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Sales Compensation Effectiveness Best Practices &Trends
March 26, 2014
Shawn Rossi, Principal, Sales Performance Practice Leader
MERCER 1
Today’s discussion
• Key Context & Trends
• Sales Compensation Design Best Practices
• Appendix: Sales Compensation Effectiveness Assessment Best Practices
• Questions?
Key Context & Trends
MERCER
Key trend sales compensation is a critical driver for the sales force
0%5%
8%8%8%
11%14%
22%24%24%
32%38%
41%41%
51%73%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
OtherCustomer Segmentation
Sales Coverage/Role/ Channel ModelingSales Person Status Changes
Account Definition & MaintenanceField Communication
Recruiting & On-boardingTerritory Definition & Alignment
Sales Compensation AdministrationSales Process & Playbook Definition
Sales Productivity Analysis & ReportingSales Training
Deal/Pipeline ManagementSales Compensation Design
Quota/Goal SettingSales Strategy & Planning
% of Companies
Impact of Levers on Sales Productivity*(% of surveyed companies who ranked lever within top 4)
3
* Source: Mercer’s Sales Operations Trends Survey of Fortune 1000 companies. Theresults are from 78 responses.
MERCER
Best practice: view sales compensation holistically
EffectiveProgramEffectiveProgram
Fair, AttainableGoals
Aligned,SimplePlans
Effective,Efficient
Comp Admin
Clear,Timely
Plan & GoalCommunication
Separating the LeadersSeparating the Leaders
Area
Leaders Laggards
Rated Area Effectiveor Very Effective*
Design 75% 60%
Quotas 73% 39%
Communication 73% 61%
Administration 70% 57%
4* Source: Mercer’s Sales Compensation Practices Survey of Fortune 1000 companies. Theresults are from 91 responses.
MERCER
Best practice is to “connect the dots” and align
Sales & Channel Strategy Sales Process Definition &Alignment
1 2 3
4Sales Organization & Role
Design
5Sales Compensation
Design
6
Customer Segmentation &Targeting
Quota Setting
Cust.Seg. Retention Expansion Acquisition
Tier 1 95% $100M $10M
Tier 2 85% $75M $100M
Tier 3 75% $25M $40M
Targets
EVP, Americas
VP, ChannelSales
VP, DirectSales
AccountManager
Director,Midmarket
Director,Strategic Accounts
Director,Hardware Sales
AccountExecutive
Salesplanning
Targetingstrategy
Qualification(go/no-todecision),based on fit& plantcapacity
Expansionopportunity
Deal strategy
Pricing/negotiation
ProductPlanning
Prototypingand Trialing
First order(PO signed)
Win/lossreview
4. Commitment
Sales Process
1. Interest 2. Belief 3. Engagement 4.Commitment
Build – Reconcile – RefineBuild – Reconcile – Refine
SeniorManagement
SalesManagement
Salesperson
Senior Managementreviews with Sales Manager
and makes adjustmentsbased on trend line data
and corporate expectations
Sales Managementdetermines how to
achieve adjusted goalson a Salesperson basis
Sales Managementstrategizes with
Salesperson on how toachieve goal on an
Account basis
Salesperson combines datawith customer insight to
developAccount-level Planning for
the year
Salesperson and SalesManager review and
agree on theSalesperson’s Account
Plans
Sales Manager rolls upSalespersons’ AccountPlans to Sales Manager
Level
MERCER 11
Target pay mix 85/15Target pay mix 85/15
Measures& Weights
Mechanics& Links
NEW ACCOUNTSTOTAL REVENUE
New Accounts = 30% of TI
Individual Contributor: Directional Incentive Comp RecommendationsFor Sales Rep, Account Manager/Executive, National Account Manager
Mix &Upside
Total Target Incentive (TI)
Total Revenue = 70% of TI +
Payout Type BonusThreshold 85% of Prior Year Re venue
Bonus Payout
Attainment TI Payout0% - 85% 0
86% - 90% 50%
91% - 97% 75%98% - 100% 100%
101%+ +3% for each 1%Cap NoPayment Quarterly
• Total revenue = all revenuegenerated both for home plant andother plants
• New accounts = number above $40K
• Remove plant EBI/operating budgetmodifier
Payout Type BonusThreshold None
Bonus Payout
New Accounts TI Payout1 - 2 $1,500
3 - 4 $5,0005 – 8 $7,500
9+ $1,500 per acct.Cap NoPayment Annually
• Payouts and tiers areillustrative and need to becost modeled
• Consider counting anaccount >$100K to count asmore than 1 account
• Hold upside pay for totalrevenue until annual goal isachieved
• Goals should be calibratedand set based upon anindividual’s market potential
5
MERCER 6
Simplicity is also a critical best practiceMaximize motivational impact by balancing simplicity and alignment
High Reliance onIncentive Plan
Low Reliance onIncentive Plan
Weak ManagementProcesses
Strong ManagementProcessesSimple incentive
plan (minimalmetrics)
Complex incentiveplan (multiple
metrics)
MERCER 7
Effective sales compensation comes from a sound process
Design Implementation
Assessment both qualitativeand quantitative analysisQualitative analysis includes:
– Interviewing keystakeholders to gatherhistorical insight and toprovide strategic directionfor the future
– Understanding currentsales compensation plans
– Reviewing relevantbusiness documentation
Quantitative analysisincludes:– External compensation
benchmarking– Reviewing pay and
performance relationships
Design involves the followingkey steps
1. Sales CompensationPhilosophy
2. Determine Eligibility3. Set Target TCC Levels4. Choose Mix of Base and
Incentive5. Determine Measures &
Weights6. Design Plan Mechanics7. Set Performance
Objectives8. Select Leverage Ratios9. Set Payout Timing10.Validate Plans and Make
Refinements
Implementation steps canvary based on the degree ofchange made to sales incentiveprograms. Some key activities:
Confirm systems andadministrative capabilitiesPrepare formal plandocumentsDraft communicationmaterialsTrain managers onchanges to the salesincentive planSet meetings for managersto communicate changesone-on-one with directreports
Assessment
Sales Compensation Plan Design BestPractices
MERCER 9
A sales compensation plan should:
Reinforce and drive behaviors that help meet management’s overallbusiness objectives
Provide motivating, meaningful and cost-effective rewards to the rightpeople for the right behavior and the right results
Align with clearly articulated sales and sales management roles andaccountabilities
Align with other key sales management programs and practices and thedesired 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
Key success criteria for effective sales compensation design
MERCER
Focus Areas Key Responsibilities
Exte
rnal
Inte
rnal
Effective sales compensation depends upon role clarity and “what goodlooks like” in terms of results
SalesRole
Customer SegmentGeography
Product/Solution Channel
Revenue Stream
Sales Process
Key
Strategic
SMB
Identify Qualify Propose Close Imple-ment Service
WWSales
Direct
AccountMgmt
TechSales
Indirect
Reseller
HW
Server
Worksta-tion
SW
CRM
Security
Services
Mainte-nance
Implemen-tation
Retain/Defend Grow
ExistingCustomer
More Volume CurrentProduct
New Product
NewCustomer
New Product
Existing Customer
Same Volume Current Product
10
MERCER 11
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 12
Limited Support Good Support Strongly Supports
Establish philosophy & supporting global design guidelines
DESIGN PRINCIPLES
PLAN DESIGN GUIDELINES
Keepplanssimple
Pay forperformance/
Differentiate pay
Balancecompany results
with payMaximize
line of sightMaximizemotivation
Maximum of 3 performancemeasures per plan, ideally 2
Maximum of 3 inflectionpoints/levels in a payout curve/ratetable
Maximum of 2 gates in a plan
Maximize pay at risk given therole’s influence on sales results
Performance measures have aminimum of 20% weight
Soft cap at 300% of payout orlarge deal > 50% of goal and lessthan a margin threshold
Pay upside of 3:1 (frontline) or 2:1(overlay) at the excellence point ofperformance
Limited support Good support Strongly supports
Step 1: Sales Compensation Philosophy
MERCER
Ground total target cash compensation in key talent and roleconsiderations
BelowMarket At Market Slightly
AboveMarketLeading
High
Excessive Adequate
Supply of Talent
ExpectedPerformance
Productivity Level
Employee Mobility
Staffing
Degree of CompanyStability
Abundant Adequate Limited Scarce
Low Average Stretch Exceptionally High
Low Average Above Average Very High
Low Modest Some Hiring Awayby Competitors
Frequent Hiring Awayby Competitors
Light Extremely Lean
Rock Solid Moderate Low (Shake Out)
13
Step 3: Set Target TCC Levels
MERCER
100%90%
80%70%
60%50%
40%30%
20%10%
DIMENSIONPrimary Job FocusSelling CycleSales Force ProminenceBusiness StrategyAccount StrategyEntry Barriers (Sales Skill Set)Management ControlProduct Life CycleComplexity of SalePerformance MeasuresOVERALL OVERALL
Scale
Incentive
Base
Full Commission Combination Full Salary
40%
60%70%
80%90%
10%20%
30%
100%
50%
Short
GrowthHigh
AcquireLowLooseIntroduceLowVolume
SalesLong
MaintainLow
StrengthenHighTightMatureHighProduct Mix
Service
Base Salary and Incentive Mix Alternatives
Determining pay mix
Step 4: Choose Mix of Base and Incentive
14
MERCER 15
March 31, 2014
Pay mix as a talent attraction and retention toolAm
ount
Earn
ed
50
50
100
70
30
60
90
1020
Uncapped
Uncapped
Uncapped
Mix
Ups
ide
$100K
$200K
Above target incentives
Target incentives
Base Salary
Legend
Step 4: Choose Mix of Base and Incentive
MERCER 16
EffectivePerformance
Measures
Withinspan ofcontrol
CompreadyAligned
• Ability to consistently andmaterially influence
• Within “line-of-sight” and keyresult for the role
• Data can be accuratelytracked
• Data is from a trustedsource and available fortimely payments
• Supports salesstrategy and businessobjectives
• Consistent with role’sdesign and keyresponsibilities
Role specific performance measures are critical
To maximize motivation, no metric should have less than15% of target pay weighted to it
To maximize motivation, no metric should have less than15% of target pay weighted to it
Step 5: Determine Measures & Weights
MERCER 17
Commission vs. Bonus
Number ofCustomers
Sales Cycle
High
Low
Short Long
Commission-Based Plans
Salary/Bonus-Based Plans
Step 6: Design Plan Mechanics
MERCER 18
Threshold 100%
Number ofSalespeople
30-40%of Sellers
60-70%of Sellers
Excellence
Top10%of Sellers
Quota Performance
Bottom10%of Sellers
Excellence level allows 10% ofsellers to earn upside, it is
usually set using historical data
Accurate target setting is key to motivate the field and align withcompany success
Step 7: Set Performance Objectives
Performance level requiringminimal effort – set based onhistorical performance or fixed
costs
Target level equates to100% of plan
MERCER
Illustrative
Payout curves should align pay and performance and motivate
Sales Leader First Line Manager Sales Rep
Step 8: Select Leverage Ratios
3/31/2014
0%
50%
100%
150%
200%
250%
300%
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%
Payo
utas
a%
ofTa
rget
% Goal Attainment
Payout Curve Leverage
The slope isaccelerated above
Target (100%) to setthe prize “beyond
the finish line” andreward for
outstandingperformance
A deceleratedslope above (or
cap) atExcellence canhelp to controlexcessive pay
Paymentsbegin once a
threshold levelis achieved
MERCER 20
Pay frequency should be aligned to the other plan design elements
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
Factors Effect on Payout FrequencyTarget 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 ofPerformanceMeasures
The greater the number of Performance Measures, the less frequentthe payout
Weighting ofPerformanceMeasures
The higher the weighting of the Performance Measure, the morefrequent the payout
Common payout frequencies are monthly, quarterly or annually and vary based on the factors above
Step 9: Set Payout Timing
MERCER 21
Back test the designs against the principles
4 Better align total production and territory size with pay
5 Top performers should earn 3x the incentives of an average performer toprovide better motivation and drive stronger pay differentiation
2 Maximize motivation of plan but still balance ROI with compensation spend
1 Maximum line of sight and influence on results that drive pay
3 There should be differentiations in compensation for specific products /product lines / product groupings and product mix
6 There should be no caps on incentive payments, though there should beprotections against “windfalls”
Step 10: Validate Plans and Make Refinements
Meets Principle’s Objectives Partially Meets Principle’s Objectives Fails to Meet Principle’s Objectives
Appendix: Sales Compensation EffectivenessAssessment Best Practices
MERCER
Key “red flags” include:1.Plans with high levels of uncapped upside2.Performance levels with no threshold3.Performance measures not based on quantifiable results4.Highly frequent payments5.Low weightings on performance measures
Assessment: understanding the current compensation plans
Role PerformanceMeasure Weighting Payout
Mechanism
Performance / Payout Level(as a % of Target) Component Detail Payout
FrequencyThreshold Target Excellence
SalesRepresentative
IndividualRevenue 60% Formulaic
Bonus 80% / 50% 100% /100%
120% /500%
Payments are notcapped (i.e.,incentives above“excellence” levelare paid at“excellence” rate)
Weekly
GroupRevenue 35% FormulaicBonus
0% / 0%(no
threshold)
100% /100%
110% /150%
Payments cappedat “excellence” Monthly
MBOs(Managementby Objectives)
5%DiscreteBonus
Payment
Completing a maximum of threeobjectives /
Up to 150% of target
This payout issubject to thecompletion ofobjectives
Annually
1
3
2
4
5
MERCER
$100
$110
$120
$130
$140
$150
$160
$170
$180
$190
$200
Base Salary Total Cash CompensationIn
Thousands
$60
$70
$80
$90
$100
$110
$120
$130
$140
$150
$160
Base Salary Total Cash CompensationInThousands
Competitive compensation analysisExample of competitive total target cash benchmarking
Sales Representativen = 27
Sales Managern = 7
25th %ile
Median
75th %ile
25th %ile
Median
75th %ile
25th %ile
Median
75th %ile
25th %ile
Median
75th %ile
Illustrative
24
MERCER
25March 31, 2014
The following pay mix exhibit shows how the mix of base and incentives (variablecompensation) compares to market benchmarks
60% 59%
39%
64%
26%
40% 41%
61%
36%
74%
60%
80% 78% 80% 80%
40%
20% 22% 20% 20%
Sales Person Recruiter Vice President ofRecruiting
Vice President ofSales
EVP of Solutions0%
20%
40%
60%
80%
100%
Base Incentive Market Base Market Incentive
Competitive compensation analysis
Average Employee Pay Mix Illustrative
25
MERCER
Key effectiveness metric: performance distribution by role
Goal Achievement
FY08 Goal Achievement
FY09 Goal Achievement
FY10 Goal Achievement
Source: Financial data obtained from Company (Dec 2010) 26
MERCER
Key effectiveness metric: pay composition by role
Source: Financial data obtained from Company (Dec 2010)
Ince
ntiv
ePa
y
Measure 1 Measure 2 Measure 3 Measure 4
27
MERCER
Key effectiveness metric: pay for performance by key business objective
R2 = 0.3251
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
% Audit (of Total Revenue Generated)
3YR
Avg
Goal
Atta
inm
ent
Source: Financial data obtained from Company (Dec 2010) 28
MERCER
Key effectiveness metric: pay differentiation
Ince
ntiv
ePa
yas
a%
ofM
edia
nPa
yout
Earner Position
29
MERCER
Shawn Rossi is a Principal and the North America Leader for Mercer’s Sales Performance Practice.Based out of Atlanta, he leads engagements with clients to deliver straight forward, aligned, highimpact sales effectiveness solutions.With over eighteen years experience, Shawn has expertise in a variety of industries includingtechnology, distribution, retail, telecommunications, banking, media, insurance, and medical devicecompanies; all with the goal of improving sales and marketing effectiveness.Shawn’s engagement experiences specifically include working with leading global companiesincluding 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. Rossi’s key core competencies include:– Sales Transformation (spurred by acquisitions, new product launches, going into new markets)– Sales and Channel Strategy– Sales Effectiveness Assessment & Dashboards– Sales Organization and Role Design– Sales Compensation Design & Administration– Quota/Goal Setting– Sales Process Definition/Re-engineering– Sales Training & Enablement
With over 30 widely published articles, speeches and webinars, Shawn is a recognized thoughtleader 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 webfor World at Work, SPM Solution Provider User Conferences, and the Sales ManagementAssociation.Shawn holds an MS in Physics from Auburn University and graduated Cum Laude from WakeForest University with a Bachelor of Arts degree in Physics.
Shawn RossiPrincipal, North America
Practice Leader
Sales & MarketingPerformance Practice
678.427.8275
Atlanta
Biography
30
MERCER 31
Questions&
THANK YOU!
