The Future of Sales Compensation Design

Paradigm Shift

The Plan of the Future

At the risk of sounding like a clairvoyant, the “right” sales compensation plan will change your life in the future. Plans aligned with the business goals and objectives of the organization and that focus on those things that salespeople can influence in the customer relationship will deliver better results…. much better results. In particular, with a much-anticipated economic recovery expected in the coming months, repositioning your sales compensation program could make the difference between just surviving, and delivering outstanding sales and profitability.

Sales compensation designs in the future will need to have the flexibility and responsiveness to change when the strategy, customers, products or market change. This kind of flexibility will necessitate targets that can accommodate changes to the product focus, target accounts and sales tactics. Annual targets will become a thing of the past or at the very least will command much less of the incentive spotlight. Instead, salespeople will focus on the development of the account relationships, creation of multi-level contact influence and analysis of product and solution potential in a range of target account opportunities. The ability to react to changing opportunities will be characteristic of the competencies necessary for the top performing salesperson. In order to ensure that the top performer is rewarded for delivering in these situations, sales compensation will need to focus on account specific performance. At this level, information, analysis, problem solving and positioning the capability of the organization (not the product) with the customer will be the desired behavior. Larger and larger accounts due to industry consolidation will require a skilled and focused sales expert. It is expected that more than half of the accounts now typically serviced by direct sales people will be handled by outsourced sales channels, inside account managers in a high end call center approach or serviced in real-time, using direct links to the company order entry system or through the internet. The top ten to fifteen percent of customers will be partner accounts with resource, technology and financial ties to the selling organization that make switching costs a significant factor in buying decisions. The remaining accounts will be distributed across selling channels, with only another fifteen percent being serviced directly. How far away is this scenario? Less than 10 years!

The ability to react to changing opportunities will be characteristic of the competencies necessary for the top performing salesperson. In order to ensure that the top performer is rewarded for delivering in these situations, sales compensation will need to focus on account specific performance. At this level, information, analysis, problem solving and positioning the capability of the organization (not the product) with the customer will be the desired behavior. Larger and larger accounts due to industry consolidation will require a skilled and focused sales expert. It is expected that more than half of the accounts now typically serviced by direct sales people will be handled by outsourced sales channels, inside account managers in a high end call center approach or serviced in real-time, using direct links to the company order entry system or through the internet. The top ten to fifteen percent of customers will be partner accounts with resource, technology and financial ties to the selling organization that make switching costs a significant factor in buying decisions. The remaining accounts will be distributed across selling channels, with only another fifteen percent being serviced directly.

paradigm shift

Large customers are beginning to understand that relationships with “key” suppliers can assist them in creating their own competitive advantage in the marketplace. More and more, the differentiator will not be cheaper and expendable when it comes to suppliers, but rather cost competitive, product quality and service reliability.

So, how do we create sales compensation plans that will attract and retain the expert level competencies that this high-level selling will require? Sales compensation will have to focus on the development of new business opportunities and selling long-term solutions to these key accounts. Targets will be based upon delivery of large, mega-sales that impacts the short and longer-term success of the company. In order for this to happen, sales compensation will need to be a combination of superb short-term tactical execution at very high and multiple levels within the customer organization, as well as longer-term strategic positioning of the organization to the customer in a way that is truly “value-added”. This is not value, as we understand it in the typical sales environment today (although some forward-looking sales organizations are doing it today). It is value that requires direct investment into research, process and technology that makes the relationship with the customer more than just a buyer/seller market transaction. These initiatives will require a different kind of contracting and knowledge-based selling to ensure a common understanding of proposed sales solutions and consensus on objectives.

The type of compensation plan required to reward this new kind of selling will feature high base salary (settle the bean counters down…there will be far fewer of them) but also with significant incentive opportunity and upside potential. The number of sales performance measures in the plan will be fewer and will focus on both short-term tactical and longer-term strategic requirements. Execution of these strategic sales initiatives will be rewarded on the basis of both quantitative deliverables as well as qualitative objectives. Qualitative measures will include customer organization sales penetration. Not on the basis of product, but rather on the basis of relationship and decision-making. The volume sales target will form a “qualifier” for incentive eligibility. Overachievement on volume can be rewarded through a multiplier on payouts for delivery of both the tactical and strategic measures.

Short-term tactical measurements will include identification of sales needs and opportunities within the seller’s competency range, problem solving to determine potential solutions and execution of product trials as part of the sales solution. New SKU introduction and profitability improvement based upon product mix will also contribute to performance in the target accounts. Each of these measures will be incorporated to an overall planned approach to the account. This account plan will be based upon meetings with the customer to assess complementary competencies and will become a signed document by both parties including commitments that may be longer than one fiscal period. It will form the basis for the performance and incentive payments for the salesperson. The longer the commitments by the customer and the greater the amount of gross margin within the agreement, the more significant the payout. Multi-year contract agreement signings of an optimum period will also generate a bonus or multiplier at the signing of the agreement. The interim period between agreements (depending upon additional needs/opportunities within the account) will see an account manager servicing contract needs while the salesperson focuses on longer-term relationship and opportunity development. If there are limited opportunities, he/she will maintain a communication and relationship management protocol, while moving on to other potential accounts.

Longer-term strategic activities will include initiatives such as implementation of executive call programs between company executives and the strategic account’s senior management. Successful execution ensures that “key” decision-makers/peers in the two organizations have regular contact and communication. The role of the sales executive will be to facilitate the process and to participate as required to ensure that any follow-up or action items get addressed. Other initiatives will embrace such things as technology integration between the organization and the customer to make doing business easier, channel initiatives with partners to service customers efficiently and cost effectively and co-branding initiatives to build on the strengths of both organizations (seller and buyer…a current example is the advertising program of Intel (seller) and Dell (buyer) who are selling with a co-branded strategy to reinforce the power, price and quality of both organization’s products together). Developing, nurturing and delivering these large account relationships will be under the accountabilities of the direct salesperson.

Indirect channels are going to change as well. As relationships deepen between buyers and sellers, there will also be a need for closer relations between the manufacturer and the channel partner(s). The channel today and into the future will be challenged to demonstrate that they add value to the buying/selling equation. As manufacturers consolidate, their “clout” in the marketplace will also increase. More of the channel partners will need to align and dedicate themselves to one of the major manufacturers and integrate the process flow, not only of product, but also of information. Manufacturers will be seeking more control over where their product goes and the terms of sales and service. To do this, manufacturers will need to intervene in the compensation arrangement between the channel owners and their salespeople. Aligning the sales compensation plans of the manufacturer’s salespeople with the way that channel salespeople are rewarded will improve coordination and “sell through” to the end user.

The remainder of the smaller or less profitable existing accounts will be handled by inside sales and compensated much as they are today. A high proportion of base salary for account servicing, perhaps with the performance management and merit increases tied to persistency (a combination of account/revenue retention and profitability), will be the hallmark of Account Manager compensation. As well, in these positions, there will be some incentive for account retention and up selling/cross selling into their specific account(s) or across the account base.

New Internet account manager positions will work the relationships with smaller or transactional accounts to provide promotional offers and relationship incentives to grow their business with the organization (in a targeted way based upon potential contribution). The goal will be to move them up in the hierarchy of customer segmentation, and allow the organization to assign greater resources to their account. The incentive compensation component for these positions will be based upon incremental sales or transition of the account to higher account segments.

Summary

Not only have the market and sales role changed within the sales environment, but also the purpose and configuration of sales compensation is changing. It is not, however an overnight process. Changing sales compensation takes time and can be either revolutionary or evolutionary.

In the case of revolution, economic factors may demand immediate changes to the sales compensation paradigm. Drastic times require drastic measures. In these cases, the immediate changes should be communicated as the transition that will include significant analysis and tracking to ensure that the changes are having the desired effect. This type of situation allows the organization to move quickly toward where they want the sales compensation plan to be. Even with drastic change, it is unlikely that the positioning of the sales compensation plan for the future can be done all in one step. Before many of the changes that are needed can be made, there are structure and role changes that have to be addressed. Because of the magnitude of revolutionary change, it will need to be revised as the organization moves forward. Typically in revolutionary times, compensation is not the only thing that is being changed. Therefore, as strategy and tactics change, the organization will need to ensure that the compensation plan remains in alignment after the changes.

The more common scenario however is evolutionary change. Organizations that are well managed understand the need to remain dynamic and quick to respond as change occurs. These organizations will develop the capability to evolve their sales compensation plans as they advance through ongoing change. The review, audit and redesign of the plans will take place as part of the business-planning course of action. In setting strategy and planning for the next fiscal year, sales compensation will be part of the development process. One fact that has become evident in the business milieu is the fact that the pace of change is hastening. Organizations would be well advised to begin now developing their sales compensation framework for the future, so that they can accommodate and manage the required modifications instead of constantly reacting to the changes as they occur.

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