Updating a Compensation Plan

A reader writes, "I inherited the current sales compensation plan from my predecessor. With a lot going on, I made the decision to live with it for one year. Now I'd like to make some changes. What time of year is best to get started on a project like this? What constitutes a good comp plan?"

Your question is well timed - October being the month when many businesses start revamping or making changes to their sales compensation plans.

To answer your question, I spoke with Robert Blohm, Senior Vice President Sales and Alliances with OpenSymmetry, a consulting company that specializes in the planning, implementation, and management of SPM (Sales Performance Management) solutions.

What constitutes a good comp plan?

Rob: "A good sales compensation plan includes some basic tenets... it aligns with the overall sales strategy, and the job / role it is supporting. It is easy to understand. While there are many layers to each of these tenets, they are good reference points when evaluating your plan or creating a new one."

How often should comp plans be revisited?

Rob: "Sales compensation plans should be assessed for their effectiveness and overall alignment with the jobs and sales strategy on an annual basis. The basic structure of a sales plan designs usually has a shelf life of 3 to 4 years. But some key parameters will likely need adjustment each year, things like an acceleration rate or the weight distribution between incentive components. While you may not need to build new plans every year, companies need to continually assess and ensure the plans align with the company's goals."

When should companies start working on their comp plan?

Rob: "A normal timeline for assessing, developing and testing new sales compensation plans is largely going to be determined by the size of the organization, number of roles, complexity of the plans, and degree of change required. That said, a normal timeline for a smaller company may be 4 to 6 weeks to get through these steps while a larger more complex organization would need 3 to 4 months.

"Work out a project plan that allows for assessment, development, testing, and preparation of communication materials to determine when the project should start. Keep in mind that this timeline does not account for implementation of the new plan in your current administration process / technology."

What's the best time to announce the new comp plan?

Rob: "Best practices for communicating sales compensation plans to the sales force would be soon after the close of the prior sales year. By waiting until you have closed the prior year you keep reps from delaying deals to the new year (if they think they can make more by doing so), and it keeps the sales team focused on closing out the year, holding the distraction and excitement of next year's plan details until the start of that plan year."

How does a company assess whether or not their comp plan is working?

Rob: "There are a number of factors that could be considered when looking at the health of a sales plan. We will most often look at the plans through two dimensions:

Qualitative: this is an opportunity to evaluate the plans as they are written to find out how well they align with the goals and expectations the company has of the jobs they are assigned. Through executive management, payee interviews and focus groups you can gauge how well the plans are aligning with the company's sales strategy.

Quantitative: this would be a deep dive into the pay and performance data to find out how well the plans are driving sales and delivering on the original business expectations. Looking at performance distributions, performance analysis and other metrics, you can start analyzing the data in a way that will show where the gaps in the current plans may lie."

What mistakes do companies typically make?

Rob: "One of the more common mistakes associated with sales compensation plans relates to over-complicating them. Studies have shown that three metrics is the optimal number (this is a general finding). When we come across what we affectionately call the "kitchen sink plan" where they have 7 or 8 metrics... this creates a situation where the rep will most often just focus on the one or two metrics where they think they can make the most money."

Any additional thoughts?

Rob: "I would strongly recommend anyone who is interested in learning about sales compensation best practices look into the wealth of information provided by consultants and / or bring a consultant in to discuss your situation. Many consultants will happily provide an hour or two of their time to discuss your situation and provide some basic feedback. It is a great way to test the waters to find out if there is value in getting outside help or if you can manage on your own."

There are a number of books that focus on sales compensation plan design.

• "Compensating the Sales Force: A Practical Guide to Designing Winning Sales Reward Programs" by David J. Cichelli

• "What Your CEO Needs to Know About Sales Compensation: Connecting the Corner Office to the Front Line" by Mark Donnolo

Rob, thanks so much for taking the time to speak with me and offer your invaluable advice on putting together a compensation plan.

Sales Practices - Don't Do This to Your Business

What happens when a sales organization is not managed thoughtfully and effectively? Potentially, severe damage to the company's reputation and the loss of customer confidence. More so even when the failures of that company become public.

That's exactly what happened with Wells Fargo. Their "Sales Practices Investigation Report," issued by the company's board in the aftermath of the company's sales management failures, is fascinating.

Approximately 2 million bank accounts or credit cards were opened or applied for without customers' knowledge or permission from May 2011 to July 2015. When theConsumer Financial Protection Bureau (CFPB), the Los Angeles City Attorney and the Office of the Comptroller of the Currency (OCC) fined Wells Fargo bank $185 million in 2016, the public began to learn about the scandal involving the bank.  Between 2011 and 2016, more than 5,300 Wells Fargo employees lost their jobs.

Most of my readers work for organizations far smaller than Wells Fargo. But there are plenty of lessons to be learned from this report.

Lack of Oversight

Wells Fargo adopted a decentralized system after it merged with NORWEST, giving local banks autonomy for determining revenue quotas and managing the sales effort.  The locally-based executives set high sales goals. With little oversight from their superiors at corporate, these executives put a lot of pressure on bank reps to achieve the inflated goals. This pressure forced reps to close low quality sales and engage in unethical behavior.

In some smaller companies I see a sales model where one or two reps report into the CEO, a few report to a sales manager in another part of the country and a manufacturers rep independently handles another area.

While there's nothing inherently wrong with a decentralized system, all salespeople serve as the face of the company.  Therefore, the overall corporate vision and sales department policies and procedures need to be clearly communicated from the top on a regular basis.

With loose or no oversight, sales reps start to interpret rules differently. As time goes on, valued clients may inquire about questionable orders and/or return unwanted merchandise. Company reputations get damaged and customers start to buy elsewhere.

Periodic audits of how salespeople conduct business need to take place routinely. Red flags of any type should generate prompt attention.

Unrealistic Sales Goals

In the new decentralized system, local Wells Fargo bank executives began setting very high sales numbers. When questioned by regional leaders, these executives insisted the inflated revenue goals were absolutely achievable.

Companies of varying sizes and industries set aggressive sales revenue goals all the time. That's fine - so long as leadership has a plan for reaching those numbers - and communicates it effectively. Whether it involves:

• increasing advertising budgets
• generating more white papers
• improving webinars
• launching new products
• prospecting into untapped markets
• offering sales skills training
• hiring an outsourced appointment setting group

potential new customers have to come from somewhere. 

Once companies reach those potential new customers, realistic expectations must be set around close ratios and initial new order sizes.

If aggressive sales goals get set with no corresponding increase in supporting activities, another problem occurs...

Turnover

Companies often contact me and say, "We have a turnover problem." I think to myself, "No, you have a problem and it's causing turnover."

Sales reps at Wells Fargo watched their peers achieve high sales numbers - and receive lavish praise for their efforts.  They saw other reps fail to reach the inflated sales quotas (or refuse to use unethical tactics) and either quit or be terminated.

As a result, between 2007 and 2013, turnover increased steadily. To counter this problem, Wells Fargo hired more and more inexperienced reps. Many "did as they were told" and the culture of opening fraudulent bank accounts and credit cards continued.

When given unreachably high quotas, reps in smaller companies either get terminated for failure to achieve their goals or become discouraged and quit. Over time, companies start to get a reputation as a high turnover organization. When this happens, fewer applicants express interest in open positions.

Final Thoughts

What happened to the financial services company that Henry Wells and William Fargo founded in 1852 carries a lot of drama: coverage on the national news, expensive fines, derailed or ruined careers, damaged reputations, and diminished profitability.

Most companies don't see their sales woes exposed to this degree. But what happened at this prestigious bank serves as a reminder about creating a system of checks and balances within the sales organization and holding strong to ethical business practices.