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Seeking input on incentive models with a threshhold floor

Aaron Codak's Profile

We have a basic incentive model we use for several of our new business people here at our company.  It's fairly simple where they must exceed a certain base dollar volume before they start earning a percentage of professional fee's brought into the company.  We want to look at other models out there and see if we can modify our own to be more appealing.  Is anyone interested in sharing their own information with me - I would be willing to speak off-line about this as well if you prefer to discuss in that manner.  My email is acodakatsjadv [dot] com.  Thank you!

Answers

Ken Gruber
Title: CFO
Company: St. Dominic's Home
LinkedIn Profile
(CFO, St. Dominic's Home) |

You might want to consider weighting/adjusting the plan towards higher margin services ir

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

Also differentiate between new accounts, renewals, new products/services sold to existing accounts. Driven by level of individual effort and overall business growth objectives.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Start with what you measure; what is important to you? Malak and Ken pointed out a few. Others include:
-Assists: Comping for bringing in a lead and/or PO in another reps region can help your salesforce act like a team.
-Business term / sales term: If cash and terms are particularly important (or unimportant), providing accelerators for preferred engagement models (like cash up front) can be helpful.

Separately, there is the "how you pay" question.
-Mix of salary / incentive: I've seen this anywhere from 0/100 to 100/0. It really depends on the personality you want in your sales team. For Enterprise Services (which I think you're talking about) 40/60 seems a good balance.
-Draws (and are they recoverable?): Draws are a very effective tool for both helping salesfolks develop new, large accounts *and* being very motiviated *and* having a positive feeling about the company. Recovery is really your issue (financial risk et al). There are lots of kinds of recovery...the harshest I'm opposed to as it becomes a perverse incentive very quickly. Draws that accumulate (as a liability to the salesperson) over multiple periods, expire eventually, yet in the short-mid term (defined by your sales cycle) offset any earnings payable (but not accelerators earnable) I think is a good starting point. This can be a powerful part of an incentive program, and is worth careful consideration in structuring. I've seen it done wrong, which removes both the benefit *and* provides a disincentive to positive activities.
-Scaling/Accelerators: You mentioned scaling (0% up to x; N% over x) in your question. Depending on your business this can be good, but can also be fraught. The gaming industry, for example, knows that your average Joe responds well to small incremental motivators with the promise of a big pot at some point. This is why slot machines work so very well. Having 0% up to a point can be a *disincentive* in that it does not provide the small yet important incremental rewards that tell the salesdude that the big jackpot is just around the corner. I prefer scaling it...for example 1% to target, 2% beyond target, 3% after doubling target.. or some variation on that theme. If one salesperson hits the jackpot, that big win is an incentive to *everyone*, just like when the sirens go off in Vegas. Yes, you take a financial hit...but if the salesperson has delivered, do you really care? Just run the numbers first and be cognizant of the financial risk (I've seen $1m salesfolks bring in $300M deals...that were really corp deals but even a well written plan is no defense...and suddenly you either pay or have a lawsuit, and if it goes the latter you've got a huge incentive problem on top of the financial one).

OK....enough for now. Cheers and have fun!

Keith

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Listen to your VP of Sales. Their incentive should be based on their team's performance. They'll be motivated to drive sales, and may well be your resident expert in this space. They likely have very good ideas about what will and won't work. I'm not saying "let them write the plan"...but they should absolutely believe in it, as they need to sell it to their team every sales cycle.

Sally Brandtneris
Title: VP and CFO
Company: Stefanini TechTeam
(VP and CFO, Stefanini TechTeam) |

I agree with most of Keith's comments - the problem is how to keep the plan relatively simple so that the sales guys can understand it and it can be administered. We comp on both sales and margin, on a sliding scale, depending on the size of the account and what we are trying to achieve. 40/60 base to variable seems too high to me, although it depends in great part on the total comp level. We are facing an issue right now because of several mergers and the comp plans vary across companies. Some of the reps have low base/high variable and vice versa. We are struggling on how to commonize them. Any thoughts?

Mark Stokes
Title: CFO
Company: Private
(CFO, Private) |

Sally, that will be very difficult if you are trying to incent different behaviors from these different folks. If everyone is selling the same thing (or nearly so), then you can create a single rationale for your comp plan and sell it to everyone. Most important here is a)you have to believe it, b)the CEO has to believe it, and c)the various sales VPs have to believe it. Once there, it's all about communication and roll out. However, it's never that easy with disparate products. The questions I usually spend the most time on with CEOs and Sales VPs are: What "kind" of sale is it, and what is the behavior we're trying to incent? If you believe that there are "hunters" - those who go out and kill big, new deals, and there are "gatherers" - keeping close to existing customers and closing repeat business, then I don't think you can create one sales plan for everyone. These two models are so different. The hunters are big game folks and they play for the big upsides. The gatherers have a fundamentally different model, and typically much lower risk/higher predictability with less upside. So trying to put them both on a common plan may end up incenting neither. Oh yes, then there's inside sales vs. direct sales - again, key is knowing the kind of sale and how they should be incented.

However, if you can figure out your fundamental one, two or three sales types and build plans for each that get past you, the CEO and the sales VPs, you could cut 10 or more plans down to a manageable handful.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

Sally

I have seen time and again that you get what you incent for so I think a simple plan is best so that you can clearly understand the behavior you are trying to drive. First thing you need to do is to determine the proper mix of base, commission and quotas. I would talk to peers in the industry to find out the appropriate level; commission percent is just commission$$ divided by quota. Accelarators are a common part of sales plans and I have seen many different flavors; quarterly, ratcheting up each quarter depending on quota achievement, annual. I think the advice to try and work with your Sales VP is wise as he/she will be trying to drive the behavior in the Sales teams.

Best

Joan

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

I recommend that you consider hiring a professional compensation consultant. By simply reading the earlier comments, it's clear that this topic is more complex than it seems. My experience with internally created incentive plans is that they usually miss the mark. Despite good intentions the resulting plan often incents the wrong behavior (unintended consequences), isn't aligned with the company's real objectives, and is frequently too stingy or too generous.

While plan simplicity is usually a worthwhile target, that is driven more by administrative considerations. As for the ability of sales people to understand a plan, don't worry. One of my first tasks with any incentive plan I had was figuring out what I needed to do to maximize my payout.

david waltz
Title: Assistant Treasurer
Company: Integrys Energy Group
(Assistant Treasurer, Integrys Energy Group) |

Is there a common practice in the industry? If everyone else is low/high and it is acceptable to the sales force, there will be some pressure to be "competitive". You don't want to go high/low and watch everyone walk out the door!

As much as I hate to say it, this might be another area for a consultant to address, if you hire one who is familiar with the specifics of your industry.

Shane Patrick Connolly
Title: Chief of Staff
Company: Council District 10, City of San Jose
(Chief of Staff, Council District 10, City of San Jose) |

Lots of good advice here, although I am not sure that you need a compensation consultant as one writer suggests. Smart folks who have a good understanding of their industry and knowledge about what behavior various options will typically drive should be able to design a reasonable system. It's also important to ensure that the system doesn't become too unwieldy to administer. To alleviate some of the administrative burden, you can source performance-tracking with a cloud-based service like Xactly or similar.

One thing that many systems overlook is what might be characterized as "claw-back" provisions for incentives on sales that are ultimately not consummated due to lack of customer consideration (i.e. payment). Salespeople will often encourage an employer to take on a customer w/weaker credit profile who doesn't make good on services they received. There should be a provision to reclaim unearned incentives (without consideration you don't have a sale, you have charity work)!

Also, if cash flow is an issue at the company and terms are granted, you can get your sales reps actively involved in the full cash-flow cycle by including a receivables aging dimension. Commissions would diminish the longer the customers' invoice remains outstanding. Sometimes your sales reps, who have the closest relationships with the customer, can be very effective at getting to the root of payment issues quickly. Obviously, this would not be necessary in an environment where up-front payment occurs or terms are not granted.

Raffy Ohannesian
Title: Managing Partner
Company: Group Phoenix Advisors
LinkedIn Profile
(Managing Partner, Group Phoenix Advisors) |

We are going through a rigorous R&D process for our incentive plan today (begun almost 9 months ago) to determine with minimal reservations what BEHAVIORS we want to reward and what reward is commensurate with that behavior. I think what's missed many times in sales incentive plans are the bare minimums: Did the client pay for the goods/services and was that sale a PROFITABLE one (meaning not just gross profit, but that's a good start at the very least). In 20+ years in finance and operations, I've seen a lot of bone-headed sales incentive plans that don't service the client, don't add to the profitability of the company but keep the sales force in fancy duds and nice sports cars. My mantra over this time has been: the COMPANY gets paid first. If the sale is profitable, then the sales force will justly and fairly get their due. If the sale is accretive, then the sales force should receive even more incentive, as the customer won will stand to be a long-term revenue stream. Often times sales are unsustainable (customer is too difficult or remote to service properly or properly, customer's cash flow/credit history is sub par, customer is a commodity-shopper and will drop your product/service for the next/cheapest alternative). Those are sometimes difficult to gauge, but successful salesmanship involves knowing the customer's needs and the customer's value to the organization. A 100% customer-service orientation is a death sentence, because you are then setting yourself and organization up for a win-at-all-costs response to the most fickle customers. That is not profitable, that is not accretive. A happy customer is one who's needs are met and who deems them met at a fair value. That fair value is fair to the customer and to your organization, not one or the other. Often times the high-fives will be fast and furious around the sales office, while downstream the company struggles to deliver the product/service efficiently or profitably. By that time, commissions are paid and the sales force has moved on to continue behavior that should not be rewarded or repeated. As for non-sales force, profitability, again, is a key benchmark. Behavior that reduces cost, increases efficiency, eliminates waste, adds structure/order/control/verification to processes in the value-chain that are critical to the profitability equation should be encouraged and rewarded. A friend once told me that many CEO's were successful sales professionals and that's a sure route to the top spot. At the time, he worked for a company that had a sure-fire service (broadband/telecom/co-lo services during the dot-com era). The company folded after failing to optimize profit through its clear advantages in the market. Many successful sales people end up in the CEO spot. But successful CEO's cannot ignore the great equalizer of profit. If you can determine your profitable customers from your unprofitable ones, and hone and replicate that formula, then the comp plan makes no difference because your wins will greatly outpace your losses. Successful businesses create comp plans that ensure the company wins first. Unsuccessful companies create comp plans that are more 'hope and prayer' than sound, defensible incentives that generate desired, PROFITABLE behavior. The chasm between the two is galactic in size.

Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

The comments so far have all been geared to incentivise salespeople to bring in the business. I also suggest you consider sturcturing the incentive to retain your key people by deferring the payment of a part of the incentive for say six months (or more)to be paid out provided the employee is still employed at that time.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Note: I *love* working on sales comp stuff, so apologies for the long note.

-Delay vs. Immediate (Shane, Simon): Delaying payments to "Hunters" can be a serious disincentive; it can be a positive incentive to "Gatherers". Deferrals are unenforceable on termination in CA and some other states, so they can be an incentive to depart! Do take care on deferrals. Claw-Backs are similarly fraught, but can be important if payment is a problem (and are absolutely enforceable in that case). If you are using accelerators, this can get really goofy, so holding back the accelerator payment based on the uncertainty of the claw-back portion is usually permissible.

-Mergers and Comp Plans (Sally, to a degree echoing Mark): LCD rules. If you have partitioned sales teams, you can work around this. Assuming you have one sales team...what is the core set of products that you want to promote? That is your LCD. The algorithm is "what plan will incent positive behavior at the core, without undermining everything else?" It may be a wholly new structure, and you will have a fight on your hands from the ones who will have to change, but it is well worth the fight.

-Complexity (Sally, Jim et al): I've always been shocked at how well sales folks can comprehend complex plans; it is standard practice for me now to go to the team for feedback as to corner cases. They live and breathe this stuff, and tend to be incredibly responsive to changes. That being said, you have to administer the thing, so make sure it is based on what you measure, and definitely consider a solution like Xactly. Speed and accuracy (especially with Hunters) is critical, and you want to meet that service level without flushing too much $$$.

And, seriously....feel free to reach out directly if you want to chat. I do have an unnatural affection for sales plans.

Happy New Year!

Keith

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