Diagnosing Your Company’s Sales Compensation … · Diagnosing Your Company’s Sales...

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Contents © 2010. Reprinted with permission from WorldatWork.

Diagnosing Your Company’s Sales Compensation ProblemsIn order for companies to have the right salesforce for a specific market, they must first compare their current workforce design to their business objectives.

By Scott Sands and Marilu Malague, Aon Hewitt Consulting

February 2011


Sales Compensation Plan Policies

Diagnosing Your Company’s Sales Compensation Problems Feb 2011

Diagnosing Your Company’s Sales Compensation Problems

There is no sales compensation plan that can solve all business problems. While this may seem in-tuitive, a challenging economy and tremendous professional pressure are taking a toll on business leaders, and many find themselves asking sales compensation to work miracles. Instead of overre-lying on sales compensation, companies need to develop a more sophisticated diagnostic system to identify underlying drivers of cost and dysfunction such as talent gaps, coverage holes and mismatched sales channels. Successful companies start by looking for these types of root business issues before beginning any redesign of sales compensation.

Often, the root business issue lies in the structural clarity and characteristics of the salesforce the company is trying to attract, motivate and retain. A detailed model to help companies apply the best techniques for workforce planning brings many of these root issues to light. Such a model helps companies construct a fully aligned and focused salesforce that creates lasting competi-tive advantage while also achieving immediate business goals. While this work may appear to be outside of the responsibilities of most compensation professionals, it is critical to ensure compen-sation is addressing appropriate goals and issues. As a cautionary example, companies sometimes try to create aggressive sales compensation programs in an effort to overcome weak sales cover-age models, creating alignment, cost, and equity issues.

In order for companies to have the right salesforce for a specific market, they must first compare their current workforce design to their business objectives. As illustrated by the representative case study that follows, nine major steps in workforce planning for sales emerge (see Figure 1).




A Hypothetical Business Situation

A company, let’s refer to it as “Acme Widgets,” is delivering $1 billion in annual revenue with 40 percent gross margins and 15 percent operating margins. The immediate problem is that two years ago, the company was delivering $1.2 billion in revenue, 50 percent gross margins and 20 percent operating margins. The decline experienced in the previous two years has placed immense pressure on senior management to orchestrate a turnaround in the company’s perfor-mance and to show the levels of shareholder return to which Wall Street had grown accustomed. The company has only 10 percent market share (ranking third to larger competitors who have 30-percent and 20-percent shares, with the remaining 40 percent of the market spread out across a fragmented group of smaller competitors), so both executives and investors believe there is an opportunity for expansion in a market that is growing at 5 percent per year.

Acme Widgets employs approximately 400 salespeople and sales managers who are largely gen-eralists. The company operates on a fairly simple sales compensation plan that pays sales repre-sentatives an average of $150,000 per year, half in base salary and half from a 2.5 percent com-mission based on total revenue in a geographical territory. When the company was growing, these territories would grow and then divide as new sales representatives were added. Recently, the company has trimmed back the number of representatives, resulting in accounts, sales and com-missions being distributed to the remaining representatives somewhat arbitrarily. Compensation cost of sales (or CCOS – the sum of all base salaries and actual cash incentives paid as a percent-age of revenue) has hovered around 6 percent in recent years despite headcount reductions.




The CFO has decided that Acme’s return to greatness should begin in 2011, with goals of:

• 10 percent revenue growth to $1.1 billion• 48 percent gross margins • 18 percent operating margins.

The CFO and CEO believe that much of the revenue and gross margin increase can be driven by selling more solutions to their customers’ senior-most C-suite buyers. The operating margin increase, they believe, can come from improved gross margins plus further cuts in headcount and compensation. The first premise makes sales and marketing nervous, because the company does not have a track record of successful solution sales. The second premise makes human re-sources uneasy, because most compensation professionals understand that the chances of cutting everyone’s pay in one year and still fielding an engaged salesforce is slim. Talent management and change management experts would also contend that the challenge of converting an entire salesforce from volume-oriented commodity sellers to value-oriented solution sellers in a year is significant. So how should Acme HR help make such a transition and convince senior leadership that there is a right and wrong way to attempt this feat?

The Solution

One of the critical success factors for this type of transition is an explicit workforce plan for sales. For companies engaging in successful salesforce planning, there are nine major steps:

1. Identify business goals, situations and constraints. If an organization, such as Acme, plans to sell solutions faster than the market is growing, there are different strategic, talent and motiva-tional implications than exist for a zero-growth company. Resources that manage existing pro-curement relationships to sustain orders of a commodity typically possess one set of skills, while taking market share from competitors by selling new conceptual product/service bundles to senior leaders in larger accounts requires a very different set of competencies. The question that work-force planning should ask, therefore, is “How many of each type of resource do we need?”

One of the basic mistakes that companies make as they attempt to become solution sellers is de-ciding that all of their salespeople need to possess the new competencies (whether through train-ing or outside hiring). That is often not true for three main reasons:

• The supply of good solution salespeople in the market is constrained. Short of a risky acqui-sition, few companies can access a reliable talent pool to hire 300 to 400 of these resources.

• Solution sellers command a higher price in the market than transactional sellers (see Figure 2), an economic reality that would create an unaffordable salesforce for many companies.

• Not all customers are willing to buy solutions, even under ideal circumstances.




2. Quantify the opportunity in customer segments. Any increase or change in mix of revenue must come from a finite market. Companies can use several methods for sizing that market and its segments, from customer surveys to statistical regression. Once a company knows how much revenue and profit opportunity is in the market, how much is accessible by its salesforce, which customers are loyal, what marketshare is in the hands of major competitors and which prospects would be inclined to purchase if price, service level or product quality changed, then it can deter-mine how much of the business plan can be delivered from each segment.

Note that some portion of the business plan could still be delivered from customer segments that value only transactional commodities. Therefore, companies may decide to keep some transac-tional salespeople deployed against accounts that will most likely continue to buy in this manner. This can also create a gradual transition that takes some pressure off of change management and salesforce transformation. In pure compensation terms, pay level premiums may not need to be as high to recruit 150 new solution sales people as they would be to get 300.




In the case example, Acme had 50,000 total customers that, on average, purchased $20,000 worth of widgets each year. Based on Acme’s customer surveys, there are 1,000 potential strate-gic accounts that can be targeted with solution selling and that can be expected to be successful in 2011. On the other end of the spectrum, the bottom 10 percent of the market is actually un-profitable. Profits and margins could go up by simply not deploying sales resources against those customers going forward, or by using very different resources or terms. The Pareto principle (also known as the 80-20 rule) applies to Acme just as it does to most other companies, meaning a significant number of accounts purchase very small amounts each year. These buyers state that they would be just as happy with a telesales representative as their touch point with Acme (in all honesty, there are many of these smaller customers who received no personal touch when the generalist territory sales representatives were assigned more than 120 customers each). Therefore, Acme might be able to get higher productivity at lower cost with telesales resources deployed against these accounts.

3. Develop a productivity equation. Specifically define how much a single resource in a specific channel can be expected to produce. Many companies seek this information in sales compensa-tion benchmarking surveys. Note, however, that while there are a few surveys that provide reli-able quota and revenue production information, surveys are probably best used as sanity checks and not the basis for a sales productivity model. Crediting rules for companies contributing to the surveys aren’t always consistent, as recurring revenue and long-term contracts often prevent an apples-to-apples comparison. As a result, the numbers may have bits of apple and orange mixed up into a dangerously misleading fruit salad of data.

Leading sales organizations quantify the sales potential in each account, the penetration rates, close rates, retention rates, sales resource seniority, selling time and workload for each sales process. This creates a model that will help companies determine the sales resources needed to achieve business objectives as allocated to segments. For example, if Acme’s goal is to land a new strategic account with $20 million of sales potential (of which 40 percent is secured in the first transaction), it might require a team of three people to pursue 10 prospects through a sales process that demands 50 percent of their time over the course of six months to yield one successful sale.

4. Determine talent requirements. What size (and shape) salesforce is needed to cover a compa-ny’s target markets and deliver against the business plan for an acceptable cost? Start understand-ing sales talent requirements by using the productivity model to determine how many accounts a sales resource can cover. In Acme’s case, if each strategic account requires 60 hours of selling time per year, and a strategic account manager (SAM) has a selling capacity of 1,200 hours per year, then each SAM can cover 20 accounts, and 50 SAMs are needed to cover the targeted 1,000 accounts. If strategic accounts can deliver $400,000 in revenue each, and SAMs cost $180,000 each, there is now a cost associated with the talent required to cover this segment and deliver targeted revenue. Going segment by segment, complete this initial sizing exercise for each type of resource.




By articulating talent requirements and identifying the types of resources that will be assigned to customers, it is apparent that five different types of sales resources will be deployed (see Figure 3):

• Strategic account managers (blue in Figure 3) – assigned to large accounts• Territory generalists (red in Figure 3) – assigned to mid-market accounts• Product specialists (yellow in Figure 3) – overlay resources assigned to assist in sale of new

offerings• Inside sales representatives (green in Figure 3) – assigned to small transactional accounts• Sales managers (black in Figure 3) – oversee front line sales resources

For each resource deployed, companies should have a rough number required and a set of com-petencies defined.

5. Evaluate the current talent supply. It is imperative for companies to identify a set of compe-tencies for each sales role within the organization. Creating a workforce plan is not just about numbers of resources required, but also the skills or competencies that must be demonstrated by each. This can make a transition like Acme’s more complex. For example, in order to sell solu-tions to senior buyers in larger accounts, SAMs may need competencies such as problem solving or financial acumen, where previously sales representatives were hired based on their negotiation or communication capabilities only. Acme should perform a fresh evaluation of all sales resourc-es based on the new competencies defined. Leading companies will embed these competencies in interviewing tools to screen recruits, training curriculum and performance management systems. 6. Quantify talent gaps. After evaluating the qualities needed in the salesforce, organizations need to also evaluate how many individuals in the salesforce possess those skills in order to determine how much additional hiring (and/or attrition) is needed. In Acme’s case, assessors may




determine that just 10 percent of Acme’s original 400 territory sales representatives score high enough in financial acumen, leaving a gap of at least 10 SAMs to hire from outside sources. Each role may have a surplus or deficit of internal talent to be addressed over time. The higher the tal-ent gaps, the more the company will lean on the talent gap closure levers in Step 7.

7. Select talent gap closure levers. There are many tools that a company can use to recruit new sales talent, improve existing sales talent or coax additional productivity from resources. These talent gap closure levers include many of the HR programs companies often address in isolation, including:

• Process improvements to create more selling time, loop in new resources or improve sales yield

• Recruiting initiatives to access new talent pools or improve offer acceptance rate• Training and development to focus on new competencies• Outsourcing (i.e., using channel partners or agents) to reduce dependence on internal talent• Career path development to accelerate the movement of desired talent• Changes to compensation or benefits to attract the specific talent demographic in the labor

market• Leadership initiatives to get sales managers in place who can orient resources for strategy

execution.

These levers all have time, resource and other hard or soft financial costs associated with them. A good workforce plan can accommodate a variety of scenarios and respond to external factors (economic conditions, competitor actions, etc.) with different talent management levers.

For Acme’s SAM role, sales compensation surveys confirm that these resources command ap-proximately a 20 percent premium over the legacy sales representatives. This means Acme would probably need to use the compensation lever to pay for the added skills required to close this talent gap. This premium could make the transition more attractive for successful internal candi-dates, making it part of Acme’s sales career path. Alternatively, training and development pro-grams might make financial sense if Acme can deploy the improved skills with less pay increase. Whatever the combination of levers used, companies must have refined market and employee value propositions to avert salesforce planning pitfalls such as increased turnover, customer churn and poor strategic execution.

8. Build the talent plan. A basic workforce planning model (see Figure 4) can help reinforce this approach across the necessary functional resources within any company. The output of this step should be a clear, actionable road map that directs sales, HR, finance, IT and other functional project leads to execute on a series of activities over a defined period of time with specific out-comes. Beyond documenting all of the supporting analysis previously outlined, the plan creates recipes for organizational success that are readily supported by existing and new programs and initiatives.




9. Execute the salesforce transition. Execution is where many workforce plans fail. For sales, there are additional factors to consider, including customer relationships and geographically dis-persed employees. Successful execution typically requires a clear case for action, a universally understood plan, adequate resources, visionary leadership, coordinated management, effective communication and frequent progress checks. In Acme’s case, the company chose to:

• Designate the worldwide vice president of sales as the central leader of the transition, sup-ported by HR, marketing and finance and governed by a CEO mandate.

• Create regional task forces composed of sales, HR and IT executives. • Develop standardized tools for everything from competency evaluation to customer commu-

nications. • Meet monthly to review key metrics, including salesforce turnover, revenue, customer churn

and CCOS.• Use a combination of best internal resources and new external talent pools to fill out the new

salesforce structure as quickly as possible, creating a hiring calendar that accounted for attri-tion and ramped up to a sustainable flow of new candidates without overloading the recruit-ing function.




The Result

By following this process, Acme is able to effectively grow the business while still showing a drop in CCOS using key workforce planning levers for sales (see Figure 5). Acme’s reallocation of headcount, resource mix and associated pay levels reduce overall salesforce expense while im-proving talent quality and productivity to ensure greater yield. This approach brings out the best results from workforce planning and sales compensation when used together with sound market intelligence.

Effective salesforce planning is a multiyear exercise for most companies. Even with a detailed plan, turning around a supertanker can take some foresight and patience. Identifying the con-straining function or element in a specific workforce plan can help speed the process and exploit any bottlenecks in the system. The ultimate lesson is that there are many paths to the desired business outcomes, and the right results tend to come from a deeper, strategic, sequenced evalu-ation of the business model and a workforce ultimately supported — not created — by sales compensation.



About the Authors

Scott Sands is a principal and salesforce effectiveness practice leader at Aon Hewitt Consulting in Atlanta, Ga. He can be reached at [email protected].

Marilu Malague is a senior consultant in Aon Hewitt’s talent and rewards consulting practice in The Woodlands, Texas. She can be reached at [email protected].

Contents © 2010. Reprinted with permission from WorldatWork. Content is licensed for use by purchaser only. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

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