 "<b>Book Extract:</b> Rethinking sales compensation")
Let's consider some common assertions with respect to sales compensation that in my experience, are often false.
"Compensation plans must be simple"
The fear is that "complex" plans can cause salespeople to spend too much time calculating payoffs instead of selling and taking care of customers. Conventional wisdom is that "a good compensation plan is simple and predictable ... A well-designed plan fits on a card small enough to be carried around in the salesperson's wallet." Maybe not. Many sales situations involve complex bundles of activities: group sales efforts, product plus service offerings, multibusiness participation on solutions sales, and so on. You can pretend the complexity isn't there, but it is.
Behind the simplicity assertion is an implicit view of salespeople: they may not be bright enough to understand a comp plan that's bigger than a business card. But this claim is contradicted (often by the same person making the assertion) by fears that a complex plan will drive gaming behavior by salespeople who maximize income with minimal effort. Will reps game the system, any system: complex or simple? Yes. But then the issue is crafting a win-win plan, not fear of taxing their brains. In a strategically effective plan, the company wins when the salesperson wins a bonus. Consider sales comp plans at firms like IBM, Oracle, and others that have strategies with complex sales tasks. The plans are many pages long, with multiple permutations and complex payout schemes. That complexity reflects selling realities. I have yet to meet the sales force that, in the aggregate, does not understand within a week the implications for (in the phrase used at IBM) "hitting big casino" and maximizing income. Available data across firms indicates no difference in the percentage of reps who meet and beat quota under more or less complex comp plans. As one CEO says, "Salespeople become experts in their sales plan, regardless of its simplicity or complexity, and you can count on unintended consequences." Why? If a policy determines how you will eat, you will study it in detail. As for predictability: it's the market that ultimately determines predictability or volatility, not your comp plan.
The simplicity assumption reflects another issue: "what gets measured gets managed." People tend to produce the performance measured and often ignore other important tasks. In fact, many CEOs, when they advocate simple sales comp plans, are reflecting their experience with boards, executive compensation consultants, and Sarbanes-Oxley-Dodd-Frank regulations. Jeff Ubben, an activist investor, has served on many boards. He notes that, often overwhelmed by conflicting requirements and eager to keep the CEO's pay out of the papers, "boards become servants to formulas and solve for the dollar amount to be delivered, losing focus on desired outcomes and the design of incentives." Too bad for the conceptually challenged board of directors, but that's no reason to inflict this oversimplification on your sales force.
"We pay for results, not process"
Here, the reasoning is that because sales tasks are contingent on specific customers and market conditions, the field rep will always know more about ground truth than anyone at headquarters. As managers, we should therefore ignore process (because we're not sure what the best process is) and simply reward results: pay (or don't pay) for actual outcomes, not the process in the sales sausage factory. But the process for administering compensation is always at least as important in effecting desirable behavior as the level of pay. For one thing, a pay process reflects strategic choices and management norms - explicit or implicit. At many companies, for example, salespeople receive big bonuses for results. But the process for providing the bonus is at odds with the firm's formal performance evaluation of that person. That is, the basis of the bonus (e.g., orders booked by an individual rep) often contradicts what the company, its espoused strategy, and sales managers say they want in performance-evaluation sessions (e.g., cross-referrals, joint presentations, or other aspects of team selling). The result is de-motivation or, worse, motivation toward the wrong type of sales effort.
ALIGNING STRATEGY AND SALES: THE CHOICES, SYSTEMS, AND BEHAVIORS THAT DRIVE EFFECTIVE SELLING
AUTHOR: Frank V Cespedes
PUBLISHER: Harvard Business Review Press
PRICE: Rs 1,250
ISBN:9871422196052
Consumers have more information and so do sellers, and smart sellers can use that information to align strategy and sales more effectively, Cespedes tells Ankita Rai
How has the internet/social media changed the sales function?
The impact of the internet on the sales function has been misunderstood. Let us understand this using US numbers. Online spending by consumers in 2014 will be an estimated $300 billion. That may sound like a lot, but it is about 6 per cent of total retail spending and less than what one retailer, Wal-Mart, sells annually in its stores. Also, half of that $300 billion is done through the online channels of brick-and-mortar retailers, because the store is a handy place for returns, and 20 per cent is through Amazon.com. So, "pure" internet purchases beyond Amazon are a small portion of buying and selling.
It's not true that the internet is "disintermediating" or replacing sales people. The number of salespeople in the US was the same in 2012 as in 1992 - before ecommerce existed in any meaningful form. And that number is almost certainly under-counted because, in an increasingly service economy, many business developers are called 'associates', 'managing directors', or 'vice presidents', not put in a 'sales' category for reporting purposes.
Second, internet and social media are realigning sales tasks. As one auto executive puts it, customers "visit our dealerships less frequently when deciding which car to buy. So our salespeople have to be better at closing the sale-they usually have only one shot, and there's not really a warming-up period anymore." Consumers have more information and so do sellers, and smart sellers can use that information to align strategy and sales more effectively.
In your book, you say that companies need to rethink traditional sales compensation plans...
Most sales compensation plans are simple: 70 per cent base bonus or commission on sales volume. But the economic and strategic implications of selling are not so simple. When compensation plans are based on volume, the basic message to salespeople is, sell to anyone willing to pay our price, and discount if you must to get that volume. That's what salespeople do. They bring in orders that have very different impacts on the seller's R&D, product customisation and service requirements, margins, and so forth. Soon, the firm has a diverse, motley mix of customers and sunk-cost investments, and it really does not matter what the strategic plan says; the real "strategy" of the firm is driven by that ad hoc process. That's why most compensation plans should be re-examined.
FRANK CESPEDES
Senior lecturer, Entrepreneurial Management Unit, Harvard Business School
Reprinted by permission of Harvard Business Review Press. Excerpted from Aligning Strategy & Sales: The Choices, Systems, and Behaviors that Drive Effective Selling. Copyright 2014 Frank Cespedes. All rights reserved.
"Compensation plans must be simple"
The fear is that "complex" plans can cause salespeople to spend too much time calculating payoffs instead of selling and taking care of customers. Conventional wisdom is that "a good compensation plan is simple and predictable ... A well-designed plan fits on a card small enough to be carried around in the salesperson's wallet." Maybe not. Many sales situations involve complex bundles of activities: group sales efforts, product plus service offerings, multibusiness participation on solutions sales, and so on. You can pretend the complexity isn't there, but it is.
Behind the simplicity assertion is an implicit view of salespeople: they may not be bright enough to understand a comp plan that's bigger than a business card. But this claim is contradicted (often by the same person making the assertion) by fears that a complex plan will drive gaming behavior by salespeople who maximize income with minimal effort. Will reps game the system, any system: complex or simple? Yes. But then the issue is crafting a win-win plan, not fear of taxing their brains. In a strategically effective plan, the company wins when the salesperson wins a bonus. Consider sales comp plans at firms like IBM, Oracle, and others that have strategies with complex sales tasks. The plans are many pages long, with multiple permutations and complex payout schemes. That complexity reflects selling realities. I have yet to meet the sales force that, in the aggregate, does not understand within a week the implications for (in the phrase used at IBM) "hitting big casino" and maximizing income. Available data across firms indicates no difference in the percentage of reps who meet and beat quota under more or less complex comp plans. As one CEO says, "Salespeople become experts in their sales plan, regardless of its simplicity or complexity, and you can count on unintended consequences." Why? If a policy determines how you will eat, you will study it in detail. As for predictability: it's the market that ultimately determines predictability or volatility, not your comp plan.
The simplicity assumption reflects another issue: "what gets measured gets managed." People tend to produce the performance measured and often ignore other important tasks. In fact, many CEOs, when they advocate simple sales comp plans, are reflecting their experience with boards, executive compensation consultants, and Sarbanes-Oxley-Dodd-Frank regulations. Jeff Ubben, an activist investor, has served on many boards. He notes that, often overwhelmed by conflicting requirements and eager to keep the CEO's pay out of the papers, "boards become servants to formulas and solve for the dollar amount to be delivered, losing focus on desired outcomes and the design of incentives." Too bad for the conceptually challenged board of directors, but that's no reason to inflict this oversimplification on your sales force.
"We pay for results, not process"
Here, the reasoning is that because sales tasks are contingent on specific customers and market conditions, the field rep will always know more about ground truth than anyone at headquarters. As managers, we should therefore ignore process (because we're not sure what the best process is) and simply reward results: pay (or don't pay) for actual outcomes, not the process in the sales sausage factory. But the process for administering compensation is always at least as important in effecting desirable behavior as the level of pay. For one thing, a pay process reflects strategic choices and management norms - explicit or implicit. At many companies, for example, salespeople receive big bonuses for results. But the process for providing the bonus is at odds with the firm's formal performance evaluation of that person. That is, the basis of the bonus (e.g., orders booked by an individual rep) often contradicts what the company, its espoused strategy, and sales managers say they want in performance-evaluation sessions (e.g., cross-referrals, joint presentations, or other aspects of team selling). The result is de-motivation or, worse, motivation toward the wrong type of sales effort.
ALIGNING STRATEGY AND SALES: THE CHOICES, SYSTEMS, AND BEHAVIORS THAT DRIVE EFFECTIVE SELLING
AUTHOR: Frank V Cespedes
PUBLISHER: Harvard Business Review Press
PRICE: Rs 1,250
ISBN:9871422196052
Frank Cespedes
Internet and social media are realigning sales tasks: Frank CespedesConsumers have more information and so do sellers, and smart sellers can use that information to align strategy and sales more effectively, Cespedes tells Ankita Rai
How has the internet/social media changed the sales function?
The impact of the internet on the sales function has been misunderstood. Let us understand this using US numbers. Online spending by consumers in 2014 will be an estimated $300 billion. That may sound like a lot, but it is about 6 per cent of total retail spending and less than what one retailer, Wal-Mart, sells annually in its stores. Also, half of that $300 billion is done through the online channels of brick-and-mortar retailers, because the store is a handy place for returns, and 20 per cent is through Amazon.com. So, "pure" internet purchases beyond Amazon are a small portion of buying and selling.
It's not true that the internet is "disintermediating" or replacing sales people. The number of salespeople in the US was the same in 2012 as in 1992 - before ecommerce existed in any meaningful form. And that number is almost certainly under-counted because, in an increasingly service economy, many business developers are called 'associates', 'managing directors', or 'vice presidents', not put in a 'sales' category for reporting purposes.
Second, internet and social media are realigning sales tasks. As one auto executive puts it, customers "visit our dealerships less frequently when deciding which car to buy. So our salespeople have to be better at closing the sale-they usually have only one shot, and there's not really a warming-up period anymore." Consumers have more information and so do sellers, and smart sellers can use that information to align strategy and sales more effectively.
In your book, you say that companies need to rethink traditional sales compensation plans...
Most sales compensation plans are simple: 70 per cent base bonus or commission on sales volume. But the economic and strategic implications of selling are not so simple. When compensation plans are based on volume, the basic message to salespeople is, sell to anyone willing to pay our price, and discount if you must to get that volume. That's what salespeople do. They bring in orders that have very different impacts on the seller's R&D, product customisation and service requirements, margins, and so forth. Soon, the firm has a diverse, motley mix of customers and sunk-cost investments, and it really does not matter what the strategic plan says; the real "strategy" of the firm is driven by that ad hoc process. That's why most compensation plans should be re-examined.
FRANK CESPEDES
Senior lecturer, Entrepreneurial Management Unit, Harvard Business School
Reprinted by permission of Harvard Business Review Press. Excerpted from Aligning Strategy & Sales: The Choices, Systems, and Behaviors that Drive Effective Selling. Copyright 2014 Frank Cespedes. All rights reserved.