Strategic Initiatives in Sales Compensation: Factors to Consider

Strategic Initiatives in Sales Compensation: Factors to Consider

Objectives-based or strategic performance measures in sales compensation attempt to balance the short-term delivery of financial results with longer-term sales growth and increased customer value. Strategic Initiatives (or M.B.O.’s as they were once known), if used properly, have both qualitative and quantitative expectations and outcomes. To determine whether they make sense for your sales organization requires an assessment of their rationale and the pros, cons and requirements necessary to implement and manage their use.

Strategic Initiatives: What are the Issues that need to be considered?

The use of Strategic Initiatives can be an important Critical Success Factor (CSF) in the achievement of your company business goals. They help to focus the salesperson on targeted opportunities with limited short-term results, but significant long-term potential. In addition, they can also initiate and reinforce the strategic behavior (e.g. account management practices, business case analysis) that will improve overall sales organization performance and profitability.

Strategic Initiatives incorporate “Key Performance Indicators” (KPI’s) or qualifiers into the sales compensation plan. While performance against stretch sales targets is often a daunting task, the nature or kinds of sales made, sales processes employed and the accounts targeted may be the important differentiator in determining profitability. Strategic Initiatives designed, implemented and rewarded appropriately in the sales compensation plan help to create this kind of focus.

Because no two sales territories are exactly the same, the use of Strategic Initiatives allows management to focus sales activities on strategic goals that are specific to both the salesperson and their territory. The sales manager can thereby reward one individual for missionary work with a new market segment while focusing another on a customer partnership opportunity. These are sales activities that in the past they would not normally get paid to execute unless there were sales transactions that took place.

Arguing against Strategic Initiatives would seem to be counter to the interests of the organization. However, using this type of sales performance measure is not without risk. Their effective use requires management discipline, clear and well-defined strategy and continuing commitment to their use. Some of the things that must be considered are:

Measurement

Because of the qualitative nature of Strategic Initiatives, they are not easy to evaluate and empirically measure. The traditional sales performance measures of revenue or gross margin lend themselves to assessment in that they can be summed or calculated from information put into the company financial or order entry systems. The key however, with any performance measure, especially if you are going to link it to compensation, is the ability to measure it accurately, consistently and objectively. For this reason, it is important that Strategic Initiatives encompass both qualitative and quantitative measures. If the Strategic Initiative to penetrate a new market is sign three agreements, within two years, with “foundation” customers upon whom to build further sales, then definitions are required to assess the salesperson’s performance. What is a “foundation” customer? If defined as an account with a minimum of $500,000 in first year sales, with the active participation of “key” decision-makers, then the contract value becomes part of the quantitative measure and evidence of attendance at key meetings and the signature of for example, the customer’s president on the initial purchase order agreement may satisfy the qualitative component.

Administration

Most organizations, in recent years, have undergone some form of staff reduction with the consequential role expansion for those that remain. That means that while many have left the organization, the work has not gone away, but rather, has been spread across those that remain, or…it just doesn’t get done. Therefore, there has been a significant push in sales organizations to streamline sales performance measures and integrate systems so that data can be extracted from internal sales or ERP applications for reporting, rather than requiring manual documentation or raw data manipulation from spreadsheets. Spreadsheets, while good for conducting single case analysis; are poor practice as a performance measurement system because of the high potential for error when manipulating the data. The extract process works well for the quantitative component of the Strategic Initiative, but does not address the qualitative element.

The qualitative factor requires documentation of accomplishment. This can consist of letters, memos, visual evidence or anecdotal reports. Because these methods of determining performance and achievement are not easy to collect, store and assess, organizations have avoided using Strategic Initiatives for compensation purposes. Make no mistake; Strategic Initiatives require more administration than simple quantitative measurement. However, they also have the potential to deliver longer-term consistent and profitable sales streams. As with many resource-based decisions, there is a trade-off between the costs (in terms of administration) and the benefits (in financial and strategic results). In the use of Strategic Initiatives, there is also an additional burden, in the form of management time required to create, monitor and evaluate the effectiveness of the salesperson in executing the initiative. This has turned out to be one of the bigger issues in the adoption of Strategic Initiatives. As embarrassing as it may seem, a number of sales executives when asked about their willingness to approve Strategic Initiatives as a compensation measure, cited a lack of confidence in their sales management team to agree on, implement and manage as the primary drawback.

Criteria for Payout

When compensation is involved, the evaluation of sales performance is more than personal; it is critical to the salesperson’s lifestyle and their ability to meet their financial obligations. Calculation of achievement for the quantitative component to determine payout is relatively easy. Percentage of quota achievement, number of units sold, dollars of revenue or gross margin all can be determined accurately and consistently. Whether to payout on a sale to a new customer, where adherence and execution of a new business development process is a qualifier, is a different matter. How well did the salesperson follow the required steps? Did they target the key decision-maker? How complete was the customer information collected prior to the completion of the sale? These factors are much more difficult to evaluate, and are often lost in the euphoria of getting the order. They may however be critical to the replication of the feat in future opportunities, and therefore should be essential in the evaluation and payout.

Getting consensus on the proper criteria for evaluation is difficult, as is creating the metrics to determine the degree of achievement and how much to pay out for the level of performance. This is especially true in those cases where the strategic activities have a longer-term sales cycle and organizational payoff. In these cases, the payout may be based upon execution of activities and milestones rather than orders and financial results.

Thresholds and Overachievement

In order to assess achievement on Strategic Initiatives, it is important to determine the points at which you want to deliver an incentive payout, for the expected performance to be exhibited. One option is to have an all or nothing payout. This requires you to make a judgment as to whether the target level of performance has been achieved. If not, no payout occurs. If met, then 100% payout is made, but usually without further upside opportunity. Typically this method is used when there is limited measurement capability. Other variations on this theme include a threshold level of performance that results in less than 100% payout (perhaps 80%). The trick is to set the threshold level performance expectation and differentiate that from target performance (at 100%) to warrant the additional 20% payout. One method often used in this paradigm is to base the threshold payout level, on quantitative performance criteria and the additional 20% of payout to target level is based upon delivery of both the quantitative and qualitative elements.

What then happens to the individual who exceeds the target level of performance and delivers not only exceptional quantitative results but also demonstrates overachievement on the qualitative expectations of the initiative? Upside opportunity in Strategic Initiatives generally is tied to overachievement on the quantitative measurement component.

One alternative design option is to set a cap at 120% of target payout for overachievement on either the qualitative or quantitative components and at 150% if both the qualitative and quantitative components are both exceeded. Any measurement and payout for overachievement, however, requires the metrics to identify what constitutes outstanding performance.

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