Episode #1 @ http://justinssalesperformancenews.blogspot.com/2015/06/blog-post.html
Wednesday, July 1, 2015
Sales Comp(lications) Episode #2
Wanted to get this out before the long weekend. Hope you enjoy.
Episode #1 @ http://justinssalesperformancenews.blogspot.com/2015/06/blog-post.html
Episode #1 @ http://justinssalesperformancenews.blogspot.com/2015/06/blog-post.html
Saturday, June 27, 2015
Incentive Compensation Administration Self-Assessment
Why focus on Administration?
Lots of people work
in sales and sales related jobs. Depending on vertical sector and country commonly
accepted numbers range from 1 in 9 to 1 in 16 people work in sales. According
to the United States Department of Labor2 the percent of the
workforce that has a sales or sales related job in May 2013 is 10.61
(relatively unchanged from 2000 and 2005 at 10.41% 10.69% respectively)
Sales Compensation is
well funded. In a July–August 2012 Harvard Business Review article1 titled,
“Motivating Salespeople: What Really Works” an estimated $800B per year is
spend on sales compensation by U.S. companies in the form of commissions and
bonuses. $800 Billion dollars is a
staggering number. Looking at 2012 as a
baseline year to compare the $800B est. to U.S. corporate revenue the
percentage of revenue spend on sales compensation to top line revenue is
approx. 5.33%. 3 In a sales organization focused survey done
by CSO Insights they showed sales compensation spend as a percentage of annual
revenues at 11.5 percent4. The actual percentage of course will vary
considerably business to business but it is a material budget line item that if
managed appropriate can lead to success and if managed poorly can lead to
sub-optimal results or business failure.
The purpose of incentive pay has many purposes – recruitment,
retention, motivation of behaviors and to reward performance. Corporate leaders have bought into the idea
for both sales and non-sales roles that pay for performance, variable pay or
incentive pay (Term usage can vary widely) can drive top line performance. Both behavioral economics theory and real
world performance have shown that a well-constructed compensation plan aligning
corporate strategy to individual, team or corporate goals can motive employees’
behaviors in a desired fashion.
So what’s the problem?
Its difficult
administer sales compensation. Poor
upstream data quality, inflexible technology, inefficient processes, highly
manual processes, decentralized operations, and limited reporting are some of
the more common factors that lead to sub-optimal administration. Incentive compensation can part of a
well-designed compensation plan and be well funded but survey research shows
that the execution or administration of the incentive plan falls far short of
perfection. On the low side studies indicate a 3-5%
percent over-payment of commissions5. Gartner research shows an even higher 3-8%
error rate6 in administrating sales compensation. Don’t forget that reported errors are
generally when the employee is underpaid while over-payments are rarely
reported.
Incentive payments can be incorrect, late, or lose their
motivational potential when businesses are unable through reporting to explain
to employees how their individual payments were calculated or where their
potential earnings stand at any point in time.
Beyond the easily calculated hard dollar impact these accuracy problems lead
to lower employee morale, lack of trust, less than optimal performance, lost
sales time due to shadow accounting, lead to unwanted employee turnover and
difficulty in recruitment. Worse yet,
organizations in highly regulated organizations can be out of compliance and
subject to fines.
With a large budget item like incentive compensation we want
to be sure that we are maximizing the return on investing by using best
practices for administration. To be
successful the classic business triangle of people, process and technology all
need to be working in harmony
Is there a solution?
To be successful the classic business triangle of people,
process and technology all need to be working in harmony To start determine your organization
current state we must critically look at the administration of compensation and
determine how well the overall management program is working as well as uncover
potential areas of improvement.
In the self-assessment to follow we will looking at process
maturity as the key area to incentive compensation administration success and
give you a scoring model to attribute a score to your current process. At the end of the assessment there will be a
summary of next steps depending on your organizations score.
Sales Compensation Administration Capability
Process Steps
The process is the foundation for success in administering
compensation. Best practices for
compensation administration are to have a well-defined process with clear
ownership, well understood criteria for success and accountability. Most organizations will have some version of
the following process to administer compensation.
Step 1: Collect Data – Data to drive the incentive
compensation calculation must be gathered.
This can be fully or partially automated or a wholly manual
process. Inbound data into the system
generally comes in two types – transactional and referential. Transactions are the business events that
your organization will compensate on – it could be revenue, invoice, bookings,
customer satisfaction, units, etc.
Reference data can take a wide variety of forms depending on the
complexity of the compensation programs but essentially it is people data –
quotas / goals, territories, start date, leave status, termination date, position,
role, title, base pay, payment currency, etc.
Number of data feeds to support incentives can range hierarchy, product
data, etc. from 1-2 feeds to well over
100 source systems. The data collection
can be done in batches based primarily on availability, and secondarily on
desired payment and reporting frequency.
Step 2: Crediting – Crediting is determining, “who gets paid
for what”. An example of simple
crediting is when a sales representative id is part of a sales
transaction. Crediting can become an
extremely complex problem if there are territories built on multiple dimensions
and frequent changes. The complexity
can be off the charts when you start to include unique splits, overlays,
historical roll-up from sales representative to managers, third party data,
etc.
Step 3: Calculation – This is the math portion of the
calculation. Applying the business
rules of the compensation plan to the data and determining a payout less any
potential monies owed from a draw or previous over-payment.
Step 4: Payroll – The sub-process of getting the right
information in the correct format to payroll or AP for external payees.
Step 5: Reporting and Analytics – Reporting can be for the
plan participants, management, or the administrative team. It includes producing a standard set of
reports to communicate activity and / or payout amounts such as a compensation
statement and the drill to detail of the underlying transactions. The step also includes ad-hoc reports and
the reporting to analyze plan effectiveness and administration efficiency.
Step 6: Dispute
Resolution –If payments are incorrect, how the payees submit an inquiry or
dispute and the steps to resolve the issue.
IF you are missing
any of the step described above that is a clear indication of less than fully
mature process and something that must be addressed before digging deeper in
capability.
Self-Assessment
Below is the self-assessment capability model that has 5
levels. Each level is categorized by a
number of people, process, and technology attributes. The exercise is to find the best match of
category to your organizations current capabilities in administering sales
compensation. As a note of caution it’s
better to not round up. If you find
yourself thinking that you are somewhere in between two scores, err on the side
of conservatism and go with the lower score.
When determining which level of maturity think locally and then
globally. You may find a country or
business unit that is farther along with best practices and you can leverage
that across the organization.
Level |
Indicators |
Level 1: Lacking Capability
|
|
Level 2: Limited
Capability
|
|
Level 3: On-Par
|
|
Level 4: Measured and
Automated
|
|
Level 5: Best in
Class
|
|
So what does it mean?
Level 1 -2: If you scored your organization as a level 1
or 2, you have a significant problem such as a completely broken process or a
gap in the technology profile that isn’t allowing you to adequately serve the
needs of the business. The organization is at risk and faces material
financial exposure. Any organization
that self identifies as level 1 or 2 could benefit from outside consulting to
help build the future state capabilities framework and prioritize next steps
for improvement.
Level 3: A score
of 3 puts your organization in line with the market. This is the average and commonly seen from
organization to organization. Realize
that being on-par isn’t necessarily a good thing as shown by market
research. On-par companies fail in any
number of ways – accuracy, timeliness and communication.
Level 4: A score of 4 puts you well down the right
track but still includes some elements of risk.
Time and investment has been made around compensation administration and
you should be reaping some of the benefits.
The key question as a level 4
organization who is out performing their peers is the cost to benefit ratio of
going from a 4 to 5. The usually
depends on the size of the sales organization, the total amount of compensation
paid, competitiveness of your industry, the frequency of change, and / or the level of regulation in your
current industry.
Level 5: If you scored your organization a 5,
congratulations! A 5 puts you firmly in
the top 2% companies in the administration of compensation. Your risk level is low and are from a capabilities
perspective you are delivering tremendous value to the organization and
optimizing your return on investment of compensation dollars.
Capability is a living thing and compensation is in the middle
of a lot of organization change. Review
the scoring model on a periodic basis and re-assess where you are. Without focus, over time scores will drift
downwards;
One question that is often asked when looking at incentive
management improvement is around data.
It’s obviously mission critical.
You can have the best process and technology in the world but if the
upstream data is of poor quality – inaccurate, incomplete, untimely, or
difficult to get to then you will have less than desirable results. Data quality to support compensation is
another enterprise level issue that cannot be ignored. The process is generally the foundation for
success and along with the compensation plan and reporting requirements drive
the data requirements. To holistically
about where data and process fit into the overall compensation management
program, think about it in this order - understand the data, design the plans,
determine the desired reporting, build the administration process, utilize
enabling technologies, and clean up the data, rinse and repeat as necessary.
What
Benefits should we expect?
A fair amount of research has been done around the usage of
the sales performance management technology (Level 4 & 5) and how it will
benefit companies who have made the investment.
Peter Ostrow at
Aberdeen Research summarized the benefits as “companies adopting sales
performance technologies outperform those that don’t—higher attainment of
quota, more reps making quota, higher win rates, increased revenue.”7
Michael Dunne at Gartner Research found that “Organizations
adopting SPM technologies reduce errors by more than 90 percent, reduce
processing times by more than 40 percent and reduce IT/admin staffing by more
than 50 percent.”8
Organizations are all looking to drive top line revenue and
higher margins. Enhancing your
capability to administer sales compensation is one way to do so by things such
as:
·
Providing reporting and analytics around sales
performance for all levels of the organization.
·
Transparency and visibility to the reps for
their pay
·
Giving the sales force back selling time
·
Reducing the number of errors and total
over-payment amounts
·
Increase Management Visibility into sales force
and channel performance
·
Lowering your regulatory risk
And ultimately – Prove the ability to optimize your sales
compensation spend and derive the greatest return on compensation dollars
possible.
Justin can be reached at jlane98@yahoo.com
Please follow Justin on Twitter @spmconsulting
Links to Articles Mentioned
1.
Motivating Salespeople: What Really Works http://hbr.org/2012/07/motivating-salespeople-what-really-works/ar/1
5.
Gundy P. and Gaea E., “Sales Compensation
Governance: The Last Frontier of Corporate Reform,” Benefits Quarterly. http://www.ncbi.nlm.nih.gov/pubmed/15015424
6.
Joe Galvin, Sales ICM Systems: Ready for Prime
Time, Gartner Research. https://www.gartner.com/doc/348357/sales-icm-systems-ready-prime
7.
Aberdeen, Sales Performance Management: Getting
Everyone on the Same Page, Peter Ostrow, August 31, 2010.
8.
Gartner, Marketscope for Sales Incentive
Compensation Management Software, Michael Dunne, March 5, 2010.
Friday, June 26, 2015
Wednesday, December 17, 2014
Vendor Selection – The RIGHT way
 |
| Photo by Krzysztof Poltorak |
As organizations look to technology vendors for products and
services to drive revenue and cut costs to compete in a global hyper-competitive
marketplace, the selection of an enterprise software vendor is a critical component
to companies’ long term success. Chose
the right vendor and reap tremendous economic value-add. Chose poorly and suffer the financial,
motivational, and individual career repercussions.
As a consultant I’ve helped over 50 clients with their ICM /
SPM software vendor selection projects and on the software vendor side at beqom (www.beqom.com) I’ve
seen a dozen or so in the past few months, but I don’t currently do this type
of project and there is a very small list of firms who I would recommend to lead
an ICM / SPM vendor selection. In general, there is a lack of overall
industry knowledge, strong system integrator bias, and a rise in vendor resistance
to third-parties helping clients out with the vendor selection process. (which
I shared some thoughts about years ago – would you allow the buyer to pressure you into a real estate sale without a
Realtor? How is software any different?).
But companies still have a need for help (I know as I continue
to field emails and phone calls on the subject). In response I’ve decided to put some thoughts
to paper based on my experience. I want
to share best practices, insider tips, and a few tools to help you make the
best decision possible for your organization and limit the downside risk to you
and your company. The RIGHT way methodology
will work for any category of software purchase but the specific information I’m
going to share pertain to the Incentive Compensation Management (ICM) and Sales
Performance Management (SPM) space. Anyone
who chooses to follow the RIGHT way methodology is going to get the latest and
greatest approach to vendor selection as the market had changed somewhat and my
opinion and perspective towards selection has changed dramatically since the
last time I managed a vendor selection process.
Future posts will cover the details for each step of the process as well as
the classic mistakes that companies who don’t know the RIGHT way will make. The most common mistake is following the
traditional way of looking at a software selection and to focus on features and
functionality. This mistake will lead
to all of the top vendors in the space looking exactly the same. Organizations will then add unnecessary steps
to the selection process forcing the vendors to go through hoop after hoop and
more likely than not will make a final selection based on cost. The mistake of focusing on features and
functionality leads to a selection that is not much better than throwing a dart
at a wall filled with vendor handouts. So what do you need to focus on to get the
best solution for your company?
The RIGHT way selection methodology
- Capabilities Assessment – This step is crucial to determine if you need to acquire technology or focus on building new processes or perhaps spend time on your data sources. Technology isn’t a silver bullet – technology allows for process and decision enablement and where appropriate process automation.
- Vendor Landscape & Shortlist – If you find a technology shortcoming or aspirational opportunity from the assessment, determine what offerings might make sense and then narrow the choices to request and assess offers. I’ll offer up thoughts on best practices to get to a short list, why your short list might be different from the next, and the value of analysts covering the space.
- Business Case for Change and Project Framework – How to build an internal business case, a stakeholder team and structure the overall internal project.
- RFx – RFI, RFQ, RFP, Optional (surprising? Many companies find little value from RFx responses in the decision making process)- Somewhat self-explanatory but I’ll offer up some ideas on how to best construct a RFx to try and create differentiation and perhaps a better way to find a vendor that is business partner you are looking for.
- Vendor Interviews: This is a new step that I haven’t recommended in the past, but to make the right decision you need to spend time with the potential vendors to determine cultural fit and commitment and to build rapport and trust.
- Demonstration – Have the vendors show their wares in the context of your organization. At one point in time I was a big advocate of the “Custom Demonstration” but my opinion has changed and I’ll tell you how I recommend to do it now. The common approach to selection uses the RFx and the Custom Demonstration to create an "apples to apples" comparison where you might not know that you want and need an orange or maybe even a banana!
- References, Optional (surprising? Not many software organizations are going to schedule a reference that isn’t going to speak about them in a glowing fashion). If you chose to do the traditional reference call I’ll cover how to use the time wisely.
- Negotiations and Contracting – How to get a win/win deal. The traditional model and the SaaS model of pricing is outdated and not to your advantage. I’ll cover a new way to guarantee Success is included in the pricing.
As a final piece of advice, keep the selection process as simple as possible and at each step take the time to validate that the solution and the more importantly the vendor is meeting the original need(s) and aspiration goals found in the assessment and outlined in your business case. Please contact me with any questions at jlane98@yahoo.com, follow me on twitter @SPMconsulting.
Tuesday, December 2, 2014
The Future of Compensation Part 1
You only have to look at some of the leading news stories to
know that compensation is important – Pay inequity, pay equality, raising the
minimum wage, and executive bonuses are all hot topics. At beqom the future of compensation is near
and dear to our hearts. We attend
conferences, speak with consultants, read surveys, articles and blogs and most
importantly listen to our clients to keep our finger on the pulse of what’s
next. This active listening allows us
the luxury of adding new features and functionality to our software, enriching
out services offering and positioning us to continue to provide tremendous
value to exist existing customers and hopefully demonstrate enough value to our
potential clients that they want to partner with us in lieu of our
competition.
One of the important considerations when thinking about the
future of compensation is that the basics will remain the same. The trends that have led us to today will
continue into the future, including the long term theme of the rise and
recognition of the importance of human capital hand in hand with the rise of human
resources and right to be heard at the executive level.
Compensation will continue to be used to attract, retain,
and motivate talent. The other day I
came across a fascinating survey finding challenging some of the commonly held
beliefs of different generations’ core motivations. Every age group of employees listed base pay
as their number one reason that they
joined their current organization and the number
one reason that they were planning on staying. In the same Towers Watson1 survey
27% of employees responded that they would be looking for a job in the next 12
months. That is more than one out of
every four people, base pay if well managed is a key component of a recruitment
and retention strategy as the war for talent heats up.
Compensation of all forms will continue to be used as a
motivational tool to drive behavior and sustained employee engagement. To optimize return on compensation spend
organizations will continue to set goals and incentives, but only a handful of
companies have deployed the process, tools and training to do so effectively
and efficiently.
Compensation, especially in the financial services vertical,
will continue to be shaped by a regulatory environment. Sarbanes Oxley, Frank-Dodd (and the federal
guidance of the quarter) Solvency II, Basel III and individual state and
country laws all have direct or indirect impact to compensation. Regulations aren’t going away and will
continue to drive current and future complexity around compensation
The future of Compensation is a huge topic and I’m going
focus on a few key items that I have the most impact.
Over the course of this multi-part blog post I will cover:
- The most important trends in Compensation (and how companies are reacting)
- Why a Total view of Compensation including HR and Sales Compensation is a winning strategy
- What role Technology is playing in Compensation Management at leading companies
- A primer in Motivational Theory and Behavioral Economics and how the latest research fits into a compensation strategy.
- What’s to come – a far reaching look at how multiple dynamic forces will shape compensation of the future and what your organization needs to be doing today to remain competitive.
Stay tuned!
Please follow me on twitter at @SPMConsulting and if you like what you've read check out more blog posts on how to attract, retrain, and motivate your entire workforce at SPM News
Tuesday, November 25, 2014
JFK and the Janitor
At beqom we provide a solution to make your people
happy. We firmly believe that 3 of the
key tenets in employee happiness are:
- Clear Direction - Understanding the corporate vision
- Alignment - Knowing your part
- Motivate - Understanding how you will be compensated
At a company meeting I overheard someone describing the JFK
and the Janitor story to a colleague. I
had never heard the story of JFK and the Janitor before, but immediately after
reading the story for myself a couple of ideas clicked together. The idea of understanding the vision of the
company linked in my head with Motivation 3.0 theory of purpose the desire of
people to be part of something that is bigger than they are. Total Compensation, Motivation & Productivity are all tightly linked.
If you don’t know the story here it is:
President John F. Kennedy was visiting NASA headquarters for
the first time, in 1961. While touring the facility, he introduced himself to a
janitor who was mopping the floor and asked him what he did at NASA. The
janitor replied, “I’m helping put a man on the moon!”
The janitor got it.
He understood the vision, and his part in it, and he had purpose. While looking for the JFK and the Janitor story
I found another similar story:
“Perhaps you have heard the story of Christopher Wren, one
of the greatest of English architects, who walked one day unrecognized among
the men who were at work upon the building of St. Paul’s cathedral in London
which he had designed. ”What are you doing?" he inquired of one of the
workmen, and the man replied, "I am cutting a piece of stone." As he
went on he put the same question to another man, and the man replied, "I
am earning five shillings twopence a day." And to a third man he addressed
the same inquiry and the man answered, "I am helping Sir Christopher Wren
build a beautiful cathedral." That man had vision. He could see beyond the
cutting of the stone, beyond the earning of his daily wage, to the creation of
a work of art—the building of a great cathedral. And in your life it is
important for you to strive to attain a vision of the larger whole.” Louise
Bush-Brown http://www.bartleby.com/73/458.html
 |
| St. Paul's Cathedral |
I like this story as well. One by one it touches on all of beqom tenets of employee happiness – what’s your
part, how will you be compensated, and what is the corporate vision. Two of the men only understand one of the
three tenets but the 3rd workman that gets the whole picture. Both the JFK and the Janitor story and the story of Sir Christopher Wren are illustrative of our ideas around employee happiness
and personally both stories brought a smile to my face. A quick injection of happiness! I hope you
enjoy them as well.
To learn more about
beqom, please visit www.beqom.com
Thursday, November 13, 2014
Global Sales Compensation Plan Design Considerations
Question: How to
motivate people in different countries? We are really interested in getting
some ideas about ICM examples and best practices.
Response: I will start off by saying that the sales plan is
just one component of sales effectiveness and while a powerful motivation tool,
the plan itself may or may not be the root problem to address. I would start off with an analysis of the
sales and go-to-market strategy, the competitive landscape, sales force design,
sales operations capabilities and corporate culture before I would look
straight to the sales compensation plan for fixes. A holistic understanding of the
organizational strategy and structure allows for a greater understanding of
what can and needs to be addressed in the sales compensation plan and what the
potential expected and unexpected consequences of any change might be. That being said, here are some general
guidelines for consideration when about designing a sales incentive compensation
plan for a multi-national company.
Laws & Regulations: You have to take into consideration local laws and industry regulations For example if you would like to have a clawback component to your sales compensation plan the enforcement of a pay-deduction for monies owed to the company due to a clawback in counties such as Denmark, France, Japan, Korea, Sweden, Latin America or the state of California will range from difficult to impossible under local laws. Another example from the state of California prohibits any retroactive changes to a sales compensation plan, organizations cannot rewriting the terms of the commission agreement once the sale or performance has occurred. From a regulatory perspective certain industries such as pharmaceutical, insurance, and financial services have rules that will designate what you can and cannot do in a sales incentive compensation plan. These industry regulations can vary by country or by region. The penalties for not following regulations can results in extremely large fines. Some great examples of this from the Pharmaceutical Industry can be found here; http://projects.propublica.org/graphics/bigpharma
Cultural Differences: Different countries can have vastly different cultures and the main impact to sales compensation plan design is how much pay to put at risk. An example compensation plan may by 70/30 where 70 of the total target compensation (TTC) is base pay and 30% of TTC is at risk and dependent on performance. In a well-designed plan he greater the % of pay at risk, the great the potential upside for the sales representative to earn. The guiding principle of how much pay to put at risk for a particular sales role is how much control does the sales representative have over the deal. High control = higher at risk pay, Low control = lower at risk pay. But, cultural differences towards risk and reward must be taken into consideration as well. For example, the mix for a sales role in America would be different for the same sales role in Japan. A very nice article around the topic of cultural differences can be found here; http://www.worldatwork.org/waw/adimLink?id=26136 The article describes four dimensions of culture, Power Distance, Collectivism/Individualism, Uncertainty Avoidance and Femininity/Masculinity. Each of these four cultural dynamics has a relationship to risk / reward and helps to determine the amount of pay at risk.
Market Pay: Different markets will obviously have different total target compensation based on cost of living and the competitive market for talent. When thinking about the sales structure and roles also consider the pay philosophy needed to recruit, motivate and retain the level of talent that you need. A good summation of things to consider around market pay is summarized by Jeff Haden in his article, The 7 undeniable truths of employee pay, “Employees are smart. They understand market conditions, financial constraints, revenue shortfalls, and increased competition. They understand when you can’t pay top-of-market salaries. What they don’t understand is when they don’t feel fairly compensated compared to other employees in similar positions, both inside and outside your company.” Do the research to see what the competitive landscape is for like jobs in different markets that you want to compete and set your pay levels accordingly.
Motivation 2.0 v. 3.0: Motivation is tricky and only so much can be accomplished by a sales compensation plan. Not a lot of research has been done directed culture differences and sales motivation but there has been a lot of research done around motivation in general that may be applicable to sales compensation. In Daniel Pink’s book Drive he outlines the concepts of Motivation 2.0 and Motivation 3.0. Motivation 2.0, is what business management has used to drive operations in the modern era. The basic principle of Motivation 2.0 is that we as humans will seek reward and avoid punishment. The classic sales compensation analogy of carrots and sticks. Motivation 2.0 is found in compensation plans as If-then rewards, “If you do this (sell product), then you'll get that (commissions and bonuses)." Motivation 3.0 theory is where Daniel Pink states that people would prefer activities where they can pursue three things:
- Autonomy: People want to have control over their work and activities
- Mastery: People want to get better (be the best) at what they do
- Purpose: People desire to be part of something that is bigger than they are
Keep it simple: This is a rule that applies to any country that a business may operate in, each sales compensation plan must be simple enough to understand with a small number of measures that link to sales strategy. For a plan to be effective there must be a linkage between overall sales strategy and the compensation plan measures. An easy example is revenue, if the company is in an early growth stage and any dollar of revenue is good revenue then you would expect a compensation plan to have a corresponding revenue metric. As the business matures and grows more complex you would expect additional metrics to get added to the plan such as profit margin. The conventional wisdom is no more than 3 measure per plan. If you have more than three measures in a single plan you probably have the need to create an additional sales role to focus on the new measures. The downside to having too many measures in a single plan is the inability to drive behavior. You cannot sufficiently fund all the measures to give them the attention that they need.
Subscribe to:
Posts (Atom)