How Sales Compensation Works: An Introduction

have you ever wondered how sales people are paid more importantly how sales compensation programs are constructed it really shouldn&#39;t be that difficult if you just think about it you know sales person sells the product the revenue is then registered at the company and then you pay the sales person a portion of that revenue yeah that&#39;s kind of the underlying principle of sales compensation but it gets a lot more complicated so what do you measure on revenue or new revenue or renewals do you play major account managers and territory reps the same way what about people who are working retail or others that are maybe working with channel partners and what about quotas what&#39;s the purpose of them and why do you use them and how does that affect pay and what about credit splits and other things having to do with uh getting awarded for the sale so those are a lot of interesting questions and it kids can&#39;t get fairly complicated so what this program is is a way for you to learn about sales compensation it&#39;s an introduction so our title is how sales compensation works and introduction and really what it is is a it&#39;s a checklist a synopsis of the key topics in sales compensation design so you may be in finance or sales operations or sales management or hr and you&#39;ve been tasked with helping improve the sales compensation program maybe even update it for the next fiscal year well this video will give you a quick education about the topics you should be paying attention to now of course it&#39;s not an in-depth course that actually explains how to do all the calculations and the formulas and all the choices that you have there are good resources available for that but it kind of gives you a introduction a way of learning about the subject and maybe a mental checklist now for those of you who do this on a regular basis many of these topics will sound familiar with you and you should use this video as a sort of recap of what you know and just really confirming again some of the things that are important when actually designing sales compensation programs sales compensation is a wonderful uh tool management tool uh it&#39;s very effective it&#39;s proven it&#39;s worth over and over again they work if they&#39;re designed well so uh i&#39;m dave chicelli with the alexander group and uh and that i have a focus in this particular area so i get a chance to work with local and global sales organizations helping them redesign their sales coverage models and then also i act as our practice leader at the alexander group here in sales compensation and i&#39;ve written a number of books that you might find adventurous i think the one particularly in this particular subject is the book in the middle uh compensating the sales force third edition so all the things i&#39;m going to be talking about are dealt in much greater detail in that particular book okay and uh so i&#39;m glad you&#39;re here uh you&#39;ll find it very interesting hopefully some entertaining too and it&#39;s a great it&#39;s a great subject it&#39;s a great powerful management device sales reps want to do well they want to perform well management wants to reward them for their outstanding performance it&#39;s a win-win but the important thing is making sure we design them correctly okay and that&#39;s what our our session is going to be how sales compensation works an introduction so here&#39;s our topics of course we&#39;re going to talk about eight important things first of all we&#39;re going to talk about getting strategic alignment then we&#39;ll talk about coverage and segmentation we&#39;ll talk about how to charter sales jobs and how to look for where you&#39;re going to compensate and how you&#39;re going to compensate we&#39;re going to do a quick introduction of sales compensation principles they&#39;re like the building codes of sales compensation design they&#39;re they&#39;re universal too we&#39;re going to suggest a methodology for designing your compensation programs and remember every year sales departments look at their sales compensation programs to make sure they&#39;re in alignment with the strategy of the company going forward we&#39;re going to talk a little bit about a design formula and then how to communicate and then we&#39;ll also mention some data sources for you survey data sources and also automation vendors people that provide tools for actually automating the sales comp calculation process so with that let&#39;s get started okay well first of all what drives sellers okay is it all about pay well it&#39;s only one factor and that&#39;s kind of the first two things i want to share with you is even though we&#39;re going to be talking about sales compensation sales people are very complex people just like you are it&#39;s not just pay that motivates them of course the pay is important and it&#39;s a very visible reward system but there&#39;s a lot of other things that causes great performance at the top of the list is leadership so sales leadership providing a sense of direction a mission a a communications to the sales organization about what role they&#39;re playing and why it&#39;s important for the corporation there can be no more powerful uh motivator and and communicator than the the leader standing forward saying this is why you&#39;re here this is what we want you to accomplish it gives people a sense of identity okay now accountability these are other types of measures that are not part of the compensation program and actually first line supervisors spend a lot of time tracking what sales reps are doing they do pipeline measurement you know deals outstanding there&#39;s a whole variety of activities in terms of measuring sales people and how they&#39;re performing that don&#39;t necessarily appear in the compensation program and sales representatives get regular reports of how they&#39;re performing against quota and how they&#39;re doing with campaigns and so they are they are receiving a lot of information and just like you are they are responding to anything they&#39;re being held accountable for it&#39;s in their nature to want to perform well and these other accountability measures are are ways of informing them that there&#39;s additional things that they&#39;re focusing on and making sure they&#39;re accomplishing those things okay well that then brings us to the next thing and that&#39;s personal accomplishment so remember you&#39;re motivated to do well you have personal ambitions well so do sales people and they will perform because they want to perform they have a desire to succeed they have a desire to contribute they have a desire to be recognized for their performance and so with personal uh accomplishment you know part of the team reviewing how you&#39;re doing with your sales team members it&#39;s all part of being connected being engaged with the sales organization then finally we have remuneration and we of course have cash programs such as our base salary and then we have our security programs the benefit programs and things like that and then we have incentives and there&#39;s a bunch of categories in incentives remember incentive is a you know additional reward for additional effort so we have sales compensation we also have contests and spiffs and also national recognition programs too those are all types of forms of remuneration or incentives so this particular obviously video is going to deal with the one at the bottom incentives which means do not diminish the importance of the other activities they&#39;re just as if not greater importance so where does sales comp fit in the intensity of performance accountability remember that sales organization is being measured all the time so a sales person and if you&#39;re not familiar with the world of sales people they&#39;re working continuously in what&#39;s called their sales funnel progression they have a series of deals they&#39;re putting them into their crm system their bosses are asking them about how&#39;s things going where&#39;s the next step for this particular it&#39;s a day in and day out discussion that sales reps are following it themselves making sure that they&#39;re keeping contact with their clients and customers moving the decision process forward that&#39;s the number one thing that&#39;s a day morning and night that&#39;s what sales people are thinking about is moving it forward to a final close of course then we have the performance reporting systems and those are things like which i described before these uh accomplishments these measurement systems that kind of describe how well you&#39;re doing against goal like objectives various indices okay and then finally the and then the next one which would be supervisory oversight and that kind of contributes to the boss says well how are you doing dave how&#39;s the how&#39;s the sales occurring what&#39;s xyz company where do we stand with them and then we have sales compensation so why did i mention these others first because these others actually have a bigger impact on the salesperson&#39;s psyche and motivation so sales compensation is important but it&#39;s not on top of the pyramid in terms of what sales people are focused on and why they pay attention to performing well pay is super important now we have a number of other factors that influence the salesperson membership and engagement that&#39;s our team and then appraisal there&#39;s an end most companies have an annual appraisal program and then finally the opportunity may be to be promoted and move up the ranks all of these are factors that are affecting the sales compensation program and what the previous chart in this chart is saying is remember sales compensation is one part of a huge array of things that are used in the management cycle for sales people but sales compensation is super important and by the way if you get it wrong and if you measured incorrectly or you don&#39;t pay when you&#39;re supposed to pay it becomes a huge distraction so let&#39;s talk about making sure that we&#39;re designing great sales compensation programs so with that let&#39;s take a look at first of all get strategic alignment well what does that mean so alignment and in the opposite word is i would say misalignment or obsolescence this is making sure that what the objectives of the company are can actually be seen in the sales compensation program but of course it translates through a whole bunch of steps let&#39;s just take a look at this for example sales compensation is connected so the strategic intent is sales and profit objectives that&#39;s at the top and then at the bottom we&#39;ve got our compensation program that is actually making sure there&#39;s alignment you know you can just kind of look straight up and see oh yeah the compensation program is rewarding me for the important objectives that we have this year now you might say well why would the sales or profit objectives even change well they change frequently one year we might be focused on growing revenue and the next year we might be focused on growing revenue from existing customers or maybe the after that getting new customers or it might be selling additional products to existing customers so these these ships in where the focus is usually is occurring on an annual basis now as you can see that then translate and if you&#39;re a sales leader you&#39;re then asking the question okay so which segments do we have and who&#39;s going to call in those segments and then what type of people do we need and then we have the jobs that we need to make sure that are functioning correctly so major account job and territory rep and i got to make sure the talent the people have the skills to deliver the messages and then i need to have a sales process that they follow on a regular basis and then i have performance management which i&#39;m tracking the results and then some of those results will then eventually translate into uh into the compensation program so it&#39;s a connected and it&#39;s part of a multiple set of processes and you really can&#39;t design a sales compensation program unless you take these into account now why is this chart also kind of important it tells you that prevalence of practice what your neighbor is doing down the street and how they pay their sales reps is not what you&#39;re going to follow because they are making decisions around segments talent jobs skills processes and performance measures that are unique to them now of course you want to get the target pay information from that group of people but not necessarily their pay plans okay because of their pay plans are going to be unique to them and we have a lot of benchmark data that shows there&#39;s wide variation in the actual design of the compensation program even within the same industry okay so let&#39;s talk about segment for coverage so what does that mean so sales organizations are best designed when they are organized around buyer populations now if you think about a little bit about the geometry of this most companies are organized around product divisions however the sales department needs to be organized around buyer populations and they do a variety of things with those buyer populations they go find relevant customers they persuade those customers and then they fulfill so if i take a look at this this is an example what&#39;s called a coverage map that a sales organization would employ now across the top is a simplified form of sales process uh if you actually put that into a google search and type in sales process you&#39;ll see literally hundreds of various sales processes but generally they all share these underlying principles along the top here i got to go find customers maybe that&#39;s the salesperson do it maybe it&#39;s the marketing department do it i need to persuade the customer convince them to purchase something and then i got to make sure that the customer has it so what do we mean by segments well on the left hand side is our segment population and these are the groupings of customers that you can kind of deliver the same message to so sales organizations are grouped around buyer populations not around product divisions so there&#39;s the global accounts central buy in other words it&#39;s a big customer and at their headquarters they make all the buy decisions and then we have global accounts central decide local buy wow that means i&#39;ve got a national account job where i have a key account manager calling on the customer and then i have a local sales person calling at the same time i have large accounts just big large customers i&#39;m calling on then i have my mid market accounts and my territory accounts and small accounts that are self-serve potentially so each of them are being you know the coverage is solving the access persuade and fulfill which creates a lot of jobs okay and those jobs have different objectives and those jobs therefore will have their own unique compensation program one more word about segmentation so this particular segmentation you can hear it&#39;s a both size and the nature of the buying process now there are many many flavors of segmentation we could talk about channel partners we could talk about industry verticals we could talk about a variety of other methodologies how customers might buy there are high risk products and then there are low risk products so the skill set of designing a sales organization really rests with the competency of being able to fare it out and discover segment populations that you provide value proposition to that are covered by sales people or some connected device that then if there&#39;s a person involved then rewarding them for their point of persuasion so that&#39;s why all of a sudden sales compensation starts to take on a degree of complexity because we have a lot of jobs doing different things with different populations of customers so let&#39;s take a look at some examples so this would be known as a direct sales job and i&#39;m just giving you an illustration of where the jobs might come from so along the top we have the makers and these are people that make things manufacturers or they may be a service provider or maybe they&#39;re underwriters but that they&#39;re the creator of the product and along the bottom are the buyers and they could be commercial buyers you know industrial commercial buyers or they could be government buyers they can even be consumers okay and so that on the left-hand side that means that the manufacturer direct has its own sales people that sells to that population and it can take on lots and lots of different iterations your company would be unique to you if you&#39;re selling direct okay so this example here uh we and this is a famous you know most common design known as the stratified sales department which we have the large customers at the top and then we have the small customers at the bottom maybe even a consumer population and then i have these different jobs global account managers strategic account pursuit team you know this is a group of sales resources put together temporarily to go after a major deal okay i keep asking you the question how would you compensate them okay how would you compensate a pursuit team how would you compensate a key account manager or about a territory representative or what about sales coming through the web okay is is that confident somebody getting compensated for that that&#39;s a good question and there might be additional jobs making all this work effectively there might be a business development person they go out and stimulate business they don&#39;t write an order they may even refer to a channel or they are simply an advocate for the product and the customers then uh contact you know their local sales person uh pre-sale support these might be engineers or technical people uh product overlay specialists we&#39;ve got a sales person covering a territory and they need help technical help with a certain line of product and so this overlay specialist might be a product specialist maybe supporting 20 sales reps okay so again ask the question how do you compensate product specialist or same way industry specialists or installation support people or customer service or should they be incented so that kind of gives you a a picture that what happens is that we&#39;re taking these business units we&#39;re redividing them into customer populations and then we&#39;re allocating jobs to them and then that raises the question okay so we have a whole management system sales process we have supervisory practices we have reporting systems and a compensation system okay here&#39;s our indirect sellers now there&#39;s a lot of content on this page but let me describe what we have here real briefly got the manufacturers again however we don&#39;t sell directly to the end user we sell through an intermediary so the dark oval lines is if you&#39;re the manufacturer those are the people that you have in the field you might have partner managers or you might have channel enablers you might have channel sellers and you might have category managers those are all examples of talent that you might have in your organization so these are and there&#39;s a huge variety of indirect channels again you&#39;re faced with the question if those are your employees your product managers your channel enablers your channel sellers your category how are you going to compensate them remember they&#39;re not selling to the end user they&#39;re selling to a partner who is then selling to the end user now there we have the partner jobs at the bottom full solutions to sell sellers adoption sellers choice sellers purchase assistance folks those are all the jobs and if you happen to be one of the intermediaries a partner well you&#39;re going to have the jobs along the bottom and then the question raises okay well how am i going to compensate those and just so you can understand what some of these acronyms are oem original equipment manufacturer bar value added reseller broker is a person who represents the buyer they then sell to the buyer when they pick from a variety of vendors kind of like your insurance broker they&#39;re they&#39;re supposed to shop insurance for you as you can see that produces lots and lots of different interaction points between the manufacturer and the buyer we may then have going through this indirect channel okay all right next let&#39;s get down in more detail into the sales jobs because that&#39;s the gateway in the sales compensation design so so the charter sales job so jobs sales jobs sales jobs are super important to be designed correctly okay and then frequently there&#39;s a challenge that says well the compensation system isn&#39;t working and so you go okay well what&#39;s wrong with the compensation system and frequently you know sales compensation systems start to grind to a halt well maybe it&#39;s the quota setting system that&#39;s bad or are we we&#39;re not tracking all the sales correctly that&#39;s the administrative system or maybe product management has unrealistic objectives for the sales force or we just didn&#39;t communicate well but let me suggest to you and this has been our experience is that over over hundreds of hundreds of projects we find rampant job design errors now you might say well i&#39;m here just to design the formulas well you cannot design the formulas without looking at the jobs themselves because jobs often become damaged over a period of time it&#39;s not intentional but it becomes damage over a period of time for example the word corrupted job not person the job got corrupted this would be an example where the sales person&#39;s selling selling selling but there&#39;s a whole bunch of service issues but now they&#39;re spending their time on service issues and not on sales that job&#39;s broken so we&#39;ve got a broken service function that&#39;s not it&#39;s backed up into the sales job that needs to be cleaned up no compensation system is going to solve you know the sales results when you have a job that&#39;s spending most of its time on service issues rather than on sales issues so and then the the second would be the blended job well we&#39;ll have them call on new customers and existing customers well in some sparse geographic areas that&#39;s necessary you can&#39;t support two sales people but normally that job is split apart into a hunter and a farmer otherwise the blended job gets hard to operate yeah here&#39;s another example of brenda blender the branch manager not only are they supervising people they have their own accounts okay it&#39;s sometimes it&#39;s necessary from a cost point of view but you can hear that you know there&#39;s competition in the person&#39;s head about what should i be spending my time on now raise the question how are you going to compensate for that okay and then we have overloaded jobs we&#39;ve just given them too many products and too many buyer populations to call on or the job has evolved you know you started off as getting new customers now we&#39;re actually managing existing customers well the pay system that you use for startup or getting customers is actually a different pay system for managing and that&#39;s the account manager plan i&#39;m not quite sure what these images represent these these people in lying down here just bear with me a second here so the usual suspects are they in line for what i don&#39;t know for a lineup or these are the these are the typical things that it&#39;s too funny and thank you for the young ladies uh image up here and she&#39;s telling us no there really are hidden culprits and those are job design areas and most of the time the sales compensation programs that i work with that that are struggling usually have job design mistakes and those need to be cleaned up okay so here&#39;s some tools like a microscope for looking at a job here&#39;s a really simple uh 2x2 and i&#39;m going to walk you through it and set it up then i&#39;ll show you how to apply it so first of all if we take the world and put buyers on one side and products on along the bottom and we divide buyers into two populations one there are current customers and the other is prospects and we take products and break them into two populations current products and newer different products you can see there are four types of selling behaviors and uh remember the discussion about blended well this is an example that if you&#39;re asking the sales person to do all these things i want you to sell current customers new products i want you to sell new customers new products uh so you can see that we have a variety of things that we&#39;re asking the salesperson to do now why this is a helpful chart you can just ask any uh sales leader or you know field manager tell me how the sales person is spending their time which of these four buckets are they focused on of all of them okay well then divide up their time what time oh yeah and plot the revenue in each of these four boxes and actually plot the profitability so you can do it by a job okay so a job you know you might have 300 sales reps and you can just actually do time measurement and find out where they&#39;re spending their time and if they&#39;re spending a lot of time in the lower left-hand corner they&#39;re doing what&#39;s called fulfillment selling okay you could expect a startup company you know would be doing new market selling in the upper right hand corner you you now know and you are saying well of course i would pay differently the new market seller than the fulfillment selling and remember the discussion about blended whenever you&#39;re asking someone to do all these things at the same time i&#39;m not quite sure how you compensate that job total revenue but where do they spend their time where do you want them to spend their time so moving on you can see most sales organizations will eventually as they get larger not in the beginning because they&#39;re basically doing you know new account selling you know if they&#39;re spending their finding they&#39;re spending a lot of time doing fulfillment selling they will then maybe provide some market specialist or product specialist to help sell the new products or get it get into customers we haven&#39;t sold before or maybe even create a dedicated sales force in the upper right hand corner so these are where our jobs come from so the classic territory rep is usually asked to do all of these things it&#39;s pretty challenging job and if you actually measure their time they seem to be all over the place sometimes they&#39;re working with existing customers sometimes they&#39;re calling on new customers you can see the account manager spends most of his or her time in the lower left-hand corner and new account seller would be along the top why am i doing this because everything that i have up there you know product specialist dedicated sales team territory rep account manager they all get their own compensation program based upon the performance measures for that job so where are we so alignment what is the company&#39;s business objectives what are we trying to accomplish segmentation you know why how are we grouping the customers for coverage purposes jobs you know so we have all these different populations of jobs that need to cover the customer base and then we drill in a little bit further and what we&#39;re hunting for is what&#39;s called the point of persuasion and that&#39;s the question that you&#39;re going to ask to determine who gets compensated so one of our principles is that you pay for persuasion and you can see we have access persuade fulfill and we&#39;ve given a little more breakdown now you can obviously there&#39;s some further identifications identify qualify access the needs propose a solution close implement the solution and then retain so what is the red dot the red dot is the person who did the persuasion that&#39;s the person that gets sales compensation now you may have a different philosophy you say well i saw one team and i all want people to work together okay that&#39;s that&#39;s a whole nother discussion we&#39;re not covering that right now that&#39;s sort of group selling behavior there are instances when you would want to do that when they&#39;re co-dependent on each other but these are really kind of standalone jobs and so easily you know we would be paying the sales rep uh the generalist rep uh uh at sales incentive but what about the inside sales and service job um you know we would probably be paying them uh an incentive for um re-signing people and then a sales hunter what are they doing they&#39;re actually not actually selling they&#39;re identifying opportunities so there really really isn&#39;t an incentive there they&#39;re just identifying opportunities for the sales force to call on okay so next you can actually see then you have these coverage models and we talk about jobs the classic is in the upper top you know the field hunter account manager job uh there might be an engineer supporting it and maybe a renewal rep but notice now with the digital selling or digital evolution we have now are very disintegrated uh separated apart process i meant the word disaggregated sales process where we have maybe self learning web program manager uh we try and buy program manager uh an inside sales person we still have our field rep each of those creates a series of jobs that has a certain focus that gets rewarded for what they&#39;re being asked to do and that&#39;s the essence of sales compensation so a lot of sales compensation work is about job definition cleaning them up making sure they&#39;re not corrupted or blended or overloaded or anything like that and that they&#39;re aligned to the segments that they belong in without doing those steps you can probably design a fairly average to below average sales compensation program but most broken sales compensation programs have some degree of job damage and needs to be clarified through the sales coverage process okay now what about principles so i use the expression building codes what about building what are building codes so if i look around the room right now that you&#39;re in okay take a look at the door do you know how many inches that door handle is off the ground well if you&#39;re in the u.s and we&#39;re using our our measurement systems here in inches and feet that&#39;s actually 36 inches off the ground and the light switch is 42 inches off the ground and that socket on the wall is 12 inches on the ground how did i know that well because there&#39;s a set of building codes that are followed you know they&#39;re published locally here they&#39;re a set of building codes that we follow when we&#39;re building buildings okay now when it comes to sales compensation there&#39;s actually a set of building codes but they operate on a worldwide basis globally regardless of the industry you&#39;re in now there&#39;s many subtleties to these principles and yes they do allow to be adjusted or bend a little bit to accommodate a company&#39;s situation but if i was sitting at the headquarters of a very large company and i had regions around the world and product divisions around the world with their own sales forces i would want to make sure that i published the company&#39;s sales compensation principles by then then taking the unique nature of the jobs that they have in tokyo versus the us versus germany and pushing them through these principles i&#39;ll come out with a design that&#39;s consistent with the job design in that location the principles don&#39;t change but what might be different is the actual construct of the job itself so there&#39;s lots of different principles but one of the first things we&#39;ve got to get clarified on right away is that there are really two different types of sellers and i want to chat with you about that because it has a very important implication for sales compensation design so many of you might be thinking they&#39;re saying well wait wait a minute what about reta real estate sales people or financial advisors or or stock brokers or life insurance people um what about those people you know that&#39;s not so complicated well good for you you&#39;re describing what&#39;s known as a producer so in the world of sales departments and sellers there are two types of sellers one is known as a producer and the other is known as a sales representative and here are the plan designs that are actually applied to those the producers are on the left they get a target rate they don&#39;t have a target compensation amount they get a percentage of everything they bring in and producers one of the characteristics of producers is the company and the salesperson are in business together now yes of course they are an employee of the company but they&#39;re basically splitting the revenue or the profit or whatever the measure is that&#39;s coming in and the company provides administrative support and the seller brings their customers and they kind of optimize that and by the way they can make a lot of money or they can make little money okay so we&#39;re not really managing to a target pay but that commission rate is very well established in that market segment in that country so now one of the things about producers is it&#39;s unique to the market and it&#39;s seldom the designs sell them change and again let&#39;s think about those those would be things like real estate life insurance financial advisors stock brokers collections people okay that&#39;s another type of producer type plan whereas on the other columns what we call the sales representative plans these are people that you hire that&#39;s representing your unique value proposition they participate in two types of incentive programs so the first being the 3x on cap which is the most popular design for sales representatives so now watch make sure you hear the terms producer sales representative two types of sellers producers sales representatives so on the target pay side i&#39;m talking about sales representatives they&#39;re representing your product and by the way if they left they would go work for somebody else and represent their product if your producer left they may take their customers with them because the relationship is with the sales representative and that&#39;s where the unique value is so under the target pay system the most common design for a sales representative is known as the 3x on cap design and i&#39;m going to describe it to you but i&#39;m going to revisit it in a second now why am i spending some time on this because this is some of the underlying geometry and math associated with sales compensation so 3x on cap what does that mean well let&#39;s presume we&#39;re going to give you a target pay of 100 000 we&#39;ve collected survey data decided to to mark your compensation at the 100 000 level and that&#39;s what we want you to earn when you hit quota that&#39;s represented by that line across those two columns that&#39;s the target total compensation or sometimes referred to as on target earnings okay then i&#39;m going to split that into two pieces i&#39;m going to have a base salary component and i&#39;m going to have an at-risk component told to the sales reps as their target incentive now what do you mean by the 3x well the upside earning opportunity is 3x the at-risk component let me do that math for you if i take the 100 000 and split it into two pieces 70-30 i have a 70 000 base and a 30 000 incentive opportunity the best performers should be able to earn a hundred and sixty thousand how did i get that number i took the 30 times three ninety i added it to the base 70 that gave me the 160. now what that means is the best performers the top 10 should be able to earn 160 and that fact maybe a little bit more not a whole lot more but a little bit more and that is done when you&#39;re building the formulas you&#39;re making sure that the top 10 percentile of performers are earning the 3x that&#39;s one of the most common designs in sales compensation it&#39;s not everywhere some companies do 2.5 others do 3.5 but if you look across a great swath of data around the world it&#39;s generally a 3x on cap design the 2x cap design is used occasionally in sales departments you would know it most commonly as the management incentive plan a 2x cap is usually a design used for the vice president&#39;s direct outside the sales department i&#39;m describing here you know the executives and the directors maybe even the managers in which the person has offered a salary and then they have a bonus opportunity of 30 percent and if they do really well by the end of the year that 30 percent can be up to 60 and they&#39;re measured on a couple of things company performance division individual kpis but not more than 60 that&#39;s why it&#39;s called a 2x cap and that&#39;s really prevalent and used for management center program it&#39;s occasionally used in the sales space for example pre-support engineers are usually a 2x cap design consumer package goods generally pay a 2x cap design also so those are the things that are available to us let&#39;s take a little bit more detail of that so remember income producers they have a target rate the value is created by the seller the account owner is the sales person gosh if they left they might take their big accounts with them their big contacts with them the basis of pay is revenue they get a percentage of everything real estate traders independent agents multi-level marketers they&#39;re all producers whereas sales representatives which we&#39;re going to focus on have a target pay we&#39;re hiring them to represent our product uh the account owner the company is the account owner and in fact the salesperson left it they&#39;re very unlikely that they&#39;ll take the business with them they&#39;re going to manage to a target pay these would be our classic titles of territory rep account manager channel manager and then product specialist and you can actually see the math behind here this is what how the labor market actually treats these jobs the income producer is the red line the more you sell the more you get paid but the labor market tends to save the sales representative yeah keep selling and we&#39;re going to pay you more money but eventually because we&#39;re setting the target pays at different job levels across this targeted line you know at a certain point there the market is not going to be paying more money for more volume so total annual earnings will increase but tend to flatten out even as the volume is increasing and so you can actually see for a sales representative plan this labor market line is actually broken into the classic jobs territory reps senior sales representative account manager senior account manager global account manager and each of those boxes is the width so that means that the territory rep has more pay at risk and the global account manager has less pay at risk and that kind of describes the range of those of those earning opportunities and that&#39;s what the labor market if you look at the survey data actually suggests so not not a producer line sales representative line so now we have different target pay levels that we need to back the formulas into okay so let&#39;s revisit the question of total target compensation so we&#39;re going to be talking about you know the orange and green and blue but we&#39;ll also maybe visit a little bit with some of these other components too so notice that it&#39;s made up what a salesperson earns is made up many components they have sales expense they&#39;re normally being reimbursed for they have benefits hopefully the same as all other employees at the company a salary a target incentive amount an upside earning amount some extra money for contests and spiffs yes those are valuable particularly for doing things new for the first time and then recognition which kind of describes what&#39;s important to us in a national sales meeting or at a president&#39;s club these recognition events they don&#39;t have a lot of monetary value but they have a lot of cultural value and a lot of psychic intrinsic value to the sales person so all of that kind of gets us to the discussion about the total stack of things that are available that line going across is that on target earnings or target total cash compensation and so this is a complete picture of what is being offered so when you&#39;re doing sales compensation design you&#39;re usually what&#39;s the salary going to be what&#39;s the target incentive and what&#39;s the upside opportunity so that&#39;s our sales representative discussion and we&#39;re going to stay with that so we&#39;re going to set aside producers and you might ask a question well how do i find out what to pay producer your trade association these pay plans seldom change whereas sales representative plans 90 of all companies make changes to their sales representative compensation plans on an annual basis but multi-level marketers you know traders that compensation program producers will seldom change okay so let&#39;s take a look at some of our building block concepts and remember we&#39;re only doing a really quick drive-by on them and what we&#39;re really asking you to do is make a mental checklist oh my goodness i got to make sure i set up the payments correctly i got to make sure i set up the leverage correctly and make sure i got to select the measures correctly so those are all by job so each job while they all share the same principles each job gets its own compensation program okay so pay mix reflects the jobs degree of individual influence so the more the sales rep is convincing the customer to purchase that&#39;s called degree of degree of persuasion the lower the base salary portion of the total target compensation seldom doesn&#39;t go below 50 50 and it doesn&#39;t sell them doesn&#39;t ever get more uh shallow than 90 10. so somewhere between 50 50 and 90 10 and the most popular one say for account manager job would be about 65 35 65 in base 35 and target incentive but 60 40 70 30 those are kind of in the zip code kind of close to the numbers that are most commonly used for account managers however i want my global account manager might be closer to a 75 25 or an 80 20. then the upside so this is what we have already shared this math with you but let me revisit it again and let&#39;s look at the middle column again so the target incentive is one hundred thousand i have a split seventy percent base thirty percent in target incentive times three add that to the seventy gives me the 160 and you can see then that&#39;s the range of earnings the low performers will get zero and the average performers will get a hundred and the outstanding performers will get 160 in fact there will be some people that&#39;ll earn more than 160 170 180 but not a lot more okay leverage upside down reflects the jobs degree of individual influence and obtaining quota and considering benchmarks now we do need to check with the labor market so this rule 3x on cap is actually a representation of the labor market so if your labor market says after you look at the survey and says you know it&#39;s not 3x in our industry it&#39;s more like 3.25 or it&#39;s maybe closer to 2.75 or 2.5 then you&#39;re going to build your formulas based upon what your labor market is doing so remember 3x is a starting point if you don&#39;t have survey data use 3x it&#39;s very very prevalent but if you do have survey data and it contradicts the 3x follow the survey data just so we have our vocabulary right remember the word mix describes the split of the target incentive the word leverage is this is a multiplier of the at-risk component giving you the top number and upside which is expressed in the currency is the currency amount for earning over quota performance okay so just briefly there&#39;s a long set of discussions around where does sales compensation monies come from now you know where it comes from from the producers they&#39;re splitting the revenue with the company if the producer produces a lot they get a lot of money the company gets a lot of money the producer doesn&#39;t produce much company doesn&#39;t get much money the producer doesn&#39;t get much money but where does the money come from sales representatives well in an odd twist of fate they&#39;re actually funding their own sales compensation program so remember that 30 the at-risk component well if you have 20 reps you basically have captured 30 000 three times i mean 20 times which means you have a budget of about six hundred thousand it&#39;s that six hundred thousand dollar budget that&#39;s being reallocated the low performers earning less and the high performers earning more now it&#39;s not a hard formula pay programs sometimes will pay out a little bit richer than their target amount however the logic is where does the funding for sales compensation come from it&#39;s not well it&#39;s not the revenue of the company of course they&#39;re paying for the head count it really comes the variable component really becomes from the participants themselves and so that&#39;s kind of a shocking thing to realize and also points out that the cost of the company is not variable so one of the points is in a sales representative model um if the average pays a hundred thousand and the sales reps performing about 100 percent they should on average earn a hundred thousand some more and less someone more if the company performed at 120 percent of performance the average pace still should be a hundred thousand you should have set the quote as anticipating that hike uh quote that high revenue performance and vice versa if you come in at 90 percent of quota and the market has gotten small on you your quota should have reflected that potential shrinkage of revenue because you&#39;re obligated to the labor market in this case which is a target comp of a hundred thousand so as uncomfortable as it might seem to our finance friends sales compensation costs are not variables for sales representation it&#39;s variable to the person but not to the company meanwhile the complete opposite is true for producers uh revenues are down we pay less revenue is up we pay more the cost of sales is completely variable and it&#39;s funded by the revenues of the company directly into the producer and this and the company splitting the revenue or profit whatever the measure is they&#39;re using okay what about quota distribution height this is another important thing remember the low performers are paying the high performers so we&#39;re expecting and this is sir you know we survey this all the time and ask companies what what&#39;s your target distribution they&#39;re expecting 55 to 65 of their sales people to exceed quota and 35 to 45 not to exceed quota the low performers are paying the high performers then when the second question is asked what is the actual distribution generally companies say about 51 52 49 48 percent of their people exceeded quota and uh reach quota and the others did not reach quota so those those percentages are you know that tends to create more of a normal curve even though this is the objective and this is how you should build your formulas based upon this assumption okay and then course crediting there&#39;s a whole series of rules about crediting who gets credit for the sale split credits for example well one of the things you want to pay attention to is what&#39;s called horizontal credit vertical crediting is okay the boss gets credit for the support and sales but how many people are getting a share of the credit for compensation purposes now if i take the real revenue of the company at 100 million but the compensable revenue in other words how many times people were paid on those on that revenue comes in at 105 or 110 that means i&#39;m funding additional headcount it&#39;s not unusual for that number to be between 108 108 and 112 of the real revenue so there&#39;s revenue 100 million and then there is compensable revenue 105 to 108. why is that well we have to compensate also the national account manager and the local sales person and then we double credit between inside and outside so there&#39;s a number of places where people cooperate in terms of contributing to the persuasion their quota reflects that they&#39;re both getting credit for the quota and they are it&#39;s also in their quota but then it creates compensable amounts that are greater than the real revenue okay so we want to make sure though that number is not creeping up to 115 120 percent if that&#39;s happening then some type of safari must take place to go out and investigate why so many people are getting credited for sales on one order okay now of course the simple sales force with one person calling on their customers not an issue the larger the sales force the issue of double crediting and horizontal credit becomes much more pronounced okay your next step design successfully so how do you design a sales compensation program you sit at your computer put together a couple spreadsheets walk it on out and says here&#39;s the plan for next fiscal year okay that&#39;s not gonna work all right so we need to have some methodologies for designing well okay so let&#39;s take a look at what they might look like so be as we enter into the design process let&#39;s ask some questions what&#39;s happening with the compensation program so here&#39;s some quick checklist items you can ask yourself you&#39;re certainly not going to have all of these you may not even have one of them but use them sort of as a hey yeah that is a problem that we have and we do need to address it like the plans are ineffective they&#39;re not aligned with the strategy you know the job roles are not aligned we&#39;ve got corrupted jobs we can&#39;t hire the right people we can&#39;t retain people we are not following the building codes best practices weird practices are emerging uh lack of cross-functional leadership buy-in the product divisions don&#39;t believe it uh no fact-based decision-making everything&#39;s antidotal you know with so-and-so went to another company this is how they were paid okay that&#39;s not helpful all right then or costly and inefficient we don&#39;t have a scalable process for managing the compensation program we have risk and compliance issues we also have legal exposure sales reps are shadow accounting their paychecks they don&#39;t believe the numbers so they&#39;re spending a couple hours each week to make sure they&#39;re getting credit uh limited no transparency how payments are calculated they can&#39;t see the calculation got too many jobs too many rolls too many plans okay and then the old late cycle things compounds or deliberate blade late communications um dragged out dispute resolution inefficient use of resources to manage and comp processes kind of thought it was going to manage itself it won&#39;t okay so any of those things are happening to you you know you got to get in and get those get those addressed as part of the design process so who&#39;s responsible for the sales compensation program well we like the top bar cross-functional team who&#39;s that sales leadership sales operations we want product management representative finance sitting in we want i t and we want to review it legal and we also want hr giving us the compensation data from the marketplace and maybe helping provide some design oversight okay so you can see we you know is our cross-functional team as preferred the next uh population that&#39;s uh according to the survey said it was sales operations was responsible for sales compensation and hr was at 17.3 okay so you can see there&#39;s a variety of other players involved but we would like to see you running a team effort in designing sales compensation because a successful sales compensation program has consensus sales organization finance product management hr all those folks are in agreement with what the plan is going to look like for the next fiscal year one of the things i would suggest is part of a design process is inventory of the current plans this is a great way to do it a lot of communications float around around sales comp a lot of power points let&#39;s get it all into one page list the jobs along the bottom along the left hand side and then describe the eligibility you could actually modify that and say it&#39;s a 3x or 2x design and then target compensation levels then the mix and leverage oh yeah there&#39;s our leverage amount okay 2x and 3x and then the performance measures and the weighting of the measures and then of course the formula mechanic that&#39;s being used and of course the performance measures has its own set of principles one of those being no more than three measures no measure weight of less than 15 percent and uh those measures are then used to uh as the engine built into the calculation engine to reward and you can see all the different measures here that&#39;s why we have different compensation programs because these jobs have different charters alignment and therefore we&#39;re going to measure them based upon what we&#39;re asking them to accomplish here&#39;s the design process a lot of words on this page i&#39;ll do the headlines and just point out some of the things every year 90 of all companies review their sales compensation programs for sales representatives i didn&#39;t say producers a process you would follow would be an assessment phase where you gather all the data find out what&#39;s happening with the current program do a lot of analysis get market data alignment we&#39;re checking with senior management what do we want the sales force to do next year what do we want them to stop doing what new things we want them to start doing what what do we want them to improve doing then we have a design process and that&#39;s where our committee is going to get together and work through all the elements so that each of the jobs and then there&#39;s an implementation window in which we&#39;re going to make sure we create collateral communication material manager training all of those pieces then go out to the field and then ongoing on a regular basis is managing the plan that&#39;s usually done by sales operations answering questions making sure things are being processed correctly and then administration is usually handled by commission accounting usually in the finance department okay so design process assess align design implement so if you have a sales force let&#39;s say of 100 sales representatives that you have four or five jobs how long is this going to take maybe four to six weeks you know meeting here meeting or maybe three design meetings assessment phase two to three weeks an alignment one week implementation writing on the communication material maybe a couple of weeks to do that too you become you get into a large sales organization you have thousands of sales representatives and maybe dozens if not hundreds of jobs this process is going to extend out you&#39;ll probably start it in late august and get it all buttoned up by the middle of december or if your fiscal year isn&#39;t calendar you&#39;re going to need three or four months of work to get the compensation programs ready for next year now one of the things that some people will say well david why are you taking us through this whole process because you need to do it every year well they just want to make a few small changes to some of the plans okay that will create a a error probably that will then compound another error and those are known as tweaks those are changes that are not contextual maybe they&#39;re not that big a deal but trust me as you start to make little one-off changes you&#39;re going to miss the big picture and besides there&#39;s an important process here of re-asking the question what do we want the sales force to do next fiscal year so we&#39;re recommending even if there is no appetite for chain any major changes that you go through this same process and it will go very quickly and very briefly but if you have mergers an acquisition you acquire a new product line or there&#39;s new product launch or we got to refocus on profitability or the coverage model has changed and the segmentation models change we got to march everybody through this process and make sure that we know what the segments are what the jobs are what the performance measures are and then we build we get market data and then we build our compensation formulas and just one uh one comment here there&#39;s frequently sort of a cringing are you telling me you&#39;re going to change the sales reps compensation program they&#39;re not going to like that okay so let me solve that right now commit to the money not to the mechanics so in your communications you&#39;re committing to the earning opportunities those of you reaching quota will be earning around 100 000 those performing exceptionally well be 160. now the goals for this fiscal year are as follows in fact the planned document is usually written the plan becomes effective the first day of the fiscal year and it terminates the last day of the fiscal year okay so that&#39;s going to be you know something that you&#39;re going to have to uh take advantage of because you don&#39;t want you want an agile workforce you don&#39;t want a rigid workforce and you do not want to commit to the mechanics the mechanics if once you do that it&#39;s almost impossible to change them commit to the money and someone was um you know like you know this is the strategy we&#39;re going to do this year and here are the measures and you have an equal to if not better earning opportunity you need to test the compensation program these are your assessment phase is our pay and performance aligned okay uh the you know the cost of sales is where we expected to be are we hitting the quotas what&#39;s the payouts look like plan design effectiveness did we get the pay mix right and the pay versus performance relationship i have a chart to show you that uh did we get our quotas did they perform to the belt that curve you know 55 to 65 percent over um did the mbos work if we had them did we measure time what are people spending their time on is the job you know is the job still making sense uh employee motivation are they engaged are they satisfied what&#39;s your turnover what&#39;s your communication themes did you make mid-year changes and why do people understand them and then just overall operation this is management and administration sales comp organization we want to make sure we have a talented group of people who are helping with administration communication and the automation systems so we&#39;re going to be plotting this for every job we&#39;re going to be plotting what is the target incentive amount or what was the incentive amount earned and what is the quota achievement and in this particular case all the dots are people and this is for one job should have lined up now there are many many different types of analytics to test sales compensation programs this being the most prevalent and this particular design something&#39;s wrong here whereas the low performers who should be dotted line along the bottom are actually getting more money than they&#39;re supposed to be and it&#39;s also happening to the top performers and this is actual client data and really there was some manipulation of the contests and spiffs to take care of the low end people and sort of give another additional hit for the senior people and manipulation may have been the right word to use but some of it was also mbo assessments and things like that all right well that becomes very revealing when you take a look at these types of distribution charts another thing that&#39;s done during the design process is costing the plan and you have and this is really an excel exercise you have two techniques individual performance costing if the pay plan is relatively similar using the same measures you can take last year&#39;s performance and pump it through the new design and you can create some variables that you can then say well how is that going to affect our various employees or they earn more money or less money and is the formula working correctly remember these are done a job at a time or if you have a whole new set of measures and you just don&#39;t know what they&#39;re going to how they&#39;re going to perform at one of the things we want to do is cost it based upon different types of distribution let&#39;s say everybody did really well everybody did kind of average everybody did kind of poorly what would be the cost and how might that affect an individual okay so very important they&#39;ve set aside a couple of weeks to do this costing work while the designs are wrapping up okay next is building formulas and again formulas there&#39;s lots and lots of them and i recommend you take a look at that book compensating salesforce i got 40 different formulas these are kind of building block formulas but let me get to the underlying constructs under building formulas okay first of all we frequently use this thing known as a pay curve because it gives us a slope calculation we divide the y-axis by the x-axis and that gives us the payout rate so you can see that we have target incentive monies on the left-hand side and we have performance along the bottom and that&#39;s basically the calculation for sales compensation formula so just to make sure you know the words each of those lines going up is known as a ramp a threshold is a minimum level of performance we don&#39;t pay before that level usually not to pay for performance from previous years you don&#39;t pay for persuasion twice so revenue is continuing we put that below the threshold a progressive ramp means that we&#39;re increasing the payout rate anytime the ramp changes it&#39;s called an inflection point the upside those are the currency amounts for above target level performance so we have excellence in incentive pay and an excellence in performance and that excellence in performance has really gotten from the distribution of performance we&#39;re looking for the 90th percentile you could put a cap in don&#39;t recommend it or regress the payouts if for some reason you can&#39;t anticipate mega orders or something like that we&#39;re not a fan of either of those so but those are choices that are available so let&#39;s take a look about how these things are calculated so here&#39;s an example where we have some actual monies where we have a target incentive a hundred thousand and in this example we&#39;re not using a base salary to make the calculation easy and the excellence is three hundred thousand that&#39;s how much you would make for excellence performance and we have based upon territory size of two million dollar territory at a target and an excellence performance on a two million dollar territory is 4.5 million so everybody has the same two million dollar territory most people will be around 2 million a few people will be at 4.5 million so what are those commission rates a and b i&#39;m willing to pay 300 000 if a 2 million dollar territory produces 4.5 million in sales and you can see up here that same number is appearing and you can see the distribution chart along the lower right hand side now i need to calculate the formula so it&#39;s pretty easy you take the target incentive and you divide it by the target volume there it is compensation divided by performance times 100 to move the uh to move the decimal point gives you a five percent commission rate so really where does incentive formulas come from they&#39;re actually slope calculations you back into them you take the performance you take the compensation and divide it by the performance and that will give you the payout rate well what about the second one well you&#39;re traveling from uh 2 million in sales to 4.5 million and you&#39;re traveling and you&#39;re willing to provide another two hundred thousand of money that&#39;s a hundred thousand to three hundred thousand there&#39;s two hundred thousand in there and you set up that calculation and make that division and there you are you have the eight percent rate for the uh performance above sales volume so what said to the sales rep congratulations glad you&#39;re with us uh you all have a two million dollar territory your commission rate on our sales up to two million is five anything after that is 8 and that&#39;s what&#39;s actually communicated to the sales force there will be people who will make 300 000 maybe even slightly more based upon this formula if they go past the 4.5 million so where do incentive rates come from there are slope calculations we&#39;re taking the compensation and dividing it by the performance okay there&#39;s a variety of formula techniques so we just looked at the commission formula there are things known as icrs which means individual commission rate everybody has a different size territory and the same incentive opportunity you divide it out they get their own commission rate there are bonus formulas where you pay a percent of the incentive as a percent of quota is retired there are step bonuses and then there&#39;s the three link designs hurdles multipliers and matrices and these are considered the power group in sales compensation design and a hurdle says you can&#39;t get the accelerator unless you perform this second task really well so it links two measures together and multiplier is the same concept i&#39;m going to pay you a lot on your volume production but i&#39;ll pay you more if on this second measure you do really well or i&#39;m going to pay you less on that first measure if you do kind of not so well in the second measure and then the third technique is known as the matrix design and the matrix design has two measures that compete with each other and tells a salesperson i want you to grow and i want you to be profitable and you&#39;ll get the higher commission rate or bonus formula rate if you do both of those well now there are lots of different formula mechanics these are some of the more popular ones and they apply to different situations and so one of the things that you want to be when you&#39;re designing sales compensation programs you want to have an inventory of all the various formula mechanics that are available to you all right number seven communicate with intent all right so uh you&#39;ll hear this over and over again almost anything having to do with employees gee you got to do a great job with communications well there&#39;s no more more true than with sales compensation if you simply send out a document with a formula in it there&#39;s no connection it&#39;s got to be communicated by leadership it&#39;s got to be communicated by region managers it&#39;s got to be communicated by the first line supervisor yeah that means the sales organization communicates to their people so we don&#39;t send a road show out with sales ops and hr people we actually have the line management communicate the new plan this year&#39;s fiscal sales compensation program is intended to reward our goals for this year and we&#39;re going to be placing a focus on that remember your incentive opportunity is equal to or greater than last year and but we&#39;re going to have different measures and then you&#39;ll get a chance to see how that might impact your pay okay so when we communicate we got to check these things off we have to address these questions uh why are we making the change what is changing okay how will it work so we need a little before and after when will it go into effect uh how should i change the way i operate how is will this impact my peg and so those are you know that we need to always be able to describe those things even i&#39;m speaking of very senior leadership and i&#39;m at the national sales meeting talking about the next fiscal year comp program or i&#39;m communicating one-on-one with one of my subordinates okay so sales leader let&#39;s make sure that they&#39;re doing the right thing they provide unified consistent message to the sales organization so we don&#39;t have the vice president of sales stand up and design describe formulas for each job that&#39;s not their role okay their role is to give the mission statement the strategic alignment what&#39;s important for next fiscal year role specific training sessions so we need to make sure that we have the various jobs people can hear how their plans are going to operate so we don&#39;t want to get everybody in the same auditorium go now the account manager job now that we want to make sure that when we meet at the division level that we can say to them i mean at the district level with this first line supervisor okay we&#39;re going to talk just with the account managers now there&#39;s four or five of them describe the plan of them now we&#39;re going to speak with the territory reps a separate meeting we&#39;ll describe their plan to them and then there&#39;s one-on-one discussions where the manager meets with each person says well david you can see the new pay plan this year um it&#39;s really a great plan and there&#39;s a couple things that you could do to improve your sales results that will improve your pay levels and let me point those out to you a very helpful thing in terms of communication is putting together an incentive calculator an incentive calculator is an interactive excel sheet where people can take their real numbers uh have them pre pre-populated allow them to make changes to see how the payout system would pay them so again we&#39;re creating these uh incentive calculators by job title and then the the like the yellow colored charts are where they can plug their own numbers in okay or and that actually provides them a chance to see how they&#39;re going to earn their earnings okay uh plan document okay so we got a lot of things with a planned document and just a word of advice particularly from a legal point of view make sure you have a completely written planned document not a throwaway powerpoint or disaggregated all spread across a web portal a sales web portal we need for each job a planned document 7 to 12 pages long overview section eligibility general terms and conditions okay the compensation elements those are the payout formulas you might have two or three of those crediting rules employee changes a person is promoted they go on leave of absence they terminate quotas how they&#39;re calculated how they can be adjusted quota review board commission review board well that&#39;s our quota commission review board spiffs how they work at the company and how they would participate recognition programs and then definition of the key terms and then each person would then have their own goal there would be a separate page describing their sales objectives their quota their threshold their quota their excellence point um it would also uh you know give them a place to sign off that they&#39;ve ex that they have received their planned document that&#39;s required in several states in the u.s and it&#39;s also required in multiple countries around the world signed documents that they&#39;ve received their plans and then finally buy pay data and automation solutions now there&#39;s long lists in here and i&#39;m just going to click through the pages but this is pay data so you can&#39;t price sales jobs for sales representatives unless you have survey data and there are lots of survey data providers they specialize around industries and some of them are very large like some of the hr consulting firms have very large survey organizations collecting lots of information by vertical markets by various industries and then also by country and then we also have various trade associations that are collecting survey data too so get familiar with and make sure you spend money and buy survey information okay and again we&#39;re not here to read these but i have i think two or three pages of these and you can see the company name that&#39;s providing the surveys the many of them will have multiple multiple surveys available and and describing compensation pay levels for sales represented the different different job titles too again some more survey sources and that would be our third page on it and so each of these uh you know focus on a population let me just take a look at the top one radford uh part of the aeon organization they have an outstanding uh survey for high-tech sellers okay and uh so you get a variety of organizations and you can call them up and say this is your industry and this is the population of sellers you have do you have a survey that applies to my population and that way you&#39;ll find out and and if if they don&#39;t they may be able to recommend one to you if they&#39;re not already on this list and then finally get some automation help now what does that mean most of the time the administration of sales compensation is done on spreadsheets well that produces a difficult audit trail i mean it produces transactions where where&#39;s the audit trail it frequently is designed by a specific person who knows how it operates um you know we don&#39;t get any modeling capability we don&#39;t get any nice communications to the field that they can drill down and look at their data so there&#39;s a variety of companies uh that have produced a product just for sales compensation automation now they caught a variety of things some people call it sales performance management others call it icm incentive compensation management but these would be your top providers that have a software solutions uh and then i would suggest if you have at least 100 sales reps you definitely should be looking at one of these products and of course uh you know the prices will vary and the question is which one is the best one they&#39;re constantly updating their products so you would like to get in contact with them talk to one of their sales people give them your planned documents have them demonstrate to you how they can automate uh compensating that would be sure that we could do the modeling the sales rep could see their earnings generates a check to pay raw it generates a transaction list to payroll and gives us our performance reporting information too so with that you know it was a lot of content you&#39;re going whoa i didn&#39;t realize that was there there or if you did realize you were like yeah i got most of those covered okay so let&#39;s summarize again get strategic alignment uh where does sales organizations come from they&#39;re aligned they&#39;re connecting the company to the customer population segmentation is the skill set the top skill set of a sales leadership organization to make sure that the sales reps are aligned to the right populations clean up the jobs use sales compensation principles design successfully follow the same process build the formula you&#39;re doing a slope calculation you&#39;re dividing compensation by performance communicate with intent and then buy data and automate the process so that&#39;s your introduction to sales compensation and it&#39;s a great subject if it&#39;s part of your responsibility and something that you&#39;re being asked to contribute to there&#39;s a lot of great education available if you want to take a look at some classes you can visit worldatwork.org they actually have classes on sales compensation design so thank you for joining us uh how sales compensation work an introduction and again if you&#39;re new to the subject i think you&#39;ll find it interesting and fascinating there&#39;s a lot of great content and if you&#39;re a person has a lot of experience in this space you know make sure you&#39;re keeping your skills up to date and learning the latest practices and with that that kind of closes our program thanks for joining us i&#39;m dave chicelli with the alexander group

have you ever wondered how sales people are paid more importantly how sales compensation programs are constructed it really shouldn&amp;#39;t be that difficult if you just think about it you know sales person sells the product the revenue is then registered at the company and then you pay the sales person a portion of that revenue yeah that&amp;#39;s kind of the underlying principle of sales compensation but it gets a lot more complicated so what do you measure on revenue or new revenue or renewals do you play major account managers and territory reps the same way what about people who are working retail or others that are maybe working with channel partners and what about quotas what&amp;#39;s the purpose of them and why do you use them and how does that affect pay and what about credit splits and other things having to do with uh getting awarded for the sale so those are a lot of interesting questions and it kids can&amp;#39;t get fairly complicated so what this program is is a way for you to learn about sales compensation it&amp;#39;s an introduction so our title is how sales compensation works and introduction and really what it is is a it&amp;#39;s a checklist a synopsis of the key topics in sales compensation design so you may be in finance or sales operations or sales management or hr and you&amp;#39;ve been tasked with helping improve the sales compensation program maybe even update it for the next fiscal year well this video will give you a quick education about the topics you should be paying attention to now of course it&amp;#39;s not an in-depth course that actually explains how to do all the calculations and the formulas and all the choices that you have there are good resources available for that but it kind of gives you a introduction a way of learning about the subject and maybe a mental checklist now for those of you who do this on a regular basis many of these topics will sound familiar with you and you should use this video as a sort of recap of what you know and just really confirming again some of the things that are important when actually designing sales compensation programs sales compensation is a wonderful uh tool management tool uh it&amp;#39;s very effective it&amp;#39;s proven it&amp;#39;s worth over and over again they work if they&amp;#39;re designed well so uh i&amp;#39;m dave chicelli with the alexander group and uh and that i have a focus in this particular area so i get a chance to work with local and global sales organizations helping them redesign their sales coverage models and then also i act as our practice leader at the alexander group here in sales compensation and i&amp;#39;ve written a number of books that you might find adventurous i think the one particularly in this particular subject is the book in the middle uh compensating the sales force third edition so all the things i&amp;#39;m going to be talking about are dealt in much greater detail in that particular book okay and uh so i&amp;#39;m glad you&amp;#39;re here uh you&amp;#39;ll find it very interesting hopefully some entertaining too and it&amp;#39;s a great it&amp;#39;s a great subject it&amp;#39;s a great powerful management device sales reps want to do well they want to perform well management wants to reward them for their outstanding performance it&amp;#39;s a win-win but the important thing is making sure we design them correctly okay and that&amp;#39;s what our our session is going to be how sales compensation works an introduction so here&amp;#39;s our topics of course we&amp;#39;re going to talk about eight important things first of all we&amp;#39;re going to talk about getting strategic alignment then we&amp;#39;ll talk about coverage and segmentation we&amp;#39;ll talk about how to charter sales jobs and how to look for where you&amp;#39;re going to compensate and how you&amp;#39;re going to compensate we&amp;#39;re going to do a quick introduction of sales compensation principles they&amp;#39;re like the building codes of sales compensation design they&amp;#39;re they&amp;#39;re universal too we&amp;#39;re going to suggest a methodology for designing your compensation programs and remember every year sales departments look at their sales compensation programs to make sure they&amp;#39;re in alignment with the strategy of the company going forward we&amp;#39;re going to talk a little bit about a design formula and then how to communicate and then we&amp;#39;ll also mention some data sources for you survey data sources and also automation vendors people that provide tools for actually automating the sales comp calculation process so with that let&amp;#39;s get started okay well first of all what drives sellers okay is it all about pay well it&amp;#39;s only one factor and that&amp;#39;s kind of the first two things i want to share with you is even though we&amp;#39;re going to be talking about sales compensation sales people are very complex people just like you are it&amp;#39;s not just pay that motivates them of course the pay is important and it&amp;#39;s a very visible reward system but there&amp;#39;s a lot of other things that causes great performance at the top of the list is leadership so sales leadership providing a sense of direction a mission a a communications to the sales organization about what role they&amp;#39;re playing and why it&amp;#39;s important for the corporation there can be no more powerful uh motivator and and communicator than the the leader standing forward saying this is why you&amp;#39;re here this is what we want you to accomplish it gives people a sense of identity okay now accountability these are other types of measures that are not part of the compensation program and actually first line supervisors spend a lot of time tracking what sales reps are doing they do pipeline measurement you know deals outstanding there&amp;#39;s a whole variety of activities in terms of measuring sales people and how they&amp;#39;re performing that don&amp;#39;t necessarily appear in the compensation program and sales representatives get regular reports of how they&amp;#39;re performing against quota and how they&amp;#39;re doing with campaigns and so they are they are receiving a lot of information and just like you are they are responding to anything they&amp;#39;re being held accountable for it&amp;#39;s in their nature to want to perform well and these other accountability measures are are ways of informing them that there&amp;#39;s additional things that they&amp;#39;re focusing on and making sure they&amp;#39;re accomplishing those things okay well that then brings us to the next thing and that&amp;#39;s personal accomplishment so remember you&amp;#39;re motivated to do well you have personal ambitions well so do sales people and they will perform because they want to perform they have a desire to succeed they have a desire to contribute they have a desire to be recognized for their performance and so with personal uh accomplishment you know part of the team reviewing how you&amp;#39;re doing with your sales team members it&amp;#39;s all part of being connected being engaged with the sales organization then finally we have remuneration and we of course have cash programs such as our base salary and then we have our security programs the benefit programs and things like that and then we have incentives and there&amp;#39;s a bunch of categories in incentives remember incentive is a you know additional reward for additional effort so we have sales compensation we also have contests and spiffs and also national recognition programs too those are all types of forms of remuneration or incentives so this particular obviously video is going to deal with the one at the bottom incentives which means do not diminish the importance of the other activities they&amp;#39;re just as if not greater importance so where does sales comp fit in the intensity of performance accountability remember that sales organization is being measured all the time so a sales person and if you&amp;#39;re not familiar with the world of sales people they&amp;#39;re working continuously in what&amp;#39;s called their sales funnel progression they have a series of deals they&amp;#39;re putting them into their crm system their bosses are asking them about how&amp;#39;s things going where&amp;#39;s the next step for this particular it&amp;#39;s a day in and day out discussion that sales reps are following it themselves making sure that they&amp;#39;re keeping contact with their clients and customers moving the decision process forward that&amp;#39;s the number one thing that&amp;#39;s a day morning and night that&amp;#39;s what sales people are thinking about is moving it forward to a final close of course then we have the performance reporting systems and those are things like which i described before these uh accomplishments these measurement systems that kind of describe how well you&amp;#39;re doing against goal like objectives various indices okay and then finally the and then the next one which would be supervisory oversight and that kind of contributes to the boss says well how are you doing dave how&amp;#39;s the how&amp;#39;s the sales occurring what&amp;#39;s xyz company where do we stand with them and then we have sales compensation so why did i mention these others first because these others actually have a bigger impact on the salesperson&amp;#39;s psyche and motivation so sales compensation is important but it&amp;#39;s not on top of the pyramid in terms of what sales people are focused on and why they pay attention to performing well pay is super important now we have a number of other factors that influence the salesperson membership and engagement that&amp;#39;s our team and then appraisal there&amp;#39;s an end most companies have an annual appraisal program and then finally the opportunity may be to be promoted and move up the ranks all of these are factors that are affecting the sales compensation program and what the previous chart in this chart is saying is remember sales compensation is one part of a huge array of things that are used in the management cycle for sales people but sales compensation is super important and by the way if you get it wrong and if you measured incorrectly or you don&amp;#39;t pay when you&amp;#39;re supposed to pay it becomes a huge distraction so let&amp;#39;s talk about making sure that we&amp;#39;re designing great sales compensation programs so with that let&amp;#39;s take a look at first of all get strategic alignment well what does that mean so alignment and in the opposite word is i would say misalignment or obsolescence this is making sure that what the objectives of the company are can actually be seen in the sales compensation program but of course it translates through a whole bunch of steps let&amp;#39;s just take a look at this for example sales compensation is connected so the strategic intent is sales and profit objectives that&amp;#39;s at the top and then at the bottom we&amp;#39;ve got our compensation program that is actually making sure there&amp;#39;s alignment you know you can just kind of look straight up and see oh yeah the compensation program is rewarding me for the important objectives that we have this year now you might say well why would the sales or profit objectives even change well they change frequently one year we might be focused on growing revenue and the next year we might be focused on growing revenue from existing customers or maybe the after that getting new customers or it might be selling additional products to existing customers so these these ships in where the focus is usually is occurring on an annual basis now as you can see that then translate and if you&amp;#39;re a sales leader you&amp;#39;re then asking the question okay so which segments do we have and who&amp;#39;s going to call in those segments and then what type of people do we need and then we have the jobs that we need to make sure that are functioning correctly so major account job and territory rep and i got to make sure the talent the people have the skills to deliver the messages and then i need to have a sales process that they follow on a regular basis and then i have performance management which i&amp;#39;m tracking the results and then some of those results will then eventually translate into uh into the compensation program so it&amp;#39;s a connected and it&amp;#39;s part of a multiple set of processes and you really can&amp;#39;t design a sales compensation program unless you take these into account now why is this chart also kind of important it tells you that prevalence of practice what your neighbor is doing down the street and how they pay their sales reps is not what you&amp;#39;re going to follow because they are making decisions around segments talent jobs skills processes and performance measures that are unique to them now of course you want to get the target pay information from that group of people but not necessarily their pay plans okay because of their pay plans are going to be unique to them and we have a lot of benchmark data that shows there&amp;#39;s wide variation in the actual design of the compensation program even within the same industry okay so let&amp;#39;s talk about segment for coverage so what does that mean so sales organizations are best designed when they are organized around buyer populations now if you think about a little bit about the geometry of this most companies are organized around product divisions however the sales department needs to be organized around buyer populations and they do a variety of things with those buyer populations they go find relevant customers they persuade those customers and then they fulfill so if i take a look at this this is an example what&amp;#39;s called a coverage map that a sales organization would employ now across the top is a simplified form of sales process uh if you actually put that into a google search and type in sales process you&amp;#39;ll see literally hundreds of various sales processes but generally they all share these underlying principles along the top here i got to go find customers maybe that&amp;#39;s the salesperson do it maybe it&amp;#39;s the marketing department do it i need to persuade the customer convince them to purchase something and then i got to make sure that the customer has it so what do we mean by segments well on the left hand side is our segment population and these are the groupings of customers that you can kind of deliver the same message to so sales organizations are grouped around buyer populations not around product divisions so there&amp;#39;s the global accounts central buy in other words it&amp;#39;s a big customer and at their headquarters they make all the buy decisions and then we have global accounts central decide local buy wow that means i&amp;#39;ve got a national account job where i have a key account manager calling on the customer and then i have a local sales person calling at the same time i have large accounts just big large customers i&amp;#39;m calling on then i have my mid market accounts and my territory accounts and small accounts that are self-serve potentially so each of them are being you know the coverage is solving the access persuade and fulfill which creates a lot of jobs okay and those jobs have different objectives and those jobs therefore will have their own unique compensation program one more word about segmentation so this particular segmentation you can hear it&amp;#39;s a both size and the nature of the buying process now there are many many flavors of segmentation we could talk about channel partners we could talk about industry verticals we could talk about a variety of other methodologies how customers might buy there are high risk products and then there are low risk products so the skill set of designing a sales organization really rests with the competency of being able to fare it out and discover segment populations that you provide value proposition to that are covered by sales people or some connected device that then if there&amp;#39;s a person involved then rewarding them for their point of persuasion so that&amp;#39;s why all of a sudden sales compensation starts to take on a degree of complexity because we have a lot of jobs doing different things with different populations of customers so let&amp;#39;s take a look at some examples so this would be known as a direct sales job and i&amp;#39;m just giving you an illustration of where the jobs might come from so along the top we have the makers and these are people that make things manufacturers or they may be a service provider or maybe they&amp;#39;re underwriters but that they&amp;#39;re the creator of the product and along the bottom are the buyers and they could be commercial buyers you know industrial commercial buyers or they could be government buyers they can even be consumers okay and so that on the left-hand side that means that the manufacturer direct has its own sales people that sells to that population and it can take on lots and lots of different iterations your company would be unique to you if you&amp;#39;re selling direct okay so this example here uh we and this is a famous you know most common design known as the stratified sales department which we have the large customers at the top and then we have the small customers at the bottom maybe even a consumer population and then i have these different jobs global account managers strategic account pursuit team you know this is a group of sales resources put together temporarily to go after a major deal okay i keep asking you the question how would you compensate them okay how would you compensate a pursuit team how would you compensate a key account manager or about a territory representative or what about sales coming through the web okay is is that confident somebody getting compensated for that that&amp;#39;s a good question and there might be additional jobs making all this work effectively there might be a business development person they go out and stimulate business they don&amp;#39;t write an order they may even refer to a channel or they are simply an advocate for the product and the customers then uh contact you know their local sales person uh pre-sale support these might be engineers or technical people uh product overlay specialists we&amp;#39;ve got a sales person covering a territory and they need help technical help with a certain line of product and so this overlay specialist might be a product specialist maybe supporting 20 sales reps okay so again ask the question how do you compensate product specialist or same way industry specialists or installation support people or customer service or should they be incented so that kind of gives you a a picture that what happens is that we&amp;#39;re taking these business units we&amp;#39;re redividing them into customer populations and then we&amp;#39;re allocating jobs to them and then that raises the question okay so we have a whole management system sales process we have supervisory practices we have reporting systems and a compensation system okay here&amp;#39;s our indirect sellers now there&amp;#39;s a lot of content on this page but let me describe what we have here real briefly got the manufacturers again however we don&amp;#39;t sell directly to the end user we sell through an intermediary so the dark oval lines is if you&amp;#39;re the manufacturer those are the people that you have in the field you might have partner managers or you might have channel enablers you might have channel sellers and you might have category managers those are all examples of talent that you might have in your organization so these are and there&amp;#39;s a huge variety of indirect channels again you&amp;#39;re faced with the question if those are your employees your product managers your channel enablers your channel sellers your category how are you going to compensate them remember they&amp;#39;re not selling to the end user they&amp;#39;re selling to a partner who is then selling to the end user now there we have the partner jobs at the bottom full solutions to sell sellers adoption sellers choice sellers purchase assistance folks those are all the jobs and if you happen to be one of the intermediaries a partner well you&amp;#39;re going to have the jobs along the bottom and then the question raises okay well how am i going to compensate those and just so you can understand what some of these acronyms are oem original equipment manufacturer bar value added reseller broker is a person who represents the buyer they then sell to the buyer when they pick from a variety of vendors kind of like your insurance broker they&amp;#39;re they&amp;#39;re supposed to shop insurance for you as you can see that produces lots and lots of different interaction points between the manufacturer and the buyer we may then have going through this indirect channel okay all right next let&amp;#39;s get down in more detail into the sales jobs because that&amp;#39;s the gateway in the sales compensation design so so the charter sales job so jobs sales jobs sales jobs are super important to be designed correctly okay and then frequently there&amp;#39;s a challenge that says well the compensation system isn&amp;#39;t working and so you go okay well what&amp;#39;s wrong with the compensation system and frequently you know sales compensation systems start to grind to a halt well maybe it&amp;#39;s the quota setting system that&amp;#39;s bad or are we we&amp;#39;re not tracking all the sales correctly that&amp;#39;s the administrative system or maybe product management has unrealistic objectives for the sales force or we just didn&amp;#39;t communicate well but let me suggest to you and this has been our experience is that over over hundreds of hundreds of projects we find rampant job design errors now you might say well i&amp;#39;m here just to design the formulas well you cannot design the formulas without looking at the jobs themselves because jobs often become damaged over a period of time it&amp;#39;s not intentional but it becomes damage over a period of time for example the word corrupted job not person the job got corrupted this would be an example where the sales person&amp;#39;s selling selling selling but there&amp;#39;s a whole bunch of service issues but now they&amp;#39;re spending their time on service issues and not on sales that job&amp;#39;s broken so we&amp;#39;ve got a broken service function that&amp;#39;s not it&amp;#39;s backed up into the sales job that needs to be cleaned up no compensation system is going to solve you know the sales results when you have a job that&amp;#39;s spending most of its time on service issues rather than on sales issues so and then the the second would be the blended job well we&amp;#39;ll have them call on new customers and existing customers well in some sparse geographic areas that&amp;#39;s necessary you can&amp;#39;t support two sales people but normally that job is split apart into a hunter and a farmer otherwise the blended job gets hard to operate yeah here&amp;#39;s another example of brenda blender the branch manager not only are they supervising people they have their own accounts okay it&amp;#39;s sometimes it&amp;#39;s necessary from a cost point of view but you can hear that you know there&amp;#39;s competition in the person&amp;#39;s head about what should i be spending my time on now raise the question how are you going to compensate for that okay and then we have overloaded jobs we&amp;#39;ve just given them too many products and too many buyer populations to call on or the job has evolved you know you started off as getting new customers now we&amp;#39;re actually managing existing customers well the pay system that you use for startup or getting customers is actually a different pay system for managing and that&amp;#39;s the account manager plan i&amp;#39;m not quite sure what these images represent these these people in lying down here just bear with me a second here so the usual suspects are they in line for what i don&amp;#39;t know for a lineup or these are the these are the typical things that it&amp;#39;s too funny and thank you for the young ladies uh image up here and she&amp;#39;s telling us no there really are hidden culprits and those are job design areas and most of the time the sales compensation programs that i work with that that are struggling usually have job design mistakes and those need to be cleaned up okay so here&amp;#39;s some tools like a microscope for looking at a job here&amp;#39;s a really simple uh 2x2 and i&amp;#39;m going to walk you through it and set it up then i&amp;#39;ll show you how to apply it so first of all if we take the world and put buyers on one side and products on along the bottom and we divide buyers into two populations one there are current customers and the other is prospects and we take products and break them into two populations current products and newer different products you can see there are four types of selling behaviors and uh remember the discussion about blended well this is an example that if you&amp;#39;re asking the sales person to do all these things i want you to sell current customers new products i want you to sell new customers new products uh so you can see that we have a variety of things that we&amp;#39;re asking the salesperson to do now why this is a helpful chart you can just ask any uh sales leader or you know field manager tell me how the sales person is spending their time which of these four buckets are they focused on of all of them okay well then divide up their time what time oh yeah and plot the revenue in each of these four boxes and actually plot the profitability so you can do it by a job okay so a job you know you might have 300 sales reps and you can just actually do time measurement and find out where they&amp;#39;re spending their time and if they&amp;#39;re spending a lot of time in the lower left-hand corner they&amp;#39;re doing what&amp;#39;s called fulfillment selling okay you could expect a startup company you know would be doing new market selling in the upper right hand corner you you now know and you are saying well of course i would pay differently the new market seller than the fulfillment selling and remember the discussion about blended whenever you&amp;#39;re asking someone to do all these things at the same time i&amp;#39;m not quite sure how you compensate that job total revenue but where do they spend their time where do you want them to spend their time so moving on you can see most sales organizations will eventually as they get larger not in the beginning because they&amp;#39;re basically doing you know new account selling you know if they&amp;#39;re spending their finding they&amp;#39;re spending a lot of time doing fulfillment selling they will then maybe provide some market specialist or product specialist to help sell the new products or get it get into customers we haven&amp;#39;t sold before or maybe even create a dedicated sales force in the upper right hand corner so these are where our jobs come from so the classic territory rep is usually asked to do all of these things it&amp;#39;s pretty challenging job and if you actually measure their time they seem to be all over the place sometimes they&amp;#39;re working with existing customers sometimes they&amp;#39;re calling on new customers you can see the account manager spends most of his or her time in the lower left-hand corner and new account seller would be along the top why am i doing this because everything that i have up there you know product specialist dedicated sales team territory rep account manager they all get their own compensation program based upon the performance measures for that job so where are we so alignment what is the company&amp;#39;s business objectives what are we trying to accomplish segmentation you know why how are we grouping the customers for coverage purposes jobs you know so we have all these different populations of jobs that need to cover the customer base and then we drill in a little bit further and what we&amp;#39;re hunting for is what&amp;#39;s called the point of persuasion and that&amp;#39;s the question that you&amp;#39;re going to ask to determine who gets compensated so one of our principles is that you pay for persuasion and you can see we have access persuade fulfill and we&amp;#39;ve given a little more breakdown now you can obviously there&amp;#39;s some further identifications identify qualify access the needs propose a solution close implement the solution and then retain so what is the red dot the red dot is the person who did the persuasion that&amp;#39;s the person that gets sales compensation now you may have a different philosophy you say well i saw one team and i all want people to work together okay that&amp;#39;s that&amp;#39;s a whole nother discussion we&amp;#39;re not covering that right now that&amp;#39;s sort of group selling behavior there are instances when you would want to do that when they&amp;#39;re co-dependent on each other but these are really kind of standalone jobs and so easily you know we would be paying the sales rep uh the generalist rep uh uh at sales incentive but what about the inside sales and service job um you know we would probably be paying them uh an incentive for um re-signing people and then a sales hunter what are they doing they&amp;#39;re actually not actually selling they&amp;#39;re identifying opportunities so there really really isn&amp;#39;t an incentive there they&amp;#39;re just identifying opportunities for the sales force to call on okay so next you can actually see then you have these coverage models and we talk about jobs the classic is in the upper top you know the field hunter account manager job uh there might be an engineer supporting it and maybe a renewal rep but notice now with the digital selling or digital evolution we have now are very disintegrated uh separated apart process i meant the word disaggregated sales process where we have maybe self learning web program manager uh we try and buy program manager uh an inside sales person we still have our field rep each of those creates a series of jobs that has a certain focus that gets rewarded for what they&amp;#39;re being asked to do and that&amp;#39;s the essence of sales compensation so a lot of sales compensation work is about job definition cleaning them up making sure they&amp;#39;re not corrupted or blended or overloaded or anything like that and that they&amp;#39;re aligned to the segments that they belong in without doing those steps you can probably design a fairly average to below average sales compensation program but most broken sales compensation programs have some degree of job damage and needs to be clarified through the sales coverage process okay now what about principles so i use the expression building codes what about building what are building codes so if i look around the room right now that you&amp;#39;re in okay take a look at the door do you know how many inches that door handle is off the ground well if you&amp;#39;re in the u.s and we&amp;#39;re using our our measurement systems here in inches and feet that&amp;#39;s actually 36 inches off the ground and the light switch is 42 inches off the ground and that socket on the wall is 12 inches on the ground how did i know that well because there&amp;#39;s a set of building codes that are followed you know they&amp;#39;re published locally here they&amp;#39;re a set of building codes that we follow when we&amp;#39;re building buildings okay now when it comes to sales compensation there&amp;#39;s actually a set of building codes but they operate on a worldwide basis globally regardless of the industry you&amp;#39;re in now there&amp;#39;s many subtleties to these principles and yes they do allow to be adjusted or bend a little bit to accommodate a company&amp;#39;s situation but if i was sitting at the headquarters of a very large company and i had regions around the world and product divisions around the world with their own sales forces i would want to make sure that i published the company&amp;#39;s sales compensation principles by then then taking the unique nature of the jobs that they have in tokyo versus the us versus germany and pushing them through these principles i&amp;#39;ll come out with a design that&amp;#39;s consistent with the job design in that location the principles don&amp;#39;t change but what might be different is the actual construct of the job itself so there&amp;#39;s lots of different principles but one of the first things we&amp;#39;ve got to get clarified on right away is that there are really two different types of sellers and i want to chat with you about that because it has a very important implication for sales compensation design so many of you might be thinking they&amp;#39;re saying well wait wait a minute what about reta real estate sales people or financial advisors or or stock brokers or life insurance people um what about those people you know that&amp;#39;s not so complicated well good for you you&amp;#39;re describing what&amp;#39;s known as a producer so in the world of sales departments and sellers there are two types of sellers one is known as a producer and the other is known as a sales representative and here are the plan designs that are actually applied to those the producers are on the left they get a target rate they don&amp;#39;t have a target compensation amount they get a percentage of everything they bring in and producers one of the characteristics of producers is the company and the salesperson are in business together now yes of course they are an employee of the company but they&amp;#39;re basically splitting the revenue or the profit or whatever the measure is that&amp;#39;s coming in and the company provides administrative support and the seller brings their customers and they kind of optimize that and by the way they can make a lot of money or they can make little money okay so we&amp;#39;re not really managing to a target pay but that commission rate is very well established in that market segment in that country so now one of the things about producers is it&amp;#39;s unique to the market and it&amp;#39;s seldom the designs sell them change and again let&amp;#39;s think about those those would be things like real estate life insurance financial advisors stock brokers collections people okay that&amp;#39;s another type of producer type plan whereas on the other columns what we call the sales representative plans these are people that you hire that&amp;#39;s representing your unique value proposition they participate in two types of incentive programs so the first being the 3x on cap which is the most popular design for sales representatives so now watch make sure you hear the terms producer sales representative two types of sellers producers sales representatives so on the target pay side i&amp;#39;m talking about sales representatives they&amp;#39;re representing your product and by the way if they left they would go work for somebody else and represent their product if your producer left they may take their customers with them because the relationship is with the sales representative and that&amp;#39;s where the unique value is so under the target pay system the most common design for a sales representative is known as the 3x on cap design and i&amp;#39;m going to describe it to you but i&amp;#39;m going to revisit it in a second now why am i spending some time on this because this is some of the underlying geometry and math associated with sales compensation so 3x on cap what does that mean well let&amp;#39;s presume we&amp;#39;re going to give you a target pay of 100 000 we&amp;#39;ve collected survey data decided to to mark your compensation at the 100 000 level and that&amp;#39;s what we want you to earn when you hit quota that&amp;#39;s represented by that line across those two columns that&amp;#39;s the target total compensation or sometimes referred to as on target earnings okay then i&amp;#39;m going to split that into two pieces i&amp;#39;m going to have a base salary component and i&amp;#39;m going to have an at-risk component told to the sales reps as their target incentive now what do you mean by the 3x well the upside earning opportunity is 3x the at-risk component let me do that math for you if i take the 100 000 and split it into two pieces 70-30 i have a 70 000 base and a 30 000 incentive opportunity the best performers should be able to earn a hundred and sixty thousand how did i get that number i took the 30 times three ninety i added it to the base 70 that gave me the 160. now what that means is the best performers the top 10 should be able to earn 160 and that fact maybe a little bit more not a whole lot more but a little bit more and that is done when you&amp;#39;re building the formulas you&amp;#39;re making sure that the top 10 percentile of performers are earning the 3x that&amp;#39;s one of the most common designs in sales compensation it&amp;#39;s not everywhere some companies do 2.5 others do 3.5 but if you look across a great swath of data around the world it&amp;#39;s generally a 3x on cap design the 2x cap design is used occasionally in sales departments you would know it most commonly as the management incentive plan a 2x cap is usually a design used for the vice president&amp;#39;s direct outside the sales department i&amp;#39;m describing here you know the executives and the directors maybe even the managers in which the person has offered a salary and then they have a bonus opportunity of 30 percent and if they do really well by the end of the year that 30 percent can be up to 60 and they&amp;#39;re measured on a couple of things company performance division individual kpis but not more than 60 that&amp;#39;s why it&amp;#39;s called a 2x cap and that&amp;#39;s really prevalent and used for management center program it&amp;#39;s occasionally used in the sales space for example pre-support engineers are usually a 2x cap design consumer package goods generally pay a 2x cap design also so those are the things that are available to us let&amp;#39;s take a little bit more detail of that so remember income producers they have a target rate the value is created by the seller the account owner is the sales person gosh if they left they might take their big accounts with them their big contacts with them the basis of pay is revenue they get a percentage of everything real estate traders independent agents multi-level marketers they&amp;#39;re all producers whereas sales representatives which we&amp;#39;re going to focus on have a target pay we&amp;#39;re hiring them to represent our product uh the account owner the company is the account owner and in fact the salesperson left it they&amp;#39;re very unlikely that they&amp;#39;ll take the business with them they&amp;#39;re going to manage to a target pay these would be our classic titles of territory rep account manager channel manager and then product specialist and you can actually see the math behind here this is what how the labor market actually treats these jobs the income producer is the red line the more you sell the more you get paid but the labor market tends to save the sales representative yeah keep selling and we&amp;#39;re going to pay you more money but eventually because we&amp;#39;re setting the target pays at different job levels across this targeted line you know at a certain point there the market is not going to be paying more money for more volume so total annual earnings will increase but tend to flatten out even as the volume is increasing and so you can actually see for a sales representative plan this labor market line is actually broken into the classic jobs territory reps senior sales representative account manager senior account manager global account manager and each of those boxes is the width so that means that the territory rep has more pay at risk and the global account manager has less pay at risk and that kind of describes the range of those of those earning opportunities and that&amp;#39;s what the labor market if you look at the survey data actually suggests so not not a producer line sales representative line so now we have different target pay levels that we need to back the formulas into okay so let&amp;#39;s revisit the question of total target compensation so we&amp;#39;re going to be talking about you know the orange and green and blue but we&amp;#39;ll also maybe visit a little bit with some of these other components too so notice that it&amp;#39;s made up what a salesperson earns is made up many components they have sales expense they&amp;#39;re normally being reimbursed for they have benefits hopefully the same as all other employees at the company a salary a target incentive amount an upside earning amount some extra money for contests and spiffs yes those are valuable particularly for doing things new for the first time and then recognition which kind of describes what&amp;#39;s important to us in a national sales meeting or at a president&amp;#39;s club these recognition events they don&amp;#39;t have a lot of monetary value but they have a lot of cultural value and a lot of psychic intrinsic value to the sales person so all of that kind of gets us to the discussion about the total stack of things that are available that line going across is that on target earnings or target total cash compensation and so this is a complete picture of what is being offered so when you&amp;#39;re doing sales compensation design you&amp;#39;re usually what&amp;#39;s the salary going to be what&amp;#39;s the target incentive and what&amp;#39;s the upside opportunity so that&amp;#39;s our sales representative discussion and we&amp;#39;re going to stay with that so we&amp;#39;re going to set aside producers and you might ask a question well how do i find out what to pay producer your trade association these pay plans seldom change whereas sales representative plans 90 of all companies make changes to their sales representative compensation plans on an annual basis but multi-level marketers you know traders that compensation program producers will seldom change okay so let&amp;#39;s take a look at some of our building block concepts and remember we&amp;#39;re only doing a really quick drive-by on them and what we&amp;#39;re really asking you to do is make a mental checklist oh my goodness i got to make sure i set up the payments correctly i got to make sure i set up the leverage correctly and make sure i got to select the measures correctly so those are all by job so each job while they all share the same principles each job gets its own compensation program okay so pay mix reflects the jobs degree of individual influence so the more the sales rep is convincing the customer to purchase that&amp;#39;s called degree of degree of persuasion the lower the base salary portion of the total target compensation seldom doesn&amp;#39;t go below 50 50 and it doesn&amp;#39;t sell them doesn&amp;#39;t ever get more uh shallow than 90 10. so somewhere between 50 50 and 90 10 and the most popular one say for account manager job would be about 65 35 65 in base 35 and target incentive but 60 40 70 30 those are kind of in the zip code kind of close to the numbers that are most commonly used for account managers however i want my global account manager might be closer to a 75 25 or an 80 20. then the upside so this is what we have already shared this math with you but let me revisit it again and let&amp;#39;s look at the middle column again so the target incentive is one hundred thousand i have a split seventy percent base thirty percent in target incentive times three add that to the seventy gives me the 160 and you can see then that&amp;#39;s the range of earnings the low performers will get zero and the average performers will get a hundred and the outstanding performers will get 160 in fact there will be some people that&amp;#39;ll earn more than 160 170 180 but not a lot more okay leverage upside down reflects the jobs degree of individual influence and obtaining quota and considering benchmarks now we do need to check with the labor market so this rule 3x on cap is actually a representation of the labor market so if your labor market says after you look at the survey and says you know it&amp;#39;s not 3x in our industry it&amp;#39;s more like 3.25 or it&amp;#39;s maybe closer to 2.75 or 2.5 then you&amp;#39;re going to build your formulas based upon what your labor market is doing so remember 3x is a starting point if you don&amp;#39;t have survey data use 3x it&amp;#39;s very very prevalent but if you do have survey data and it contradicts the 3x follow the survey data just so we have our vocabulary right remember the word mix describes the split of the target incentive the word leverage is this is a multiplier of the at-risk component giving you the top number and upside which is expressed in the currency is the currency amount for earning over quota performance okay so just briefly there&amp;#39;s a long set of discussions around where does sales compensation monies come from now you know where it comes from from the producers they&amp;#39;re splitting the revenue with the company if the producer produces a lot they get a lot of money the company gets a lot of money the producer doesn&amp;#39;t produce much company doesn&amp;#39;t get much money the producer doesn&amp;#39;t get much money but where does the money come from sales representatives well in an odd twist of fate they&amp;#39;re actually funding their own sales compensation program so remember that 30 the at-risk component well if you have 20 reps you basically have captured 30 000 three times i mean 20 times which means you have a budget of about six hundred thousand it&amp;#39;s that six hundred thousand dollar budget that&amp;#39;s being reallocated the low performers earning less and the high performers earning more now it&amp;#39;s not a hard formula pay programs sometimes will pay out a little bit richer than their target amount however the logic is where does the funding for sales compensation come from it&amp;#39;s not well it&amp;#39;s not the revenue of the company of course they&amp;#39;re paying for the head count it really comes the variable component really becomes from the participants themselves and so that&amp;#39;s kind of a shocking thing to realize and also points out that the cost of the company is not variable so one of the points is in a sales representative model um if the average pays a hundred thousand and the sales reps performing about 100 percent they should on average earn a hundred thousand some more and less someone more if the company performed at 120 percent of performance the average pace still should be a hundred thousand you should have set the quote as anticipating that hike uh quote that high revenue performance and vice versa if you come in at 90 percent of quota and the market has gotten small on you your quota should have reflected that potential shrinkage of revenue because you&amp;#39;re obligated to the labor market in this case which is a target comp of a hundred thousand so as uncomfortable as it might seem to our finance friends sales compensation costs are not variables for sales representation it&amp;#39;s variable to the person but not to the company meanwhile the complete opposite is true for producers uh revenues are down we pay less revenue is up we pay more the cost of sales is completely variable and it&amp;#39;s funded by the revenues of the company directly into the producer and this and the company splitting the revenue or profit whatever the measure is they&amp;#39;re using okay what about quota distribution height this is another important thing remember the low performers are paying the high performers so we&amp;#39;re expecting and this is sir you know we survey this all the time and ask companies what what&amp;#39;s your target distribution they&amp;#39;re expecting 55 to 65 of their sales people to exceed quota and 35 to 45 not to exceed quota the low performers are paying the high performers then when the second question is asked what is the actual distribution generally companies say about 51 52 49 48 percent of their people exceeded quota and uh reach quota and the others did not reach quota so those those percentages are you know that tends to create more of a normal curve even though this is the objective and this is how you should build your formulas based upon this assumption okay and then course crediting there&amp;#39;s a whole series of rules about crediting who gets credit for the sale split credits for example well one of the things you want to pay attention to is what&amp;#39;s called horizontal credit vertical crediting is okay the boss gets credit for the support and sales but how many people are getting a share of the credit for compensation purposes now if i take the real revenue of the company at 100 million but the compensable revenue in other words how many times people were paid on those on that revenue comes in at 105 or 110 that means i&amp;#39;m funding additional headcount it&amp;#39;s not unusual for that number to be between 108 108 and 112 of the real revenue so there&amp;#39;s revenue 100 million and then there is compensable revenue 105 to 108. why is that well we have to compensate also the national account manager and the local sales person and then we double credit between inside and outside so there&amp;#39;s a number of places where people cooperate in terms of contributing to the persuasion their quota reflects that they&amp;#39;re both getting credit for the quota and they are it&amp;#39;s also in their quota but then it creates compensable amounts that are greater than the real revenue okay so we want to make sure though that number is not creeping up to 115 120 percent if that&amp;#39;s happening then some type of safari must take place to go out and investigate why so many people are getting credited for sales on one order okay now of course the simple sales force with one person calling on their customers not an issue the larger the sales force the issue of double crediting and horizontal credit becomes much more pronounced okay your next step design successfully so how do you design a sales compensation program you sit at your computer put together a couple spreadsheets walk it on out and says here&amp;#39;s the plan for next fiscal year okay that&amp;#39;s not gonna work all right so we need to have some methodologies for designing well okay so let&amp;#39;s take a look at what they might look like so be as we enter into the design process let&amp;#39;s ask some questions what&amp;#39;s happening with the compensation program so here&amp;#39;s some quick checklist items you can ask yourself you&amp;#39;re certainly not going to have all of these you may not even have one of them but use them sort of as a hey yeah that is a problem that we have and we do need to address it like the plans are ineffective they&amp;#39;re not aligned with the strategy you know the job roles are not aligned we&amp;#39;ve got corrupted jobs we can&amp;#39;t hire the right people we can&amp;#39;t retain people we are not following the building codes best practices weird practices are emerging uh lack of cross-functional leadership buy-in the product divisions don&amp;#39;t believe it uh no fact-based decision-making everything&amp;#39;s antidotal you know with so-and-so went to another company this is how they were paid okay that&amp;#39;s not helpful all right then or costly and inefficient we don&amp;#39;t have a scalable process for managing the compensation program we have risk and compliance issues we also have legal exposure sales reps are shadow accounting their paychecks they don&amp;#39;t believe the numbers so they&amp;#39;re spending a couple hours each week to make sure they&amp;#39;re getting credit uh limited no transparency how payments are calculated they can&amp;#39;t see the calculation got too many jobs too many rolls too many plans okay and then the old late cycle things compounds or deliberate blade late communications um dragged out dispute resolution inefficient use of resources to manage and comp processes kind of thought it was going to manage itself it won&amp;#39;t okay so any of those things are happening to you you know you got to get in and get those get those addressed as part of the design process so who&amp;#39;s responsible for the sales compensation program well we like the top bar cross-functional team who&amp;#39;s that sales leadership sales operations we want product management representative finance sitting in we want i t and we want to review it legal and we also want hr giving us the compensation data from the marketplace and maybe helping provide some design oversight okay so you can see we you know is our cross-functional team as preferred the next uh population that&amp;#39;s uh according to the survey said it was sales operations was responsible for sales compensation and hr was at 17.3 okay so you can see there&amp;#39;s a variety of other players involved but we would like to see you running a team effort in designing sales compensation because a successful sales compensation program has consensus sales organization finance product management hr all those folks are in agreement with what the plan is going to look like for the next fiscal year one of the things i would suggest is part of a design process is inventory of the current plans this is a great way to do it a lot of communications float around around sales comp a lot of power points let&amp;#39;s get it all into one page list the jobs along the bottom along the left hand side and then describe the eligibility you could actually modify that and say it&amp;#39;s a 3x or 2x design and then target compensation levels then the mix and leverage oh yeah there&amp;#39;s our leverage amount okay 2x and 3x and then the performance measures and the weighting of the measures and then of course the formula mechanic that&amp;#39;s being used and of course the performance measures has its own set of principles one of those being no more than three measures no measure weight of less than 15 percent and uh those measures are then used to uh as the engine built into the calculation engine to reward and you can see all the different measures here that&amp;#39;s why we have different compensation programs because these jobs have different charters alignment and therefore we&amp;#39;re going to measure them based upon what we&amp;#39;re asking them to accomplish here&amp;#39;s the design process a lot of words on this page i&amp;#39;ll do the headlines and just point out some of the things every year 90 of all companies review their sales compensation programs for sales representatives i didn&amp;#39;t say producers a process you would follow would be an assessment phase where you gather all the data find out what&amp;#39;s happening with the current program do a lot of analysis get market data alignment we&amp;#39;re checking with senior management what do we want the sales force to do next year what do we want them to stop doing what new things we want them to start doing what what do we want them to improve doing then we have a design process and that&amp;#39;s where our committee is going to get together and work through all the elements so that each of the jobs and then there&amp;#39;s an implementation window in which we&amp;#39;re going to make sure we create collateral communication material manager training all of those pieces then go out to the field and then ongoing on a regular basis is managing the plan that&amp;#39;s usually done by sales operations answering questions making sure things are being processed correctly and then administration is usually handled by commission accounting usually in the finance department okay so design process assess align design implement so if you have a sales force let&amp;#39;s say of 100 sales representatives that you have four or five jobs how long is this going to take maybe four to six weeks you know meeting here meeting or maybe three design meetings assessment phase two to three weeks an alignment one week implementation writing on the communication material maybe a couple of weeks to do that too you become you get into a large sales organization you have thousands of sales representatives and maybe dozens if not hundreds of jobs this process is going to extend out you&amp;#39;ll probably start it in late august and get it all buttoned up by the middle of december or if your fiscal year isn&amp;#39;t calendar you&amp;#39;re going to need three or four months of work to get the compensation programs ready for next year now one of the things that some people will say well david why are you taking us through this whole process because you need to do it every year well they just want to make a few small changes to some of the plans okay that will create a a error probably that will then compound another error and those are known as tweaks those are changes that are not contextual maybe they&amp;#39;re not that big a deal but trust me as you start to make little one-off changes you&amp;#39;re going to miss the big picture and besides there&amp;#39;s an important process here of re-asking the question what do we want the sales force to do next fiscal year so we&amp;#39;re recommending even if there is no appetite for chain any major changes that you go through this same process and it will go very quickly and very briefly but if you have mergers an acquisition you acquire a new product line or there&amp;#39;s new product launch or we got to refocus on profitability or the coverage model has changed and the segmentation models change we got to march everybody through this process and make sure that we know what the segments are what the jobs are what the performance measures are and then we build we get market data and then we build our compensation formulas and just one uh one comment here there&amp;#39;s frequently sort of a cringing are you telling me you&amp;#39;re going to change the sales reps compensation program they&amp;#39;re not going to like that okay so let me solve that right now commit to the money not to the mechanics so in your communications you&amp;#39;re committing to the earning opportunities those of you reaching quota will be earning around 100 000 those performing exceptionally well be 160. now the goals for this fiscal year are as follows in fact the planned document is usually written the plan becomes effective the first day of the fiscal year and it terminates the last day of the fiscal year okay so that&amp;#39;s going to be you know something that you&amp;#39;re going to have to uh take advantage of because you don&amp;#39;t want you want an agile workforce you don&amp;#39;t want a rigid workforce and you do not want to commit to the mechanics the mechanics if once you do that it&amp;#39;s almost impossible to change them commit to the money and someone was um you know like you know this is the strategy we&amp;#39;re going to do this year and here are the measures and you have an equal to if not better earning opportunity you need to test the compensation program these are your assessment phase is our pay and performance aligned okay uh the you know the cost of sales is where we expected to be are we hitting the quotas what&amp;#39;s the payouts look like plan design effectiveness did we get the pay mix right and the pay versus performance relationship i have a chart to show you that uh did we get our quotas did they perform to the belt that curve you know 55 to 65 percent over um did the mbos work if we had them did we measure time what are people spending their time on is the job you know is the job still making sense uh employee motivation are they engaged are they satisfied what&amp;#39;s your turnover what&amp;#39;s your communication themes did you make mid-year changes and why do people understand them and then just overall operation this is management and administration sales comp organization we want to make sure we have a talented group of people who are helping with administration communication and the automation systems so we&amp;#39;re going to be plotting this for every job we&amp;#39;re going to be plotting what is the target incentive amount or what was the incentive amount earned and what is the quota achievement and in this particular case all the dots are people and this is for one job should have lined up now there are many many different types of analytics to test sales compensation programs this being the most prevalent and this particular design something&amp;#39;s wrong here whereas the low performers who should be dotted line along the bottom are actually getting more money than they&amp;#39;re supposed to be and it&amp;#39;s also happening to the top performers and this is actual client data and really there was some manipulation of the contests and spiffs to take care of the low end people and sort of give another additional hit for the senior people and manipulation may have been the right word to use but some of it was also mbo assessments and things like that all right well that becomes very revealing when you take a look at these types of distribution charts another thing that&amp;#39;s done during the design process is costing the plan and you have and this is really an excel exercise you have two techniques individual performance costing if the pay plan is relatively similar using the same measures you can take last year&amp;#39;s performance and pump it through the new design and you can create some variables that you can then say well how is that going to affect our various employees or they earn more money or less money and is the formula working correctly remember these are done a job at a time or if you have a whole new set of measures and you just don&amp;#39;t know what they&amp;#39;re going to how they&amp;#39;re going to perform at one of the things we want to do is cost it based upon different types of distribution let&amp;#39;s say everybody did really well everybody did kind of average everybody did kind of poorly what would be the cost and how might that affect an individual okay so very important they&amp;#39;ve set aside a couple of weeks to do this costing work while the designs are wrapping up okay next is building formulas and again formulas there&amp;#39;s lots and lots of them and i recommend you take a look at that book compensating salesforce i got 40 different formulas these are kind of building block formulas but let me get to the underlying constructs under building formulas okay first of all we frequently use this thing known as a pay curve because it gives us a slope calculation we divide the y-axis by the x-axis and that gives us the payout rate so you can see that we have target incentive monies on the left-hand side and we have performance along the bottom and that&amp;#39;s basically the calculation for sales compensation formula so just to make sure you know the words each of those lines going up is known as a ramp a threshold is a minimum level of performance we don&amp;#39;t pay before that level usually not to pay for performance from previous years you don&amp;#39;t pay for persuasion twice so revenue is continuing we put that below the threshold a progressive ramp means that we&amp;#39;re increasing the payout rate anytime the ramp changes it&amp;#39;s called an inflection point the upside those are the currency amounts for above target level performance so we have excellence in incentive pay and an excellence in performance and that excellence in performance has really gotten from the distribution of performance we&amp;#39;re looking for the 90th percentile you could put a cap in don&amp;#39;t recommend it or regress the payouts if for some reason you can&amp;#39;t anticipate mega orders or something like that we&amp;#39;re not a fan of either of those so but those are choices that are available so let&amp;#39;s take a look about how these things are calculated so here&amp;#39;s an example where we have some actual monies where we have a target incentive a hundred thousand and in this example we&amp;#39;re not using a base salary to make the calculation easy and the excellence is three hundred thousand that&amp;#39;s how much you would make for excellence performance and we have based upon territory size of two million dollar territory at a target and an excellence performance on a two million dollar territory is 4.5 million so everybody has the same two million dollar territory most people will be around 2 million a few people will be at 4.5 million so what are those commission rates a and b i&amp;#39;m willing to pay 300 000 if a 2 million dollar territory produces 4.5 million in sales and you can see up here that same number is appearing and you can see the distribution chart along the lower right hand side now i need to calculate the formula so it&amp;#39;s pretty easy you take the target incentive and you divide it by the target volume there it is compensation divided by performance times 100 to move the uh to move the decimal point gives you a five percent commission rate so really where does incentive formulas come from they&amp;#39;re actually slope calculations you back into them you take the performance you take the compensation and divide it by the performance and that will give you the payout rate well what about the second one well you&amp;#39;re traveling from uh 2 million in sales to 4.5 million and you&amp;#39;re traveling and you&amp;#39;re willing to provide another two hundred thousand of money that&amp;#39;s a hundred thousand to three hundred thousand there&amp;#39;s two hundred thousand in there and you set up that calculation and make that division and there you are you have the eight percent rate for the uh performance above sales volume so what said to the sales rep congratulations glad you&amp;#39;re with us uh you all have a two million dollar territory your commission rate on our sales up to two million is five anything after that is 8 and that&amp;#39;s what&amp;#39;s actually communicated to the sales force there will be people who will make 300 000 maybe even slightly more based upon this formula if they go past the 4.5 million so where do incentive rates come from there are slope calculations we&amp;#39;re taking the compensation and dividing it by the performance okay there&amp;#39;s a variety of formula techniques so we just looked at the commission formula there are things known as icrs which means individual commission rate everybody has a different size territory and the same incentive opportunity you divide it out they get their own commission rate there are bonus formulas where you pay a percent of the incentive as a percent of quota is retired there are step bonuses and then there&amp;#39;s the three link designs hurdles multipliers and matrices and these are considered the power group in sales compensation design and a hurdle says you can&amp;#39;t get the accelerator unless you perform this second task really well so it links two measures together and multiplier is the same concept i&amp;#39;m going to pay you a lot on your volume production but i&amp;#39;ll pay you more if on this second measure you do really well or i&amp;#39;m going to pay you less on that first measure if you do kind of not so well in the second measure and then the third technique is known as the matrix design and the matrix design has two measures that compete with each other and tells a salesperson i want you to grow and i want you to be profitable and you&amp;#39;ll get the higher commission rate or bonus formula rate if you do both of those well now there are lots of different formula mechanics these are some of the more popular ones and they apply to different situations and so one of the things that you want to be when you&amp;#39;re designing sales compensation programs you want to have an inventory of all the various formula mechanics that are available to you all right number seven communicate with intent all right so uh you&amp;#39;ll hear this over and over again almost anything having to do with employees gee you got to do a great job with communications well there&amp;#39;s no more more true than with sales compensation if you simply send out a document with a formula in it there&amp;#39;s no connection it&amp;#39;s got to be communicated by leadership it&amp;#39;s got to be communicated by region managers it&amp;#39;s got to be communicated by the first line supervisor yeah that means the sales organization communicates to their people so we don&amp;#39;t send a road show out with sales ops and hr people we actually have the line management communicate the new plan this year&amp;#39;s fiscal sales compensation program is intended to reward our goals for this year and we&amp;#39;re going to be placing a focus on that remember your incentive opportunity is equal to or greater than last year and but we&amp;#39;re going to have different measures and then you&amp;#39;ll get a chance to see how that might impact your pay okay so when we communicate we got to check these things off we have to address these questions uh why are we making the change what is changing okay how will it work so we need a little before and after when will it go into effect uh how should i change the way i operate how is will this impact my peg and so those are you know that we need to always be able to describe those things even i&amp;#39;m speaking of very senior leadership and i&amp;#39;m at the national sales meeting talking about the next fiscal year comp program or i&amp;#39;m communicating one-on-one with one of my subordinates okay so sales leader let&amp;#39;s make sure that they&amp;#39;re doing the right thing they provide unified consistent message to the sales organization so we don&amp;#39;t have the vice president of sales stand up and design describe formulas for each job that&amp;#39;s not their role okay their role is to give the mission statement the strategic alignment what&amp;#39;s important for next fiscal year role specific training sessions so we need to make sure that we have the various jobs people can hear how their plans are going to operate so we don&amp;#39;t want to get everybody in the same auditorium go now the account manager job now that we want to make sure that when we meet at the division level that we can say to them i mean at the district level with this first line supervisor okay we&amp;#39;re going to talk just with the account managers now there&amp;#39;s four or five of them describe the plan of them now we&amp;#39;re going to speak with the territory reps a separate meeting we&amp;#39;ll describe their plan to them and then there&amp;#39;s one-on-one discussions where the manager meets with each person says well david you can see the new pay plan this year um it&amp;#39;s really a great plan and there&amp;#39;s a couple things that you could do to improve your sales results that will improve your pay levels and let me point those out to you a very helpful thing in terms of communication is putting together an incentive calculator an incentive calculator is an interactive excel sheet where people can take their real numbers uh have them pre pre-populated allow them to make changes to see how the payout system would pay them so again we&amp;#39;re creating these uh incentive calculators by job title and then the the like the yellow colored charts are where they can plug their own numbers in okay or and that actually provides them a chance to see how they&amp;#39;re going to earn their earnings okay uh plan document okay so we got a lot of things with a planned document and just a word of advice particularly from a legal point of view make sure you have a completely written planned document not a throwaway powerpoint or disaggregated all spread across a web portal a sales web portal we need for each job a planned document 7 to 12 pages long overview section eligibility general terms and conditions okay the compensation elements those are the payout formulas you might have two or three of those crediting rules employee changes a person is promoted they go on leave of absence they terminate quotas how they&amp;#39;re calculated how they can be adjusted quota review board commission review board well that&amp;#39;s our quota commission review board spiffs how they work at the company and how they would participate recognition programs and then definition of the key terms and then each person would then have their own goal there would be a separate page describing their sales objectives their quota their threshold their quota their excellence point um it would also uh you know give them a place to sign off that they&amp;#39;ve ex that they have received their planned document that&amp;#39;s required in several states in the u.s and it&amp;#39;s also required in multiple countries around the world signed documents that they&amp;#39;ve received their plans and then finally buy pay data and automation solutions now there&amp;#39;s long lists in here and i&amp;#39;m just going to click through the pages but this is pay data so you can&amp;#39;t price sales jobs for sales representatives unless you have survey data and there are lots of survey data providers they specialize around industries and some of them are very large like some of the hr consulting firms have very large survey organizations collecting lots of information by vertical markets by various industries and then also by country and then we also have various trade associations that are collecting survey data too so get familiar with and make sure you spend money and buy survey information okay and again we&amp;#39;re not here to read these but i have i think two or three pages of these and you can see the company name that&amp;#39;s providing the surveys the many of them will have multiple multiple surveys available and and describing compensation pay levels for sales represented the different different job titles too again some more survey sources and that would be our third page on it and so each of these uh you know focus on a population let me just take a look at the top one radford uh part of the aeon organization they have an outstanding uh survey for high-tech sellers okay and uh so you get a variety of organizations and you can call them up and say this is your industry and this is the population of sellers you have do you have a survey that applies to my population and that way you&amp;#39;ll find out and and if if they don&amp;#39;t they may be able to recommend one to you if they&amp;#39;re not already on this list and then finally get some automation help now what does that mean most of the time the administration of sales compensation is done on spreadsheets well that produces a difficult audit trail i mean it produces transactions where where&amp;#39;s the audit trail it frequently is designed by a specific person who knows how it operates um you know we don&amp;#39;t get any modeling capability we don&amp;#39;t get any nice communications to the field that they can drill down and look at their data so there&amp;#39;s a variety of companies uh that have produced a product just for sales compensation automation now they caught a variety of things some people call it sales performance management others call it icm incentive compensation management but these would be your top providers that have a software solutions uh and then i would suggest if you have at least 100 sales reps you definitely should be looking at one of these products and of course uh you know the prices will vary and the question is which one is the best one they&amp;#39;re constantly updating their products so you would like to get in contact with them talk to one of their sales people give them your planned documents have them demonstrate to you how they can automate uh compensating that would be sure that we could do the modeling the sales rep could see their earnings generates a check to pay raw it generates a transaction list to payroll and gives us our performance reporting information too so with that you know it was a lot of content you&amp;#39;re going whoa i didn&amp;#39;t realize that was there there or if you did realize you were like yeah i got most of those covered okay so let&amp;#39;s summarize again get strategic alignment uh where does sales organizations come from they&amp;#39;re aligned they&amp;#39;re connecting the company to the customer population segmentation is the skill set the top skill set of a sales leadership organization to make sure that the sales reps are aligned to the right populations clean up the jobs use sales compensation principles design successfully follow the same process build the formula you&amp;#39;re doing a slope calculation you&amp;#39;re dividing compensation by performance communicate with intent and then buy data and automate the process so that&amp;#39;s your introduction to sales compensation and it&amp;#39;s a great subject if it&amp;#39;s part of your responsibility and something that you&amp;#39;re being asked to contribute to there&amp;#39;s a lot of great education available if you want to take a look at some classes you can visit worldatwork.org they actually have classes on sales compensation design so thank you for joining us uh how sales compensation work an introduction and again if you&amp;#39;re new to the subject i think you&amp;#39;ll find it interesting and fascinating there&amp;#39;s a lot of great content and if you&amp;#39;re a person has a lot of experience in this space you know make sure you&amp;#39;re keeping your skills up to date and learning the latest practices and with that that kind of closes our program thanks for joining us i&amp;#39;m dave chicelli with the alexander group

Transcript for:How Sales Compensation Works: An Introduction

Transcript for:
How Sales Compensation Works: An Introduction