Incentive Compensation

Do you run the risk of making a costly mistake? Be sure before you make an investment with the wrong firm. Read this post to reframe what may be disguised as a compensation problem. And get your hands on a Competency Grader for compensation assesement providers.

 

Rinse and Repeat: The Annual Comp Study

The standard comp study may be dangerously inadequate. Here are a few real-life examples of situations where the VP of Sales asked for help from HR:

 

  1. Heavy Equipment Company: The top sales rep earned more than the CEO for 2 of the past 3 years. Is this rep consistently delivering exceptional value? Or maybe something is amiss.
  2. Technology Company: More than 60% of the sales force are on a trajectory to miss their number. Sales turnover is high and the competition is stealing the top performers away. Is the compensation model to blame?
  3. Software Firm: The annual Employee survey is overflowing with negative comments about the incentive plan. Rumors abound that competitive reps make a lot more money.

 

Conventional wisdom would lead the VP of Human Resources to the following:

 

Define the Problem: Sales compensation is out of line with the market

Propose a Solution: Conduct a compensation study and redesign the plan

 

Unfortunately, HR’s usual solution to sales comp problems is a one-size-fits-all tool – the compensation study. Historically, HR has provided a valuable service to Sales leaders by contracting for quantitative and unbiased research. On-line services like Payscale.com and Salary.com are cost-effective sources for benchmark data to calibrate a functional comp plan. But, how do you know if the comp plan is really the root cause?

 

Digging Deeper

The 3 problems described above were not caused by a flawed compensation plan. Here is what a complete assessment uncovered:

 

  1. Heavy Equipment Company: A territory design and organizational structure problem was the root cause. Over several years the top Rep’s accounts had grown. (He had been amply rewarded.) Now these accounts need the support of an order taker, not this highly-compensated “hunter” sales rep.  Fixing the problem was not easy, but it did not require a compensation study.
  2. Technology Company: The source of the abysmal commission checks was a broken (non-existent) lead generation process. No one could make their number without properly nurtured and qualified leads. Only the most self-sufficient reps kept their pipelines full.
  3. Software Firm: The sales force suffered from role-corruption and weak on-boarding. Reps were engaged in customer service and billing issues that distracted them from selling. New hires were bewildered and unprepared to be successful. A comp study proved that the on-target earnings were competitive, but could not fix the underlying problems.

 

Compensation Study ≠ Compensation Assessment

Since sales compensation is a clear symptom, an assessment is the place to start. However, the scope is often too narrow. It fails to uncover the root causes that manifest as a compensation problem. Consider the 5-step methodology described on the home page of an industry-leading provider of sales compensation data:

 

  1. Review the current compensation plan
  2. Conduct a competitive earnings benchmark
  3. Design a new compensation plan and calculate the payout / cost
  4. Implement and communicate
  5. Evaluate the results

 

What’s missing? It’s the essential first step:

 

  1. Complete a Root Cause Analysis to determine the true source of the symptoms

     

Treating the Symptom

Sales compensation experts produce valid, meticulous research. However, they focus on just one diagnosis and one cure: The comp plan is broken. Fix it. Their methodology assumes that the compensation plan is the underlying problem.

 

The lesson for HR leaders?  Recognize that sales compensation problems are indicators of a variety of potential problems. An in-depth compensation assessment (not just a “benchmark study”) will uncover the root causes.

 

Compensation changes are extremely disruptive. They impact people’s paychecks. They can cause high turnover and low morale. Incentive compensation is specialized enough that it requires help from a third party expert. When choosing a firm, ask yourself these questions:

 

“Do I need a firm with expertise across the entire spectrum of sales effectiveness?”

 

“Should I engage a firm that is deeply but narrowly focused on compensation?”

 

Two Simple Steps

Using a firm that specializes in compensation is a best practice for enterprise-wide decisions. But it’s not sufficient for the unique challenges of a sales organization. Here are 2 things you can do immediately:

 

Competency Assessment for Sales Compensation Service Providers

 

1. Competency Grader: Use the tool shown here to compare the capabilities of service providers. This will help you make sure you engage the right professionals. Their expertise will uncover the true root causes and ultimately save you money.

2. Best Practices and Trends: Understand the interconnections between sales compensation and overall sales productivity. Learn how sales effectiveness drivers build upon each other. Compensation problems are often the outcome, not the cause.

 

The actions you take to solve incentive compensation challenges today will have a powerful impact on your success in 2013.