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A proven approach to sales compensation

by Mark Blessington Consulting
by

Mark Blessington

on 10 September 2014

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Transcript of A proven approach to sales compensation

Mark Blessington Consulting
Definitions
Considerations
Target Total Pay
1. Financial Relevance
2. “Line-of-sight”
3. Simplicity
4. Reliable
Performance
Sales Compensation
Prominence
Pay-for-Performance
Pay Mix
Thresholds and Pay Caps: Necessary? Too low or high?

Payout Curves: Progressive throughout, especially near and above target?

Complexity: Easy to communicate?
Prior year results per salesperson are required for all performance measures under consideration

If not available, strongly consider reporting the new measure for a year before using as an incentive
Historical performance data
*Displacement is a statistic originally created by Mark Blessington in 1985 to assess new sales compensation plans
Base scenario: Retroactively impose the new plan on last year’s performance
Is a healthy amount of stress created? (we use the
displacement*
statistic)
Additional scenarios: performance increases and decreases, learning curves, etc.
New plan modeling
Sales Compensation Plan Design
as practiced by
Implementation
Incentive Plan
Pay Mix
Target Total
Performance
Measures
Pay
Field performance reports (at least monthly)

Human Resources, Finance, Information Systems integration
Materials: philosophy, descriptions, examples

Sales management training

Field roll-out meetings
Implementation
Financial
Relevance
Income Statement
Unit Volume
x Unit Price
= Gross Sales
- Returns, Allowances, Discounts
= Net Sales
- Standard Cost
= Standard Margin
- Actual Expenses
= Net Profit
Where I am
Where they want me to be
Good line-of-sight
Poor line-of-sight
Performance Measure "A"
Performance Measure "B"
Obstacle
"We don't set price, so we should be measured on sales volume, not gross profit."

"We can't influence raw material costs, so we should be measured on standard margin, not actual gross profit."
The most common mistake:
Moving too far down the income statement
Net sales rather than volume

Standard margin rather than net sales
The most common opportunity:
Moving down the income statement
When salespeople impact product mix

When salespeople impact price negotiations
Limit of 3 to 5 performance measures in the sales compensation plan
Performance measure simplicity:
Sales Compensation:
Not the only tool in the tool box ...
.. but, a very potent one!
Never use a new performance measure in a compensation plan; field-test all new performance measures
Performance measure reliability
1. Is this measure directly linked to behaviors which improve performance?

2 Is there a significant amount of low-to-high variance?
2 great tests:
Broad Distribution => Great Candidate!
Narrow Distribution => Poor Candidate
Sales Compensation Plan Design
Implementation
Incentive Plan
Pay Mix
Target Total
Performance
Measures
Pay
Once survey data is collected, it is analyzed and used to set target total pay per position for the next fiscal year

Salary Midpoint = salary grade midpoint or median for the position

Incentive at 100% of Target = amount of variable pay earned
when an incumbent reaches 100% of quota or annual sales goal
Target Total Pay =
Salary Midpoint +
Incentive at 100% of Target
Bad: Average

Good: Median

Better: Quartiles

Best: Deciles

Why? Sales pay varies greatly and is
highly "right-skewed" toward high pay levels
Statistics
TCC for all incumbents in a given sales position, divided by total sales for same incumbents

Why do we need this?
Is our sales compensation cost structure competitive?
More productive sales forces may need to pay more to avoid unwanted turnover
Compensation Cost of Sales (CCS)
Why?
Because incentive compensation is critical for most sales positions
If a survey allows participants to provide salary-only data for sales positions, the survey's usefulness is questionable
Avoid salary-only pay surveys
Total Cash Compensation
(TCC) = Salary + Incentive
These are numbers reported in
pay surveys
, and are used to analyze sales compensation
They are reported as a
statistic
for
"x" number of incumbents
in a given sales position
Base salary =
prior year
paid base salary
Incentive = all cash incentives paid in
prior year
Excludes recognition programs, benefits, expense allowances, etc.
Bad: Prior fiscal year

Best: Prior calendar year

Rationale:
Measure the same time period for all survey participants!
Prior Year
"X" number of incumbents
Caution: do not include partial-year incumbents

Annualized incentive payments can be very inaccurate

Substituting target pay for partial-year incumbents defeats the purpose of the study, which is to define target pay in the first place!
Prominence
How much influence do salespeople have over results?

How important is personal selling relative to the whole marketing mix?
Pay-for-Performance
Is there a strong relationship between sales effectiveness and results?

Is there a strong relationship between high performance and TCC?

Do high and low performers see a strong connection between pay and performance?
Sales Compensation Plan Design
Implementation
Incentive Plan
Pay Mix
Target Total
Performance
Measures
Pay
Pay mix is two percentages that sum to 100%

The first number is % of TCC paid in salary
The second number is % of TCC paid in incentive
Pay mix is best reported as "target" (i.e., for salary grade midpoint and target incentive)
Definitions
Sales Compensation Plan Design
Implementation
Incentive Plan
Pay Mix
Target Total
Performance
Measures
Pay
Historical performance data
Technical design features
New plan modeling
Incentive Plan
Technical design features
Displacement
Displacement is the amount of money that changes hands because of the new compensation plan, expressed as a percent of TCC

After using displacement to assess nearly a hundred new sales compensation plans for 10's of thousands of salespeople, it is possible for us to:
Introduce enough stress in the new plan to ensure everyone's rapt attention ...
... but not so much that salespeople lose hope that they can succeed on the new plan
?
Threshold
100%
To the moon!
Communications
Systems

Communications
Implementation
(c) Copyright 2012 Mark Blessington Inc. All rights reserved.
Recruiting &
Selection
Training &
Coaching
Career
Management
Pay &
Recognition
Job Design
Sales Management Tools
Measures
The five basic steps are summarized in this presentation
Full transcript