Incentivize Sales to Drive Impact in High-tech

Transcription

1 Incentivize Sales to Drive Impact in High-tech ZS research reveals a four-step path to successful high-tech incentive plans By Kyle Heller

2 Incentivize Sales to Drive Impact in High-tech ZS research reveals a four-step path to successful high-tech incentive plans By Kyle Heller

3 The technological evolution that continues to transform customer behavior has had just as much impact on the technology industry itself. Increasingly, tech companies are challenged to drive sustained, profitable revenue growth while trying to navigate a continuously evolving business environment, new competitive boundaries, redefined alliances and industry restructuring. Tech companies can no longer expect to drive this growth through the promise of better products, services or solutions. Customers are increasingly looking for outcomes, which means that it isn t business as usual for sales, marketing and other functions. Put simply, tech companies will need to rethink many aspects of how they go to market in this complex and dynamic environment. According to ZS s recent Incentive Practices Research study, which surveyed leaders at nearly 100 technology companies and based on our experience with hundreds of clients, over several decades we ve found that one of the most critical spaces for evolution is how and where companies engage with customers: via the sales force. To enable and drive this transformation, creating a motivated sales force and culture is paramount, and thus designing and implementing the incentive programs to motivate, reward and retain top talent will be an increasingly important contributor to tech companies financial performance in 2017 and beyond. HIGH-TECH FIRMS MOST COMMON SALES COMP CHALLENGES Which of the following are the three most difficult sales compensation problems for your company at the moment? Sales forecasting 60% Quota-setting fairness 48% Incentive plan complexity and/or field comprehension of the plan Data availability to accurately assess performance Incentive compensation payouts not tied to corporate performance 28% 34% 32% Efficient incentive compensation administration Effective communication of the incentive compensation plan Competitiveness of total pay levels with market Adequate upside opportunity to motivate and retain top performers Incentive plan not motivational enough or motivating incorrectly 23% 22% 20% 19% 14% n=100 Figure 1: Sales forecasting and quota-setting continue to be the most difficult sales compensation problems. 3

4

5 Fewer than half of respondents to our survey (44%) have plans with three or fewer metrics, a significant decrease from prior studies. While the importance and impact of well-designed sales incentive plans is clear, it s confounding that many companies underinvest in plan design and ongoing operations. ZS research surfaced four primary barriers to successful sales incentive plans, which may offer some clarity around a better way forward: + Inability to accurately forecast and value sales, particularly as customer transactions evolve from one-time, quantifiable transaction types, to more subscription-based and pay as you go metered models + Under-investment in strategy, governance and leadership in driving sales force effectiveness, and a corresponding increase in plan complexity and diminished sales force comprehension and buy-in + Limited data, process and systems in setting accurate and motivating sales quotas, which challenges fiscal responsibility, operational efficiency and the ability to sustain a performance-based sales culture + Insufficient focus on how the incentive plans are performing, and the incremental sales performance and financial return to the company from the significant investment made in sales incentives As we see it, and as our research indicates, these four barriers present a significant obstacle to what is required in the challenging and evolving technology marketplace. In response, we ll offer a four-pronged approach to creating and sustaining successful incentive plans in high-tech. Step 1: Make Simplicity Your Mantra Since our last study, high-tech companies have moved away from standardization and simplification efforts, and toward a proliferation of plan designs, elements and metrics. Industry restructuring, expanding product portfolios, organic growth demands and shifting business models all play a contributing role in the increase in business complexity, which is translating to similar complexity within sales incentive plans. According to our research, many companies have tried to address this business complexity by making their sales incentive plans multifaceted, attempting to satisfy every possible scenario, stakeholder and corner case. Fewer than half of respondents to our survey (44%) have plans with three or fewer metrics, a significant decrease from prior studies. Some 38% have five or more metrics. This proliferation has a consequence: 62% of respondents have plans with a metric that accounts for less than 15% of a rep s target incentive pay. (See figure 2.) In 2018, we expect the pendulum to swing back toward simplification and standardization, as companies will recognize that, frankly, enough is enough. This will likely include a focus on continuity and more thoughtful 5

6 HIGH-TECH FIRMS PLAN METRICS How many metrics does your company include in the sales compensation plans for the following roles, and what is the smallest metric (as a percentage of the total target incentive pay)? Number of plan metrics Smallest metric percentage range 1 3% <15% 62% 2 19% 3 22% 15-30% 30% 4 19% 30-45% 4% 5 28% >5 10% >45% 3% n=69 Figure 2: Surveyed companies most commonly have three to five metrics in their plans, with the smallest metric being worth less than 15% of total target incentive pay. decision-making around plan changes and improvements, and avoiding checkthe-box additions or tweaks each cycle. After all, the true purpose of an incentive plan is to keep the sales force motivated and focused on very clear goals, and to provide transparency into how reps will be rewarded for their performance. Anything beyond that simply creates confusion and unintended plan results, and dilutes the return on the commission expense. Overall, the ZS perspective is that incentive plans should have no more than three metrics, and that no metric should count for less than 15% of the total target incentive pay. The ideal plan has as few variables as possible, all of which are focused and material. If metrics carry less weight, reps likely will ignore the lower-weight variables and instead focus on the metrics that will have a bigger impact on their pay. Further, overly complex plans not only dilute ROI and confuse salespeople, but also are tough to administer, and increase the difficulty of setting fair and motivating quotas often without any corresponding increase in sales performance. A good rule of thumb is to start with a standard incentive plan for each sales role and with a single primary metric for each plan, adding plan variations and metrics if and only if the benefit outweighs the added complexity. Creating an appropriate level of consistency in the governance model will improve plan ROI, operational efficiency and effectiveness, and will enable a clearer path toward creating and sustaining a performance-focused sales culture. To achieve these objectives, companies will need to be more disciplined in developing clear incentive philosophies and policies, and should establish 6

7 a governance committee to enforce the integrity of the program over time. This governing body should be charged with honoring these philosophies and policies, ensuring that the company is being proactive versus reactive, identifying the appropriate levers to address specific challenges and opportunities, and improving plan effectiveness. Step 2: Understand the Customer Journey The shift in how technology is purchased, and then consumed away from transactions toward subscriptions and metered models has resulted in a far less predictable environment and creates challenges for tech companies trying to evaluate sales reps impact and the value of each sale. According to our research, about two-thirds of respondents sell on a subscription basis (see figure 3), and about one-third now sell primarily in a metered model. We expect these percentages to grow by 2018, increasing the importance of better understanding the end-to-end customer journey. HIGH-TECH FIRMS CURRENT SALES MODELS Percentage of respondents who sell using each payment model One-time charge/license fee 65% Subscription 64% Pay-per-use 35% Not applicable 13% n=100 Figure 3: Many respondents sell through multiple models, which reflects the growing complexity of technology sales. These model shifts are forcing tech companies to rethink deal valuation. In the traditional sales model, hunters typically have been paid at the moment a sale was booked and on the value of that deal when the contract was signed. With subscription sales, companies have moved from paying on the total value of the sale or contract, to an annual or monthly measure with incentives for extending the contract. An increase in the prevalence of metered models further complicates things, as sales may be finalized without a contract, commitment or any explicit value. This tension is leaving tech companies wrestling with the proper metric, value and timing around when they can measure a sale in a way that s both motivating and financially responsible. 7

8

9 9

10 Redefining sales metrics will be based on a better understanding of how prospects and customers engage throughout their journey not just how they learn, shop and buy, but how they consume and realize value over time. Another manifestation of the shift away from one-time sales is the increasing prevalence of incentives tied to the length, timing and terms of deals. For example, 41% of respondents offer a kicker or accelerator for multi-year deals or for increasing the customer s commitment. Similarly, 32% offer fast start bonuses for closing sales early in the period, resulting in more fiscal year revenue. The growth in metered models is likely to increase the prevalence of incentives linked to other indicators of commitment and proxies for ultimate deal value. While the question of how to value, time and credit sales transactions typically is considered an incentives-related challenge, tech companies need to look well beyond the incentive program in order to get the right answer: + Understand your customer journey. Redefining sales metrics will be based on a better understanding of how prospects and customers engage throughout their journey not just how they learn, shop and buy, but how they consume and realize value over time. + Apply more robust analytics. With more advanced analytical techniques, you can move beyond guessing or simply waiting for the revenue. Instead, you can more accurately forecast the value of a sale based on the composite dimensions of the deal at, or closer to, the moment that the deal is made. + Agree on a number. Ultimately, there s still a place for rewarding some sales roles at the point of booking, so the trick is to build your organization s confidence in that number and in the idea that precision matters less than the number s ability to motivate the desired behaviors in the sales force. + Rethink systems and processes. To understand the journey and develop learning models to inform analytics and crediting, you might need new systems to capture engagement or information on deals, plus new processes around both the capture and use of such information. Importantly, it isn t enough to rely on the responses and experiences of companies featured in this research. This benchmarking is a step toward developing and implementing more effective sales incentive plans but only when applied within the specific context of each company s unique circumstances. Customer journey research, advanced analytics and other components are never one-size-fits-all. Companies that apply these capabilities to their sales plans without tailoring them to their business priorities do so to the detriment of their success. Step 3: Set Quotas That Reward and Motivate Top Performers Legitimate sales talent is undeniably valuable. Organizations invest considerably in attracting, retaining and nurturing high-quality salespeople. Further, the cost of losing a salesperson is significantly higher than that of other staff. Estimates suggest that it costs anywhere from $50,000 to $1 million to replace a sales rep versus $3,341 to replace a non-sales employee, which doesn t even include onboarding, hiring and training costs, and compensation guarantees. 10

11 Companies that participated in our research reported incentive payouts to top performers of two and a half times their target incentive pay, and our experience suggests that these ratios are increasing. At the same time, approximately 60% of companies report having no cap or decelerator across role types, which represents a shift toward uncapped earnings from previous years. This trend, of course, comes at a price, as companies will need to fund top performers earnings by reducing payouts to poor performers. Paying for performance, and exercising fiscal responsibility in doing so, will require not only paying less to poorly performing salespeople, but also having the insight to be able to objectively gauge performance and to ensure that these diverging payouts are deserved and justifiable. The success of this increasingly differentiated payout distribution, and the organizational confidence to stand by the results, will be heavily dependent on a company s ability to set, communicate and manage effective sales quotas. The high-tech industry traditionally has erred on the side of simplicity and used a very straightforward method to set quotas, which is supported by the research data. Study participants report that the most common approach, by far, is for managers to assign top-down quotas, with a fair amount of discretion. (See figure 4.) HIGH-TECH FIRMS QUOTA-SETTING METHODS Lead sales role (pure sales/hunter) Account/client relationship manager Technical specialist (pre- and post- sales) Partner or channel account manager (post- sales) Top-down, manager-assigned 42% 38% 37% 46% Everyone receives same total quota 14% 7% 5% 9% Bottom-up forecasting 14% 21% 11% 11% All grow by the same percentage over their previous baseline 11% 10% 18% 20% Weighted index 8% 14% 18% 11% Everyone grows by the same unit or dollar amount over their previous baseline 6% 5% 8% 0% Other (please specify) 6% 5% 3% 3% n-sizes (products, services, all) n=11, 25, 36 n=11, 31, 42 n=12, 26, 38 n=9, 26, 35 All companies Figure 4: Irrespective of role, companies most commonly use a top-down, manager-assigned approach when setting quotas. 11

12 As tech companies make changes to incentive plans and the requisite investments needed to implement those changes there needs to be a means to assess how well the plans are currently functioning, and the extent to which the changes will deliver incremental value to the company. While this approach is effective at capturing local knowledge and market insight, the level of discretion and bias that it introduces often outweighs the associated benefit. This approach too often leads to a manager giving someone a break or a little extra based on intuition, on the manager s relationship to the salesperson, or on something else beyond the true sales opportunity available within the underlying territory. Respondents to our survey target and expect approximately half of their salespeople on any given team to hit or exceed their quotas, which is in line with benchmarks and best practices, yet they also say that only about 35 to 45% of reps actually do. While this can be a function of the overarching sales forecast, it s more commonly a symptom of sub-optimal quota allocation. There s a clear opportunity to make the process far more scientific. Specifically, companies can implement a more data-driven, systematic approach to quotasetting in which sales leaders leverage deeper customer and partner insights, and account- and even product-level potential to determine which metrics are going to have the biggest effect on sales performance. They can run tests and simulations to confirm those hypotheses and use that information to set accurate, motivating, fair quotas that all reps have a reasonable opportunity to achieve. Sales managers who have this kind of detailed insight can still retain some leeway to refine the quotas for the people on their team based on circumstances that they re best positioned to understand with guidance and proper governance. For example, they could have the power to adjust an initial quota up or down by 5 to 10%, and even more if they have a clear rationale for doing so. That way, they re still empowered but are making objective decisions based on analysis rather than hunches, and the organization is simultaneously gathering field input and adjustments that will enhance the data and quota-setting methodology over time. Step 4: Make Sure You Get What You Pay For A Harvard Business Review 1 article, Motivating Salespeople: What Really Works, reported that U.S. companies alone spend more than $800 billion on [sales compensation] each year three times more than they spend on advertising. This investment represents the single largest sales or marketing line item for most B-to-B companies, yet most tech companies don t have a clear view of how their sales incentive plans are performing. If you ask a large group of sales leaders, What are you getting from this spend, and what would happen if you took away your sales incentive plans? most couldn t answer with confidence. It s unthinkable in most business functions to be blind to an investment s relative effectiveness in an agile fashion. As tech companies make changes to incentive plans and the requisite investments needed to implement those changes there needs to be a means to assess how well the plans are currently functioning, and the extent to which the changes will deliver incremental value to the company. 1 Steenburgh, Thomas, and Michael Ahearne. Motivating Salespeople: What Really Works. Harvard Business Review. Harvard Business Review, July & aug Web. Jan

13 When companies are able to reach this maturity, where they can run pilots or simulate profit changes and make informed plan decisions based on rigorous and predictive models, that s when the comp plan design becomes really interesting and powerful. More than half of respondents say that they conduct an annual health check of their plans and another 34% conduct semi-annual checks. However, only 10% report using metrics that indicate the relative return or yield on the plan investments meaning some measure of the expense as a function of the incremental or even total sales generated. In other words, very few tech companies are proactively evaluating whether they re managing a reasonable cost-to-revenue ratio. This would be a good first step. In 2018, we expect more tech companies to incorporate more frequent and agile health check diagnostics around their sales incentive plans. Assessing a plan s performance on an annual basis often doesn t allow the ability to identify a problem or opportunity in time. Companies that automate and operationalize these episodic assessments will be better positioned to proactively identify plan health issues, and to mitigate the risk of lost time or awaiting negative feedback and sentiment from the sales force itself. A good place to begin is to extend the defined plan philosophies to establish targets and benchmarks. For example, a tech company may decide to offer three times the target pay for top performers, that 50% of the sales force will achieve or exceed quota, or that the team will realize at least a 10 to 1 ratio of sales to incentive payouts. In some cases, there are good external sources and benchmarks for these targets. In either case, it s valuable to track and evaluate actuals over time, and in relation to evolving priorities and business strategies. Eventually, companies will need a very clear picture of the ROI of their sales compensation plans. They ll need to think about analyzing whether to add a second plan metric, or a gate, and to evaluate the associated impact on the bottom line. When companies are able to reach this maturity, where they can run pilots or simulate profit changes and make informed plan decisions based on rigorous and predictive models, that s when the comp plan design becomes really interesting and powerful. Considering the high stakes associated with sales teams, tech companies can no longer take a set it and forget it approach to their sales incentive plans. The impetus to change is real. Whether you go big or move methodically, be thoughtful, comprehensive, systematic and data-driven, and clearly identify objectives and success metrics in the incentive plans and the financial impact to the company. Most importantly, be ready to communicate and to listen. Sales is still about relationships, including those between companies and their salespeople. And for a sales incentive plan to succeed, it needs to be communicated to the team proactively and succinctly and to allow ample opportunity for feedback. Analytic and quantitative analyses can t tell companies everything, so be sure to open up communication channels to the feet on the streets and in the cloud. 13

14 About the Expert Kyle Heller is an associate principal in ZS s San Mateo, Calif., office and is the sales compensation leader in the firm s high-tech practice. He is a certified sales compensation professional whose expertise includes plan design, goal-setting, plan administration and plan health checks. Prior to ZS, Kyle worked for more than 10 years in sales and marketing leadership positions, with an emphasis on developing and managing alternate sales distribution channels in the telecommunications industry. 14

15 About ZS ZS is the world s largest firm focused exclusively on helping companies improve overall performance and grow revenue and market share, through end-to-end sales and marketing solutions from customer insights and strategy to analytics, operations and technology. More than 4,500 ZS professionals in 22 offices worldwide draw on deep industry and domain expertise to deliver impact for clients across multiple industries. To learn more, visit or follow us on Twitter and LinkedIn.

16 For more information, please contact: ZS zs.com ZS 03-17