Effective sales force compensation is one of the chapters in Unlocking Human Capital to Drive Performance: A CEO's Handbook by Sanjiv Anand (www.tatamcgrawhill.com). Sales compensation strategy is a mission-critical pay programme, the author underlines. It is a high-stakes, high-visibility pay system that requires focus and comprehensive design support, he adds.
Among the many reasons behind a weak sales compensation strategy are questionable quotas, poor formula mechanics, and broken administrative systems, the chapter instructs. Cautioning that ‘design' of the sales job is often overlooked by sales compensation specialists, Anand advises sales organisations to realign jobs with the emerging/ changing market conditions. “Without effective buyer segmentation tools, sales organisations allow sales jobs to become ‘blended' and ‘corrupted.'
To cap or not to
Opening with the lament that the HR departments sometimes forget the need to truly incentivise the people who generate the revenue, the chapter proceeds to take up the oft-debated question, ‘whether sales incentives need to be capped'. The answer, in the author's view, lies in separating sales jobs into two distinct categories. First is the ‘seller/ business' model which typically includes life insurance, stock brokers, real estate, and mortgage brokers, he explains. “In this category, a company's business is purely selling and commoditised. Here sales is individual-dependent and carries the risk of the salespeople taking customers along with them if they leave. This necessitates sales incentives to be paid as a proportion of profits/ revenues without any cap.”
The second category is the ‘seller/ representative' model, where the salespeople act as employee-representatives of the company and its products, one learns. Here, the company manages payouts within a prescribed target pay range, established by studying the market data, Anand informs.
Pay-mix
Importantly, the chapter discusses ‘pay-mix,' the ratio of ‘base salary' to ‘incentive at risk,' expressed as a percentage of target pay. Reminding that an aggressive sales incentive strategy favours a lower base salary with a higher at-risk incentive – because these plans ensure variable costs, drive volume performance, and are more motivational in nature – the author highlights that the degree of persuasion in a sales job defines the nature of pay-mix. He says, for example, that if sales rely on the persuasion skills of the seller (as in door-to-door sales), then base salary will be low and the at-risk portion will be significant. However, if the company's product/ services provide a rationale for customer purchase through brand equity, then the persuasion role of the salesperson is less relevant; in which case, the base salary is higher, and the at-risk proportion, lower. A quick takeaway from the chapter is that an effective sales compensation strategy synchronises three critical processes – forecasting, quota allocation, and sales compensation. While forecasting develops an overall goal number for a fiscal year – with the sales team participating to ensure realistic numbers – quota allocation breaks down the forecast into individual goals for each salesperson.
Right measures
Cutting a fixed paycheque isn't enough anymore, announces a chapter titled, ‘Driving individual performance.' Emphasising that the concept of adding a strong annual component of variable compensation based on the performance record of meeting targets is not new – we have had KPIs, KRAs, MBOs, for years – the author avers that their importance today is greater, especially with their link to compensation. As for the question – how many measures does one need – Anand's answer is simple: No more than 4 to 6. Guiding HR to evenly divide the measures between the perspectives – customer, financial, process, organisational, and IT – the author also suggests that weightage be determined based on the relative importance of the measures in terms of the organisation's strategy and goals.
Number game
Then comes the issue of setting targets on these measures, a play with a number, what with the employee wishing for something easy to achieve and the employer working at the other end of the scale. The best thing to do, says Anand, is to do it in an honest way. If two out of the 4-6 targets need to be challenging, make them challenging, but support the employee if he needs corporate assistance to deliver those, he recommends.
Keywords: Books, sales, compensation, brands