Getting What You Pay For: Best Practices in Sales Force Compensation October 9, 2015 Banff, Alberta

Transcription

1 Getting What You Pay For: Best Practices in Sales Force Compensation October 9, 2015 Banff, Alberta Steve Deist Indian River Consulting Group

2 About IRCG Advisory services for manufacturers, distributors, private equity and other ownership groups 2 Pioneers in market access Strategy execution Channel management Organization and operations alignment Incentive design Sales and marketing optimization Industry depth Channel and strategy projects for top tier global manufacturers Thousands of distributor clients in industrial supply, automation, electrical, fluid power, process, etc. Speaking and research for NAW, NAED, buying groups, etc. University of Innovative Distribution faculty

3 For Your Convenience Download a PDF of this Presentation 1. Go to and click on the Client Downloads tab 3 2. Enter User Name: AHTD and Password: Banff2015 and click on the Login button 3. Click on the Presentations folder to open it 4. Navigate to this presentation and click on the Download button 5. Depending on your browser, a pop up window will appear where you can select whether to open or save the file Contains additional content: compensation readiness test and sales role options

4 Today s Context How do I get my reps to just do what I want them to do? 4 Sales compensation design is one important piece but it is not the only piece and it may not be the first piece

5 Strategy Some Strategic Considerations It s a multi channel world: customers have taken control 5 Fresh faces: the workforce of the future will not be pale, male and stale The dwindling bench: our industry s tribal knowledge is retiring Attention deficit disorder: shorter tenure, less hands-on knowledge, lower patience Buyers, specifiers and decision makers are not tethered to their desk or office

6 Strategy Personal Reflection 6 Consider the following questions as they apply to your company today When was the last time you conducted real research (either qualitative or quantitative) to understand your customer segments, market potential and competitive position, and how these are changing? Private Exercise Do you budget incrementally from the prior year or strategically, based on an intentional re-balancing of your resources? If you could do a clean sheet design of your organization to best fit the next 5 years, would it look as it does today? Do your answers to these questions affect your views on what your top priorities as an executive should be? Your answers will remain private unless you choose to share them

7 Strategy An Investment Example 7

8 Awareness Prospect Target and Develop Solution Transaction Post Sale Structure Investment Possibilities 8 Specialized sales roles Lower cost channels Online self service All Customers Old school: generalist FSR + CSR Automated marketing Data analytics Segment 1 FSR FSR Spec Segment 2 TSR CSR ISR Segment 3 + automation Web Aligned model provides market access Impact: Lower cost, better coverage and radical increases in sales productivity What happens if your competitors get here first?

9 Structure Key Trade Offs Customer intimacy vs. functional excellence What is the economic value of relationship Coverage (interception) vs. depth (disruption) Are more frequent, shallow touches most important? Responsive (reactive) vs. proactive Very difficult to do both well Enough vs. too much Customers and reps never say your prices are too low! 9 Are you paying demand creation wages to meet demand fulfillment needs?

10 Structure Pay + Roles Drive Rep Behavior Reps take care of their big annuity customers >80% of revenue and commission from <10 accounts ~50% of compensation is variable and based on margin dollars They defend current business and NEVER jeopardize a big account 10 Customers expect them to add value by Being accountable (one butt to kick) Being responsive (heroic recoveries) Solving technical problems and/or providing profit enhancement ideas So, they resist sensible things like Prospecting for new business Introducing new products These are called having a relationship Swapping out products for preferred vendors Increasing gross margins Current Desired Gain Sale price $1,000 $1,010 COGS $760 $760 GP $240 $250 Comm $48 $50 4% Other Exp $190 $190 Op Profit $2 $10 500%

11 Compensation In Search of the Holy Grail 11 Zero correlation between specific compensation structure and performance The critical factor is alignment Simpler is better but simplest is rarely best High performing sales organizations have: Strong, direct linkage between strategy and daily sales management Resources aligned with customer and market needs Source: IRCG proprietary data from 2003 NAW study Management-directed, rather than self-directed, sales reps Realistic expectations but low tolerance for underperformance You can hurt yourself badly if you fix comp without these!

12 Compensation Affordability and Market Wages The golden rule: A players should make A money 12 Wage studies are helpful but limited Average compensation doesn t account for performance Wide variation in organizational roles, titles and accounting practices, etc. Important insight also comes from: Internal turnover rates Sales and branch managers, who generally have a good sense of the sales talent in their markets and how much it costs Financial benchmarks (e.g. PAR reports) - What you can afford to pay - What you need to get in return

13 Compensation Incentive Design Process Get clear on objectives, roles and metrics 2. Determine if the misalignments are sufficient to warrant new programs 3. Select the fundamental approach Self regulated (i.e. absolute performance) Management regulated (i.e. relative) 4. Optimize leverage (risk/reward) 5. Design and model thoroughly 6. Rollout effectively

14 Compensation: Strategic Clarity Role Map Example Strategic Objectives Roles Success Metrics Practices and Tools Allocate proactive sales resources based on strategic value, i.e. customer potential Penetrate new and existing customers to maximize our share of their available spend Develop and share sales best practices to leverage our internal knowledge and scale Optimize selling expense so that we are neither over or under servicing our customers Develop intimate knowledge of assigned customers and maintain detailed CRM profile information Devote >50% of time to planned, proactive customer interaction Allot customer facing time based on identified potential Completeness of CRM profiles Target account growth Daily use of CRM Call allocation based on customer attractiveness Account targeting Weekly call planning and logging Reduction in buddy calls Prospect for new customers New customer sales Online customer research Initiate, establish and maintain high potential customer relationships at all levels to drive sales growth Roles support strategic objectives Proactively identify and close technical and business CSEs Participate in company wide cross functional initiatives Proactively share successes Transition lower potential accounts to IAMs and CSRs Collaborate effectively with CSRs and TSs Sales vs. budget Gross margin vs. budget Prod cats per customer Metrics measure success in the role Pipeline $ identified and closed Execution plan assignment and completion Accounts transferred Pipeline $ closed Organization mapping Technical training Poduct gap analysis Joint TS and supplier calls Daily maintenance of pipeline tool Practices drive successful performance Frequent use of company best practices library Frequent interaction with other associates Minimize time spent on routine customer service tasks 14

15 Compensation: Should You Bother? Symptoms of Misalignment 1. Overly high or low rep turnover 2. Stagnant sales productivity (selling expense gross margin) 3. Reps and managers are satisfied with current market share and customer base 4. Reps may comply with strategic initiatives (e.g. CRM, new account development, new produce promotion) but rarely commit to them 5. When business is tough owner income is affected a lot more than reps. When business is good reps income is affected a lot more than owners. 6. Discussions about account assignments are painful and focused on income impact rather than the best interests of the customer or the company 7. There are frequent discussions about what is commissionable and who gets credit for a sale 8. Every rep is on a different plan and there are many special deals and exceptions 15

16 Compensation: Fundamental Approach An Interesting Question I sold $4M at 25%GM last year. How d I do? 16 What if: The rep sold $3M last year or $5M last year? The rep was 20% above budget or 20% below? >99% of the sales came from customers that have bought from us steadily for the past decade or the rep was pioneering a new territory? >99% of the sales came from products we ve carried for the past decade or 10% came from brand new product categories and lines? In most absolute programs, these factors would have no impact on pay

17 Commission Compensation Compensation: Fundamental Approach Absolute vs. Relative Performance 17 $100,000 $50,000 Target $100,000 Target Target $50,000 $0 $0 $500,000 $1,000,000 Territory Revenue or Gross Margin $0 Target Target Target Any measurable performance factor Absolute options Straight commission Multi-rate commissions Commission matrix Relative options Salary and bonus Variable rate commission Commission and bonus

18 Compensation: Fundamental Approach Pick Your Path 18 Absolute Program Easy to measure and manage Simple math ensures it is self funding Perception that reps eat what they kill Familiar, comfortable Compensation is highly territory dependent Reassigning accounts affects income All GP$ are equally rewarded Limited downside risk Difficult to create specialized sales roles Sales productivity is locked in Perpetuate the mentality of my customers Relative Program Pay is disconnected from territory size, so best reps can be deployed where they are needed Allows better alignment of pay with strategy Easy to implement specialized selling roles Managers set goals, which may be seen as arbitrary or unfair Higher administrative burden Concerns that the bar will be raised every year More complicated to design and model Requires disciplined processes for adjusting goals and assigning accounts

19 Compensation: Fundamental Approach Pay on Net Profit? 19 3 customer profit improvement levers Cost to serve (e.g. transaction processing) Cost to sell Pricing Product mix Which ones can your rep really influence? Complex formulae poorly understood and generally not trusted The right sales effort could turn your lead customers into gold

20 Compensation: Optimize Leverage More Bang for Your Buck Very few reps truly have 100% at risk 20 Territory revenue typically drops <25% when left open Fear of loss is generally more motivating than opportunity for gain A salary component can increase motivational leverage with minimal risk It also enables a reduction in compensation expense % as territories grow

21 Low Fear, Uncertainty, Doubt (FUD) High Compensation: Modelling and Rollout Deliberate but Decisive Modelling: validate the impact of the new plan under for each and every plan participant Range of realistic scenarios Include several years of history (ideally even the full economic cycle) Consider years 2, 3, 4 Alignment with strategic value Rollout Do your homework: expected questions, market wages, performance benchmarks, etc. Announce with confidence Embrace anxiety, don t avoid it! Address individual issues quickly Risk without reward Incremental Low Symbolism (Shock) Gambit Ideal High 21 When it s time, change becomes lower risk than the current state

22 Any Questions? 22 Thank You! Mike Emerson, Steve Deist,