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TURNING YOUR COMPENSATION SYSTEM INTO A BUSINESS SUCCESS
Todd Levin, Arcadia
Solutions
Does this sound familiar?
Senior management was frantic. Lately, revenues had dropped considerably and the
cost of sales had nearly tripled. The problem? They didn't understand what it
took to make their fancy new compensation system successful. What they ended up
with was a complex system that was costly, constraining, and still not driving business
goals.
Your situation may not be quite as dire, but chances are you've had a brush
with unexpected and unpleasant sales results. In fact, data suggests that over 80%
of all sales compensation design and automation projects fail to meet their core
business goals. Why are there so many failures, and more importantly, what does
it take to turn these projects around and make them successful?
Although many factors can influence the outcome of a compensation implementation
project, a handful of elements are common to the success of each and every technology
implementation. The presence of these elements in successful implementations spans
decades, industries, and organizations.
Value Focused Plan Design
When creating a compensation plan, the key thing to ask is "does this plan
directly drive the alignment of my business objectives with my sales force?"
What you'll find is that many - compensation plans are burdened with numerous
tactical measures and rules that do not drive achievement of business objectives.
This can occur for a variety of reasons, but the #1 factor is what we call the "complexity
disconnect".
Management teams often assume that every rule they add to a compensation plan will
help better align the sales force with business objectives. What they often fail
to see is that complexity also has an inverse effect on plan understanding. The
result is that the value curve for complexity tends to peak quite early, beyond
which each additional rule actually results in a net loss in alignment of the business
objectives and the sales team. Successful companies are able to control plan complexity,
resulting in maximum value for each dollar they spend supporting their compensation
plans.
Efficient Business Process and Workflow
Organizations often turn to technology to help streamline their business processes.
Technology can help provide centralized control and improve overall accuracy. What
many organizations miss is that technology alone will not solve problems that are
rooted in invalid upstream data or inefficient manual processes. No matter how good
the software you buy may be, it still requires human input and that leaves room
for error. Making a technology implementation successful is best done in alignment
with a process review to ensure that both IT and sales management are confident
that the people and data supporting their plans are accurate, efficient, and manageable.
Effective Reporting & Analytics
A black hole is no place to store your data. One of the best features of centralized
systems is the ability to mine and analyze large volumes of data. Reporting and
analytics allows successful companies to understand and forecast the effects of
compensation strategies on their bottom line, to increase transparency to the sales
force, and to trace incentives back to their business value. Even better, providing
business intelligence on top of compensation data allows management to adapt to
changing business landscapes and evaluate the cost/benefit of proposed changes to
compensation plans.
What this really means is that getting your data out can be just as important as
getting it in. If you are making the decision to implement a technology, make sure
there is a solid plan for extracting and reviewing the data so you can use your
systems to their full extent.
Knowing how to effectively balance complexity through optimized plan design, streamlined
business workflow, and effective reporting & analytics will help you to increase
alignment of your sales force with your business goals. Increasing this alignment
is an effective way to help increase revenues, decrease costs, and increase your
market share.
To find out more about the key factors in successful compensation program design,
you can read Arcadia's most recent white
paper entitled "Unlocking the Mysteries of Sales Compensation: Three Keys to
Sales Compensation Success." In it you will find more examples, suggestions,
and guidelines for turning your compensation program into a business success.
Todd Levin is a consultant with Arcadia Solutions. He has more than 7 years of experience
with technology solution design, architecture and implementation.
DOES YOUR COMPENSATION PLAN WORK FOR YOU, OR DO YOU WORK FOR YOUR COMPENSATION PLAN?
Vicky Feather, Arcadia
Solutions
In my experience the most successful organizations answer, "Both- almost equally."
As an organization leader you expect your variable compensation plans to work for
you by remaining focused on expense control -after all, compensation is
an expense- and supporting results-driven behavior from your sales force as they
work for the plans. Additionally, the management of your variable compensation
program must align with the rest of your financial reporting as it serves as the
measurement of success by executive management.
Getting the best of both worlds when it comes to execution of your variable compensation
plans may seem tricky. However, there are a few simple questions you can ask that
will quickly highlight where the changes may need to occur for your organization
to stay on top.
Q: Is your plan easy to support by your Compensation Administrators and your
Sales Operations and Management?
A: Transparency and simplicity often get lost in the planning process. Making
a concerted effort to preserve both will allow your sales force to focus on sales
and growing the business.
Q: Have the exceptions become the rules?
A: Too often we hear our clients express frustration with unsupportable plan
elements, only to find that these items are not even a part of the plan but rather
part of a complex and manual exception process. When you encounter this situation
you really have two options: eliminate the exception process or incorporate it into
your plans and make it the rule.
Both options have their pros and cons. Eliminating the process presents a risk to
your business by introducing what may be a very unwelcome change. Although it may
appear on the surface that the elimination will free up resources to focus on other
tasks, the reality is that until the change is accepted in your organization, the
overhead will remain. Conversely, simply making the exception a plan element without
the analysis to determine if the exceptions really support your strategic vision
may in the long run cause larger issues and expense. Your best bet is to take a
step back and evaluate what is driving the volume of exceptions and determine which
path will best address this issue.
Q: Does your plan consistently outline and support on-boarding and employment
changes (terminations, leave of absence)?
A: Turnover is unavoidable in the Business of Sales. Making sure your plans
and associated policies are structured to support these inevitable events without
business disruption will eliminate much of the 'noise' associated with the
Compensation program.
Taking a strategic perspective of on your compensation plans, asking the hard questions,
and striving for consistency and simplicity creates an environment where your compensation
program and your business strategy can work harmoniously.
Vicky Feather is a Principal Consultant with Arcadia Solutions. She has over 15
years of experience with Technology Solutions and 9 years in the Financial Services
Sector.
USING GROUP PERFORMANCE METRICS TO DRIVE INDIVIDUAL BEHAVIOR
John Sencabaugh, Arcadia
Solutions
A recent article by Kathy Kristof in the LA Times observed, "Wall Street's
five largest investment firms paid record amounts of compensation in 2007, despite
the fact that three of the five firms posted quarterly losses as the result of souring
investments in sub-prime mortgages." Is it acceptable to pay huge bonuses to
employees when the company’s investors are losing millions? To what extent, if any,
should an employee’s incentive compensation be tied to overall company performance?
Intuitively, it makes sense to link a salesperson's compensation to overall
corporate performance. After all, it promotes teamwork and gives salespeople a stake
in the financial health of the company. However, in large companies the connection
between an individual salesperson’s behavior and the company's overall financial
performance is vague at best. If the purpose of an incentive compensation plan is
to drive behavior, the most effective way of doing so is to make a clear, direct
connection between behavior and compensation. Compensating salespeople based on
factors beyond their control dissolves this connection between behavior and rewards.
Among the risks of tying incentive compensation to overall company performance are
over-compensating undeserving salespeople in years when the company prospers, and
destroying the morale of your top-performers in years when the company is strapped
(no matter whether it's due to market conditions or because executive management
made major investments in high-growth areas). Is it wise to penalize a top-performer
based on factors completely beyond his control? How confident are you that he can
be convinced of this wisdom?
On the other hand, CEOs must answer to a number of constituencies, not the least
important of which is the company's investors who could be suffering major losses.
What rationale can a CEO give for paying huge bonuses in a year in which the value
of the company was reduced by 43%, as was the case with Merrill Lynch in 2007?
What does this all mean? It means that, yes, an effective incentive compensation
plan should include a link to the performance outcome of a group, be it the entire
company or a subset like a region or district. Most importantly, the degree to which
a group's performance affects a salesperson’s compensation should be proportionate
to the impact his behavior can have on the group’s results. Little control over
outcome = little impact on compensation.
One front-line salesperson among 4,000 has scarcely any opportunity to impact the
company’s bottom line. Alternatively, that salesperson has tremendous opportunity
to impact the performance of the district he shares with 20 salespeople, so the
bulk of his group-based compensation should be tied to the performance of the district,
not the whole company. This methodology can be applied up the hierarchy, such that
a Distrct Manager’s group-based compensation derives from the performance of the
region, etc.
This is not to say that overall company performance should be eliminated as a factor
in incentive compensation plans. Rather, its portion of a payee's group-based
compensation should reflect the degree to which the payee's actions can make
a difference in the company's overall results. This approach preserves the link
between behavior and compensation, a fundamental part of any successful incentive
compensation plan.
John Sencabaugh is a Principal Consultant at Arcadia Solutions. He has more than
12 years of Sales & Sales Management experience serving a broad array of industries.
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