Assessing Sales Compensation Plan Effectiveness:One Size Does Not Fit All

Jerome A. (“Jerry”) Colletti, Managing PartnerMary S. Fiss, PartnerColletti-Fiss, LLCwww.collettifiss.com(480) 483-1480

© Colletti-Fiss, LLC, 2013

Session Topics Assessment basics

Three levels of assessment

Matching the assessment to the situation

Assessment approach

Summing up – key principles

Assessment Basics

Answers to Basic Questions About Assessment

Questions Answers

What is a sales compensation plan assessment?

Formal, documented process used to determine the effectiveness of a current plan

Addresses two key questions:- “How is plan performing?”- “How are sales people doing under the plan?’’

Answers to Basic Questions About Assessment

Questions Answers

What is a sales compensation plan assessment?

Formal, documented process used to determine the effectiveness of a current plan

Addresses two key questions:- “How is plan performing?”- “How are sales people doing under the plan?’’

Who is the audience for an assessment?

Board of Directors

Senior management (i.e., C-suite executives)

Top sales leaders and their direct reports

Finance (CFO and/or BU Finance team)

Answers to Basic Questions About Assessment

Questions Answers What is a sales

compensation plan assessment?

Formal, documented process used to determine the effectiveness of a current plan

Addresses two key questions:- “How is plan performing?”- “How are sales people doing under the plan?’’

Who is the audience for an assessment?

Board of Directors Senior management (i.e., C-suite executives) Top sales leaders and their direct reports Finance (CFO and/or BU Finance team)

What staff resources are typically involved in an assessment?

Sales Operations; Senior sales leaders

HR/Compensation staff

Finance staff

Assessment is an Important First Step Because Change is a Constant

Approximately 73% of companies made changes to their plans in the last two years

44% of companies expect to make plan changes for the next fiscal year

Source: WaW 2012 Sales Compensation Practices Survey

Assessment Creates Focus for a Design ProcessTop of Mind Issues for Top Executives

Profitable selling

Reward for selling multi-year contracts

Quota assignment practices

Degree to which pay aligns with performance

Reward to top performers vs. others

Plan complexity

Levels of Assessment

Determining What Type of Assessment is Needed Issues and/or challenges

currently under consideration

Scope of enterprise, i.e., global vs. single world region or business unit

Number and types of different businesses

Sales model(s), complexity and uniformity

Current jobs and number of plans

Assessment Choices - Not A Replacement forAnnual Pay for Performance Analysis Before embarking on a “specific” assessment, confirm what

already exists:

types of sales reports (from Sales Ops) provided to first level sales managers; to sales reps;

reports or online results trending available to the CSO and leadership team

Don’t reinvent the wheel; what is readily available may be a good start

Assessment Choices - Not A Replacement forAnnual Pay for Performance Analysis Many companies complete an annual pay for performance

analysis of their sales incentive plans, e.g.,√ Is TCC aligned with company’s market position√ Are plan components operating as expected√ Is payout correlated with performance√ Is the company performing as expected relative to its

business plan√ Does quota or goal attainment significantly differentiate

top performance from average or marginal performers√ Do the majority of sales reps understand the plan

Assessment Choices

Level Focus

1 High level review of alignment between strategy, organization and sales compensation plans

2Selective analysis of plans and related programs (e.g., quota allocation) to determine effectiveness for strategically important jobs

3Broad scale assessment (1 & 2 above) for all plans plus cost and productivity examination

Assessment Choices

Level Focus Illustrative Questions

1

High level review of alignment between strategy, organization and sales compensation plans

Are business strategies supported by architecture of current plans – e.g., right types and number of measures?

Are sales leaders clear about what to accomplish with plans?

Assessment Choices

Level Focus Illustrative Questions

1High level review of alignment between strategy, organization and sales compensation plans

Are business strategies supported by architecture of current plans – e.g., right types and number of measures?

Are sales leaders clear about what to accomplish with plans?

2Selective diagnosis of plans’ effectiveness for strategically important jobs

Are pay levels and plans competitive? For employees in these jobs that show

largest deviation in actual pay to median compensation, what are causes of high or low payout?

Are payouts aligned with business objectives? Consistent with design intent?

Assessment Choices

Level Focus Illustrative Questions

1

High level review of alignment between strategy, organization and sales compensation plans

Are business strategies supported by architecture of current plans – e.g., right types and number of measures?

Are sales leaders clear about what to accomplish with plans?

2Selective diagnosis of plans’ effectiveness for strategically important jobs

Are pay levels and plans competitive? For employees in these jobs that show largest

deviation in actual pay to median compensation, what are causes of high or low payout?

3Broad scale assessment (1 & 2 above) plus cost and productivity examination

Is performance aligned with expectations? Is sales comp ROI defined, measured and

tracked? How does plan cost compare to revenue growth?

Are businesses tracking cost of plan administration? What is trend?

Issues That Typically Trigger the Need for Assessment

Most Common A new focus on strategic sales priorities Rewards not skewed to top performers Compliance – roles/job; plans; rules Quota assignment practices Emphasis on multiyear contracts Plan complexity Weak relationship between pay and

performance

How to Select Right Type of Assessment

…it’s all about the degree of granularity required….

Large

“or”

Small

Discussion of Three Types of Assessment

Who typically requests this type of assessment

Characteristics of the business situation

Assessment scope

Process and tools

“Read out” content outline

Level 1 Assessment*Alignment between sales strategy and compensation plan

*Analytics and data associated with a plan assessment are described in detail elsewhere: Jerome A. Colletti, Mary S. Fiss, Ted S. Briggs and S. Scott Sands, Sales Compensation Essentials, Second Edition (WorldatWork Press, 2013) and, Joseph DiMisa, Sales Compensation Made Simple, WorldatWork Press, 2010

Level 1 Assessment – High Level Review

Topic Comments

Who is asking

Newly appointed executive (CEO; CSO) CFO or member of Finance staff Chief HR officer Board; PE investors

Business situation; illustrative indicators

Projected results of new strategy fall short of expectations

Results from integration of acquisition or product line purchase are consistently behind plan

Competitors winning a disproportionate share of business compared to prior periods

Margins on core products are falling at a rate greater than prior year(s)

Level 1 Assessment – High Level Review (Con’t)Topic Comments

Assessment Scope Positions directly associated with the problem TCC; incentive opportunity; actual payouts Performance and payout data that highlighted the issue

Process and Tools

Small multifunction internal team Interviews/discussion with key leaders – “…what results

were expected; views about why not achieved; opinions about root causes…”

Stacked bar analysis for selected sales people, “…how are sellers earning their money…”

“Read out” Outline

Executive summary Describe the underlying causes, what triggered the

problem; is compensation really the problem? Illustrate the solution alternatives, “what’s the fix” Summary of required decision(s) Describe implementation; confirm capability to made

recommended change

Level 2 AssessmentSelective diagnosis of plan effectiveness for strategically important jobs

Level 2 Assessment – Selective Diagnosis

Topic Comments

Who is asking

Chief Sales Officer (CSO) Functional Sales Leader Sales Finance Director HR/Compensation Director

Business situation; illustrative indicators

New or changed sales role; incumbents performing substantially above or below quota

Incumbents in the jobs of concern are leaving before 12 months of service

“Noise level” is high around how sales credit is assigned for large deals

Incentive compensation payment to employees for jobs in question at budget, performance is not

Level 2 Assessment – Selective Diagnosis (Con’t)Topic Comments

Assessment Scope

Limited to job family or families associated with identified problem – likely one or two jobs

TCC; incentive opportunity; payouts and performance data that directly related to specific issue(s)

Process and Tools

Relatively small multifunction internal team Extensive interviews with leaders and sales people associated with

job family Competitive benchmarking (if applicable) Two essential internal analyses: pay for performance correlation;

and, differential (scatter plot) analysis

“Read out” Outline

Executive summary Describe the underlying causes, what triggered the problem; is

compensation really the problem? Illustrate the solution alternatives, “what’s the fix” Summary of required decision(s) Describe implementation; confirm capability to made

recommended change

Level 3 AssessmentBroad Scale Assessment

Level 3 Assessment – Broad Scale/Deep Dive

Topic Comments

Who is asking

CEO, CFO Cross-section of enterprise senior leaders (e.g., Sector

Presidents; BU General Managers)

Business situation; illustrative indicators

Many plans, concern about differences without distinction; wide variances in how same jobs are paid across world regions

No defined process related to how plans are designed Compensation cost increasing at a rate fastest than sales

growth Rules and procedures related to plan change and

approvals inconsistent; exceptions appear to be more frequent in some parts of the company

Top talent leaving because of stated issues with earnings opportunity; difficult to recruit qualified candidates

Level 3 Assessment – Broad Scale/Deep DiveTopic Comments

Assessment Scope

All sales organizations – channels and jobs All elements of compensation and related incentives, e.g., SPIFFS,

contests All plans and related administrative systems

Process and Tools

Highly structured process (i.e., detailed Work Plans) involving multiple internal teams; potentially external resources

Broad cross section of interviews; internal surveys or focus groups In-depth analyses using internal pay and performance data, and external

(survey) data (pay levels and practices)

“Read out” Outline

Assessment of current plans- Strengths and weaknesses- Pay for performance analysis- Cost of sales compensation analysis

Opportunities for improvement- Guiding principles as for future plans design decisions- Recommended improvements by job family/plan

Advice regarding change implementation Summary of decisions required before moving forward

Summing Up – Key Principles Starting point – confirm the problem at a conceptual level

Identify what information, data and analysis are already available and pertinent to the problem to solve for

Determine level of assessment required based on- Who is asking the question(s)- How big the problem appears to be- Resources available and willing to work the issue