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Sales Compensation Effectiveness Best Practices &

Trends
March 26, 2014

Shawn Rossi, Principal, Sales Performance Practice Leader


Todays discussion

Key Context & Trends


Sales Compensation Design Best Practices
Appendix: Sales Compensation Effectiveness Assessment Best Practices
Questions?

MERCER 1
Key Context & Trends
Key trend sales compensation is a critical driver for the sales force
Impact of Levers on Sales Productivity*
(% of surveyed companies who ranked lever within top 4)

Sales Strategy & Planning 73%


Quota/Goal Setting 51%
Sales Compensation Design 41%
Deal/Pipeline Management 41%
Sales Training 38%
Sales Productivity Analysis & Reporting 32%
Sales Process & Playbook Definition 24%
Sales Compensation Administration 24%
Territory Definition & Alignment 22%
Recruiting & On-boarding 14%
Field Communication 11%
Account Definition & Maintenance 8%
Sales Person Status Changes 8%
Sales Coverage/Role/ Channel Modeling 8%
Customer Segmentation 5%
Other 0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of Companies

* Source: Mercers Sales Operations Trends Survey of Fortune 1000 companies. The
results are from 78 responses.
MERCER 3
Best practice: view sales compensation holistically

Separating the Leaders

Leaders Laggards
Aligned, Fair, Attainable
Simple Goals Area
Plans Rated Area Effective
or Very Effective*
Design 75% 60%

Effective Quotas 73% 39%


Program Communication 73% 61%

Clear,
Timely Effective,
Plan & Goal Efficient
Comp Admin Administration 70% 57%
Communication

* Source: Mercers Sales Compensation Practices Survey of Fortune 1000 companies. The
MERCER results are from 91 responses. 4
Best practice is to connect the dots and align
1 2 3
Customer Segmentation & Sales & Channel Strategy Sales Process Definition &
Targeting Alignment

Sales Process
Cust.
Retention Expansion Acquisition 1. Interest 3. Engagement 4.
Seg. 2. Belief
4. Commitment Commitment
Sales Expansion Product First order
planning opportunity Planning (PO signed)
Tier 1 95% $100M $10M Targeting Deal strategy Prototyping Win/loss
strategy and Trialing review
Tier 2 85% $75M $100M Pricing/
Qualification negotiation
(go/no-to
Tier 3 75% $25M $40M decision),
based on fit
& plant
capacity

Targets

6 5 4
Quota Setting Sales Compensation Sales Organization & Role
Build Reconcile Refine Design Design
Senior Management
Senior reviews with Sales Manager
and makes adjustments
Management
based on trend line data Individual Contributor: Directional Incentive Comp Recommendations
and corporate expectations For Sales Rep, Account Manager/Executive, National Account Manager EVP, Americas
Mix &
Upside
Target
Targetpay
paym
mix
ix85/15
85/15

Sales Manager rolls up Sales Management Total revenue = all revenue


Total Target Incentive (TI)
Salespersons Account
Plans to Sales Manager
determines how to
achieve adjusted goals Measu res
generated both for hom e plant and
other plants
VP, Direct VP, Channel
& Weigh ts
Level on a Salesperson basis New accounts = number above $40K Sales Sales
Total Revenue = 70% of TI + New Accounts = 30% of TI Remove plant EBI/operating budget
Sales m odifier
Management
TOTAL REVENUE NEW ACCOUNTS Payouts and tiers are
Payout Type
Thresho ld
Bonus
85% of Prior Year Re venue
Payout Type
Threshold
Bonus
None
illustrative and need to be
cost modeled
Director, Director, Director,
Attainment TI Payout New Accou nts TI Payout Consider counting an Midmarket Strategic Accounts Hardware Sales
Salesperson and Sales Sales Management 0% - 85% 0 1 -2 $1,500 account >$100K to count as
Manager review and strategizes with Mech anics m ore than 1 account
86% - 90% 50% Bo nus Payout 3 -4 $5,000
agree on the Salesperson on how to & Links Bonus Payout
Salespersons Account achieve goal on an 91% - 97% 75% 58 $7,500 Hold upside pay for total
Plans Account basis 98% - 100% 100%
revenue until annual goal is
9+ $1,500 per acct.
101%+ +3% for each 1% Cap No
achieved
Account Account
Goals should be calibrated
Cap
Paymen t
No
Quarterly
Payment Annually
and set based upon an Manager Executive
individuals m arket potential
Salesperson Salesperson combines data
with customer insight to
develop
Account-level Planning for MERCER 11
the year

MERCER 5
Simplicity is also a critical best practice
Maximize motivational impact by balancing simplicity and alignment

Strong Management
Simple incentive Processes
plan (minimal
metrics)

Low Reliance on High Reliance on


Incentive Plan Incentive Plan

Complex incentive
plan (multiple
Weak Management metrics)
Processes

MERCER 6
Effective sales compensation comes from a sound process

Assessment Design Implementation

Assessment both qualitative Design involves the following Implementation steps can
and quantitative analysis key steps vary based on the degree of
Qualitative analysis includes: 1. Sales Compensation change made to sales incentive
Philosophy programs. Some key activities:
Interviewing key
stakeholders to gather 2. Determine Eligibility Confirm systems and
historical insight and to 3. Set Target TCC Levels administrative capabilities
provide strategic direction 4. Choose Mix of Base and Prepare formal plan
for the future Incentive documents
Understanding current 5. Determine Measures & Draft communication
sales compensation plans Weights materials
Reviewing relevant 6. Design Plan Mechanics Train managers on
business documentation 7. Set Performance changes to the sales
Quantitative analysis Objectives incentive plan
includes: 8. Select Leverage Ratios Set meetings for managers
External compensation 9. Set Payout Timing to communicate changes
benchmarking 10.Validate Plans and Make one-on-one with direct
Reviewing pay and Refinements reports
performance relationships
MERCER 7
Sales Compensation Plan Design Best
Practices
Key success criteria for effective sales compensation design

A sales compensation plan should:


Reinforce and drive behaviors that help meet managements overall
business objectives
Provide motivating, meaningful and cost-effective rewards to the right
people for the right behavior and the right results
Align with clearly articulated sales and sales management roles and
accountabilities
Align with other key sales management programs and practices and the
desired culture of the sales effort
Be appropriately simple so the plan can be clearly communicated,
understood, reinforced, and administered
Be managed properly to meet the changing needs of the business

MERCER 9
Effective sales compensation depends upon role clarity and what good
looks like in terms of results

Focus Areas Key Responsibilities

Geography Customer Segment Revenue Stream


External

Existing New
Key Existing Customer
Customer Custome
Strategic
More Volume Current

SMB Sales Product

Role Same Volume Current Product


New Product

New Product

Product/Solution Channel Sales Process


Internal

HW SW Services WW
Sales

Server CRM
Mainte-
Identify Retain/Defend
Qualify Propose Close
Imple-
ment
Service Gr
nance Direct Indirect

Worksta- Implemen- Account Tech


tion Security tation Reseller
Mgmt Sales

MERCER 10
Design all key sales compensation components as a total solution

Step 1: Sales Compensation Philosophy

Step 2: Determine Eligibility

Step 3: Set Target TCC Levels

Step 4: Choose Mix of Base and Incentive

Step 5: Determine Measures & Weights

Step 6: Design Plan Mechanics

Step 7: Set Performance Objectives

Step 8: Select Leverage Ratios

Step 9: Set Payout Timing

Step 10: Validate Plans and Make Refinements

MERCER 11
Step 1: Sales Compensation Philosophy

Establish philosophy & supporting global design guidelines


DESIGN PRINCIPLES
Keep Pay for Balance
plans performance/ company results Maximize Maximize
PLAN DESIGN GUIDELINES simple Differentiate pay with pay line of sight motivation
Maximum of 3 performance
measures per plan, ideally 2
Maximum of 3 inflection
points/levels in a payout curve/rate
table

Maximum of 2 gates in a plan

Maximize pay at risk given the


roles influence on sales results
Performance measures have a
minimum of 20% weight
Soft cap at 300% of payout or
large deal > 50% of goal and less
than a margin threshold Limited Support Good Support Strongly Supports
Pay upside of 3:1 (frontline) or 2:1
(overlay) at the excellence point of
performance

Limited support Good support Strongly supports


MERCER 12
Step 3: Set Target TCC Levels

Ground total target cash compensation in key talent and role


considerations

Supply of Talent Abundant Adequate Limited Scarce

Expected Low Average Stretch Exceptionally High


Performance

Productivity Level Low Average Above Average Very High

Some Hiring Away Frequent Hiring Away


Employee Mobility Low Modest
by Competitors by Competitors

Staffing Excessive Adequate Light Extremely Lean

Degree of Company Rock Solid High Moderate Low (Shake Out)


Stability

Below Slightly Market


At Market
Market Above Leading

MERCER 13
Step 4: Choose Mix of Base and Incentive

Determining pay mix

Base Salary and Incentive Mix Alternatives


Scale
DIMENSION
Primary Job Focus Sales Service
Selling Cycle Short Long
Sales Force Prominence High Low
Business Strategy Growth Maintain
Account Strategy Acquire Strengthen
Entry Barriers (Sales Skill Set)Low High
Management Control Loose Tight
Product Life Cycle Introduce Mature
Complexity of Sale Low High
Performance Measures Volume Product Mix
OVERALL 100% OVERALL
90%
80%
70%
60%
50%
40%
30%
20%
10%

10%
20%
30%
Incentive 40%
50%
Base 60%
70%
80%
90%
100%

Full Commission Combination Full Salary

MERCER 14
Step 4: Choose Mix of Base and Incentive

Pay mix as a talent attraction and retention tool

Uncapped

$200K
Uncapped

Upside
Uncapped 100
Amount Earned

60 Legend
Above target incentives
20
$100K Target incentives
10
30 Base Salary
50
90

Mix
70
50

March 31, 2014

MERCER 15
Step 5: Determine Measures & Weights

Role specific performance measures are critical


Ability to consistently and
materially influence
Within line-of-sight and key
Within result for the role
span of
control

Effective
Performance
Measures
Supports sales Data can be accurately
strategy and business tracked
objectives Comp
Aligned Data is from a trusted
ready
Consistent with roles source and available for
design and key timely payments
responsibilities

To maximize motivation, no metric should have less than


15% of target pay weighted to it
MERCER 16
Step 6: Design Plan Mechanics

Commission vs. Bonus

High

Commission-
Based Plans

Number of
Customers

Salary/Bonus-
Based Plans

Low

Short Long
Sales Cycle

MERCER 17
Step 7: Set Performance Objectives

Accurate target setting is key to motivate the field and align with
company success
Target level equates to
100% of plan

30-40% 60-70%
of Sellers of Sellers

Number of
Salespeople Bottom10% Top10%
of Sellers of Sellers

Threshold 100% Excellence


Quota Performance

Performance level requiring


Excellence level allows 10% of
minimal effort set based on
sellers to earn upside, it is
historical performance or fixed
usually set using historical data
costs

MERCER 18
Step 8: Select Leverage Ratios

Payout curves should align pay and performance and motivate


Illustrative

300%
Payout Curve Leverage A decelerated
slope above (or
cap) at
250%
Excellence can
help to control
Payout as a % of Target

200% excessive pay

150%
The slope is
accelerated above
100% Target (100%) to set
the prize beyond
the finish line and
50% reward for
Payments 3/31/2014
outstanding
begin once a performance
0%
threshold level
is achieved 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

% Goal Attainment

Sales Leader First Line Manager Sales Rep


MERCER
Step 9: Set Payout Timing

Pay frequency should be aligned to the other plan design elements

Factors Effect on Payout Frequency


Target Incentive The higher the Target Incentive, the more frequent the payout

Pay Mix The more aggressive the Pay Mix, the more frequent the payout
Number of
The greater the number of Performance Measures, the less frequent
Performance
the payout
Measures
Weighting of
The higher the weighting of the Performance Measure, the more
Performance
frequent the payout
Measures
Common payout frequencies are monthly, quarterly or annually and vary based on the factors above

When selecting pay frequency, it is advisable to choose one that:


Ensures proper cash flow to the salesperson
Is significant enough to attract the attention of the salesperson
Is as close as possible to the time of sale
Is feasible to administer accurately and efficiently
MERCER 20
Step 10: Validate Plans and Make Refinements

Back test the designs against the principles

1 Maximum line of sight and influence on results that drive pay

2 Maximize motivation of plan but still balance ROI with compensation spend

There should be differentiations in compensation for specific products /


3 product lines / product groupings and product mix

4 Better align total production and territory size with pay

Top performers should earn 3x the incentives of an average performer to


5 provide better motivation and drive stronger pay differentiation

There should be no caps on incentive payments, though there should be


6 protections against windfalls

Meets Principles Objectives Partially Meets Principles Objectives Fails to Meet Principles Objectives

MERCER 21
Appendix: Sales Compensation Effectiveness
Assessment Best Practices
Assessment: understanding the current compensation plans
Key red flags include:
1. Plans with high levels of uncapped upside
2. Performance levels with no threshold
3. Performance measures not based on quantifiable results
4. Highly frequent payments
5. Low weightings on performance measures
Performance / Payout Level
Performance Payout (as a % of Target) Payout
Role Weighting Component Detail
Measure Mechanism Frequency
Threshold Target Excellence

1 Payments are not


capped (i.e.,
Individual Formulaic 100% / 120% / incentives above
60% 80% / 50% Weekly
Revenue Bonus 100% 500% excellence level
are paid at 4
excellence rate)
Sales 2
0% / 0%
Representative Formulaic 100% / 110% / Payments capped
Group Revenue 35% (no Monthly
Bonus 100% 150% at excellence
threshold)
5 This payout is
MBOs Discrete Completing a maximum of three
subject to the
(Management 5% Bonus objectives / Annually
3 completion of
by Objectives) Payment Up to 150% of target
objectives

MERCER
Competitive compensation analysis
Example of competitive total target cash benchmarking
Illustrative

Sales Representative Sales Manager


n = 27 n=7
$160 $200

$150 $190 75th %ile

75th %ile
$140 $180

$130 $170 Median


Median
$120 $160
75th %ile
75th %ile
$110 $150 25th %ile

Median 25th %ile


$100 $140
Median
$90 $130
25th %ile
$80 $120
25th %ile
$70 $110

$60 $100
In In
Thousands
Base Salary Total Cash Compensation Thousands Base Salary Total Cash Compensation

MERCER 24
Competitive compensation analysis

The following pay mix exhibit shows how the mix of base and incentives (variable
compensation) compares to market benchmarks

Average Employee Pay Mix Illustrative


100%
20% 22% 20% 20%
80% 40% 40% 41% 36%

61%
60% 74%

40% 80% 78% 80% 80%


60% 60% 59% 64%

20% 39%
26%

0%
Sales Person Recruiter Vice President of Vice President of EVP of Solutions
Recruiting
March 31, 2014 Sales 25

Base Incentive Market Base Market Incentive

MERCER 25
Key effectiveness metric: performance distribution by role

FY08 Goal Achievement


FY09 Goal Achievement
FY10 Goal Achievement

Goal Achievement
MERCER 26
Source: Financial data obtained from Company (Dec 2010)
Key effectiveness metric: pay composition by role
Incentive Pay

Measure 1 Measure 2 Measure 3 Measure 4

MERCER 27
Source: Financial data obtained from Company (Dec 2010)
Key effectiveness metric: pay for performance by key business objective

180%

160%

140%
2
R = 0.3251
120%
3YR Avg Goal Attainment

100%

80%

60%

40%

20%

0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
% Audit (of Total Revenue Generated)

MERCER 28
Source: Financial data obtained from Company (Dec 2010)
Key effectiveness metric: pay differentiation
% of Median Payout
Incentive Pay as a

Earner Position

MERCER 29
Biography
Shawn Rossi is a Principal and the North America Leader for Mercers Sales Performance Practice.
Based out of Atlanta, he leads engagements with clients to deliver straight forward, aligned, high
impact sales effectiveness solutions.
With over eighteen years experience, Shawn has expertise in a variety of industries including
technology, distribution, retail, telecommunications, banking, media, insurance, and medical device
companies; all with the goal of improving sales and marketing effectiveness.
Shawns engagement experiences specifically include working with leading global companies
including Apple, Allstate, Bank of America, Microsoft, Halliburton, Aflac, Unisource, Oracle, IBM,
United Healthcare, TBC, AT&T, T-Mobile, HP, Verizon, Superpages.com, Lexmark, Randstad,
Ryder, NCR, Motorola, FedEx, St. Jude Medical, Smith & Nephew, Red Bull, Sysco, Johnson &
Johnson, Ecolab, McKesson, Network Appliance, Samsung, Clear Channel and Vodafone.
Mr. Rossis key core competencies include:
Shawn Rossi Sales Transformation (spurred by acquisitions, new product launches, going into new markets)
Sales and Channel Strategy
Principal, North America
Practice Leader Sales Effectiveness Assessment & Dashboards
Sales Organization and Role Design
Sales & Marketing
Performance Practice Sales Compensation Design & Administration
Quota/Goal Setting
678.427.8275
Sales Process Definition/Re-engineering
shawn.rossi@mercer.com Sales Training & Enablement
Atlanta With over 30 widely published articles, speeches and webinars, Shawn is a recognized thought
leader in the sales performance management space. He has had works published in WorldatWork,
SHRM and other publications. Additionally, he has spoken at multiple conferences and via the web
for World at Work, SPM Solution Provider User Conferences, and the Sales Management
Association.
Shawn holds an MS in Physics from Auburn University and graduated Cum Laude from Wake
MERCER
Forest University with a Bachelor of Arts degree in Physics. 30
Questions
&
THANK YOU!

MERCER 31

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