Five positive outcomes of a successful sales compensation plan

March 1, 1999

Pharmaceutical Representative

Where and how a compensation plan can make an impact.

Sales compensation is one of the most powerful tools available to management to achieve business results. The incentive component (commission or bonus) communicates the results that the company needs its sales personnel to achieve. In most sales organizations, the sales force is extremely interested in the sales compensation plan. In fact, sales representatives typically judge the plan by a single criterion: "Am I making more money now than I did a year ago?"

Management, on the other hand, typically judges the sales compensation plan's success on multiple criteria. In companies where sales compensation plays a key role in shaping the effective performance of the sales force, top management looks to the plan to contribute positively to five business outcomes: growth, profits, customer satisfaction, sales talent and sales productivity.

Growth

The desire to grow - by creating new markets, winning new markets, winning new customers and continually improving processes to retain current customers - is a top priority at most companies. The Alexander Group's 1997 Survey of Executive Confidence in Sales Growth reported that 64% of the respondents expected to achieve sales growth of 15% or more. Our in-depth investigation into how companies achieve their sales objectives shows that the growth strategy they pursue is "deeper penetration of current customers." This suggests that these companies have gone back to the basic block-and-tackle approach to growth: selling more to current accounts, either new product sales to current buyers or more sales to new buyers within the same account. This sales strategy suggests a compensation plan that rewards the sales organization for (a) retaining and growing sales volume in current accounts and (b) booking sales with new customers. The challenge is to motivate and reward the sales force for profitable top-line growth. Often, the biggest obstacle to doing so is overcoming the inertia associated with "annuity"-oriented compensation (80% to 90%) on reaching volume objectives tied to last year's sales.

Profits

Increasingly, companies want salespeople to focus on profitable business. The availability of meaningful information about purchase transactions at the account level, and the intense pressure in many industries on operating profit margins, are motivating executives in many companies to examine the mix of business sold to customers. Selling the right mix of products may produce better profits and, therefore, a key question to investigate is, 'Is the sales force motivated to and rewarded for selling the right mix of products?'

Marshall Industries is a billion-dollar electronics distributor headquartered outside Los Angeles. It was founded in 1954 on the simple idea, "buy low and sell high," but its world became infinitely more complicated. Marshall continued to grow, says Rob Rodin, president and CEO, "but only through staggering manipulation and brute force." And the bigger the company grew, the worse the problems became. As Rodin told Fast Company magazine, the problem wasn't inside the system; the system was the problem. "It made sense for one division to hide inventory from another; they were paid to compete. It made sense for salespeople to ship orders ahead of schedule or hide customer returns; they were paid to make their monthly numbers. The system persuaded good people to make bad decisions."

Rodin's solution: eliminate all pay for performance. In 1992, he says, "we eliminated commissions, incentives, promotions, contests, P&Ls, forecasts, budgets, the entire functional organization chart. Everyone at Marshall, including the 600 salespeople and their managers, is now paid the same way and shares in a company-wide bonus pool. It means that while a salesperson cannot win big commission checks by landing a large account, his income does not plummet when the account goes elsewhere. And there's another benefit: the new system "encourages salespeople to invest months, even years, prying companies away from other distributors and turning them into Marshall customers." As one Marshall rep told Fast Company, "I can look out for the interest of the customer. I can take the long view. I can invest time with a new customer without worrying about paying my next gas bill."

Customer satisfaction

In the early 1990s, we found a large number of companies embracing the idea of rewarding employees for improvements in customer satisfaction. The tremendous interest in and recognition associated with the quality movement provoked the trend. The Baldrige Award acted as a lightning rod that focused top management's attention on achieving excellence in quality and customer satisfaction. Virtually every company we met with in those days was focused on quality and customer satisfaction, and the sales organization felt the impact. Many companies took aggressive action to implement sales management practices and changed their sales compensation programs to reflect the importance they attached to customer satisfaction. Companies actually paid their salespeople as much as 25% of their variable compensation based on improvement in customer satisfaction scores.

While companies look to the sales organization as an integral player in sustaining and improving levels of customer satisfaction, a relatively recent update on the prevalence of paying sales incentive compensation based on customer satisfaction suggests this trend may have peaked. We have found (and other experts in sales compensation also report) that while the concept of paying the sales force based on customer satisfaction seemed attractive initially, the major stumbling block in doing so has been measurement. The difficulty of defining what "customer satisfaction" means and then measuring it so that it can be linked to the sales compensation process has discouraged companies from hardwiring it to the sales force's variable pay. Jim King, the director of sales at Boehringer Ingelheim, a marketer of ethical pharmaceuticals, told us he is not convinced customer satisfaction surveys are valid. He gave an example: "We can take a survey out to a managed care customer and ask, 'What do you think of Boehringer Ingelheim?' The response really depends on whether he has had any contact with Boehringer Ingelheim in his current position, and it depends on the latest contact. If we are having a lot of trouble signing a contract with them, they tend to - at least in my opinion - think that Boehringer Ingelheim are a bunch of clowns. If we give them a hard time on rebates, they think we're clowns. If we give them a lot of rebate money, and we're pretty easy to deal with, then we're great guys."

The net result is that today a smaller portion of pay - whether merit increases, special rewards or incentive compensation - is tied to customer satisfaction, because in many companies, the sales force, and in fact all customer contact personnel, have learned how to meet and exceed customer requirements.

Sales talent

In most companies, top management looks to the compensation plan to help attract and retain the caliber of people it needs to successfully sell to and interact with customers. A strong sales force is a major competitive advantage, especially in highly contentious markets - markets characterized by high product parity or markets in which all the major players offer virtually equally high levels of product quality or customer service. In such situations, your company's advantage is the relationship between the customer and the salesperson. As one executive told us, his company's objective in this type of competitive environment was to "shrink-wrap" the salesperson around the product offering so that a company employee became the source of differentiation. The sales compensation plan plays a pivotal role in attracting and retaining talented salespeople. Thus, a question to ask about a current plan is, "Does it help the company hire and keep the right salespeople?"

Sales productivity

Today, most companies view their customers as "assets" of the business. Thus, investments in salespeople, who regularly interact with customers, are regularly reviewed for improvement. Three years ago, a sales job well done in a given industry produced $1 million to $1.5 million in revenues. To justify that salesperson with today's smaller margins, two things have to happen: volume has to be higher, usually twice as much or more, and the mix of business has to change, in terms of both what customers buy and which customers to address. If the salesperson's average productivity was $1.2 million a year, it now has to be $2.4 million to maybe $3 million with an improved product and customer mix. Otherwise you may get the volume, but not the better margins.

Moreover, the productivity issue is dynamic. Today, an entry-level person may have to produce $700,000 in sales while a senior salesperson may have to produce $2.5 million, but those numbers are not fixed. Each year, they must rise by some significant factor if the company plans to continue investing in direct resources. Companies' management teams ask us what they should expect a salesperson to produce (a figure that varies by industry), and once we get the figure, they want to know if it stays set. The unhappy answer is no; it has to go up if no resources are added. PR

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