LeapComp - Sales Performance Management Blog

My goal for LeapComp was to talk about the entire Sales Performance Management space. I was thinking that with such a ‘narrow’ topic, I’d have no problems doing that. However, it’s only when you start writing that you start to realize how vast a topic really is. So the blog slowly took an IT and solution review slant - something which was not quite planned. However, my goal is still to bring broad information about the SPM space. To start accomplishing this more, Scott Barton, a leading SPM management consultant will help me by sharing his thoughts on profitability in incentive compensation plans, and how profitability gains notoriety when a company’s growth starts to fall off.

There’s lots of talk today about incentive measures and risk management. Even if you’re not a TARP recipient, your company’s board and executive management could take greater care in deciding which performance measures get used to calculate incentives.

Sales incentives are another matter, but the issue still pertains. During a growth cycle, most sales people focus on quantity – basically sales volume. Now in cost-containment mode, many executives desire better alignment between company profitability and sales compensation. Advances in information technology and reporting enable a clearer picture of profitability at the account and transaction level. Yet the incentive professional needs to recognize and argue for the differences inherent in sales plans from those used for executives and other employees. Failure to thoughtfully plan and execute compensation changes to sales professions can undermine progress toward the company’s profitability goals.

Comp Philosophy and Market Practice
If you are in the position of having to create or redefine your company’s pay philosophy, take note. Reframing the compensation philosophy is especially important if the company plans a fundamental shift it how it measures and rewards success at the organizational, group and individual levels.

We are in a time where statements such as: “The objective of XYZ’s compensation program is to providing exciting and competitive rewards that attract and motivate high-performing individuals” are not particularly useful. This isn’t to say that simple statements are not appropriate. If your company is relatively small, something as basic as “if we make money, you make money” can be effective, so long as those you want to motivate understand how profits get allocated and distributed to individuals. What if the company is not small, or not profitable?

Not-so-scientific research suggests many employees are just happy to have a job at the moment. Why all the fuss? Well, again, sales people are different. Assuming your pay philosophy still needs to use the word “motivates,” then we argue against the wholesale, profit-funded bonus pool for this group.

Let your philosophy clarify which job roles are appropriate for incentives, which for a profit-funded bonus, and which for recognition. These categories are often used interchangeably. For purposes of incentive philosophy, and improved comp ROI, consider the continuum illustrated below:

Any of the three variable-pay categories can apply to any one of your job roles, but incentives are most effective (i.e., most likely to result in the desired behaviors) when the job role has clear goals, clear and meaningful payment opportunity, and a strong line-of-sight to the metrics defining success. Sales roles fit best in this category.

In fact, the market for most sales positions sets expectations for incentive structure. If your company plans to adopt or further reinforce a philosophy akin to a profit-sharing plan, as an employer you might be at a disadvantage for attracting and retaining critical sales talent. Not a concern in this current environment? Alienating your customer-contact employees, especially your high-performing sales people, is counter to profitability objectives.

The comp designer should understand both market (external) and internal expectations for incentives specific to: 1) variable pay opportunity and 2) performance metrics. Jobs with the majority of incumbents who are somewhat risk adverse, that is, have relatively low amounts of incentive pay opportunity relative to base salary, are more likely be measured on unit-level goals such as profitability. Those jobs and employees that are inherently risk taking, with a high proportion (>40%) of base salary that is incentive opportunity, require goals more closely aligned with their own, individual behaviors.