracks commission, bonuses, and other performance rewards, as well as contests and leader boards. Money appeals to reps’ desire to earn more, while contests appeal to their competitive nature. In performance metrics, Brown is seeing more emphasis on leading indicators, such as calls, visits, and proposals prepared.

Compensation plans should be easy for reps to understand but complex enough to match company objectives, Brown argues. With automation, compensation can be accelerated, with cash paid out monthly or even weekly, instead of quarterly, thus increasing motivation. Brown estimates that companies can save 5 to 10 percent of compensation spend by choosing the right metrics and automating sales compensation.

For two years, CallidusCloud has been automating coaching also, taking qualitative data from managers and quantitative data from CRM or billing systems. Brown estimates that firms can increase sales by 17 percent by automating this critical task. A third of CallidusCloud’s new clients choose a combination of compensation  and management-automation solutions.

Even smaller companies are using all the incentive and management tools they can to maximize rep productivity. For example, Mark Rubino leads a sales organization of 35 people as vice president of sales and marketing at Acton Mobile Industries. His reps get a base salary plus commission for sales and are managed through leading indicators of performance and key performance indicators.

Rubino puts a heavy emphasis on recognizing top performers each quarter. He runs contests, such as an NFL-themed competition that runs for 10 weeks each fall. Each rep is assigned a team and scores touchdowns for sales and field goals for contacts. Football jerseys are issued, and Rubino chronicles the standings in a weekly newsletter. Eight division winners enter the playoffs. Rubino estimates that the football contest lifts sales by 15 to 20 percent.

“You can’t run contests all the time or salespeople get burned out,” Rubino acknowledges. Nevertheless, there is a six-week, NCAA-themed single elimination contest in the spring.

Because support staff is essential to a reps’ success in these contests, Acton recognizes and rewards the winning sales rep’s entire branch office with noncash, lasting prizes and awards.

Rubino gives reps individual attention on ride-alongs, trying to encourage them and help them envision what they can do with their cash bonuses, for example finance boats or a child’s education. “You have to help them visualize it,” he emphasizes. “Each salesperson is different. There are no silver bullets to making a successful sales team, just thousands of BBs.”

Rubino also puts a heavy emphasis on training and development and utilizes an established performance-improvement process, which he says works for a preponderance of salespeople to get them back on the right track.

Firms That Can Help You Improve Sales Compensation

Xactly
www.xactlycorp.com

SuccessFactors
www.successfactors.com

CallidusCloud
www.calliduscloud.com

Synygy
www.synygy.com

Varicent
www.varicent.com

Capterra
www.capterra.com

 

Performance Metrics Used in Sales Compensation
% of Companies
Revenue, volume 80
Profit margin 46
Management by objective 38
Strategic products 31
Units 20
Customer satisfaction 15
Other 23

Source: Gibson Consulting

 

Spiff Use
% of Companies
Use spiffs 72
Spend 3-5% of incentive comp 29
Spend 5-10% of incentive comp 29
Spend 10-20% of incentive comp 14

Source: Gibson Consulting

 

Stocks Incentive*
15% of companies surveyed plan to increase stock or options for 2012 sales
30% of high-tech firms see stock attracting sales talent
57% of telecom firms see stock attracting sales talent

* Most companies restrict stock options to directors and above.

Source: Gibson Consulting