CHEMICALS & SPECIALTY MATERIALS Case Study
Introduction
Only When the Tides Go Out…
Due to favorable market conditions, this client had enjoyed spectacular margin growth in prior years, which overshadowed important flaws in their sales compensation program. In the previous year, their U.S.-based plans paid out over 300% of variable targets for achieving approximately 120% performance to the target margin, a very high spend even for this spectacular performance.
However, alarm bells only went off when market conditions normalized, and the client was no longer achieving its margin targets but continued to exceed its sales comp budgets.
Alexander Group’s expertise in sales compensation plan design would ensure that the client’s plans aligned with industry best practices, strategic goals and business targets.
Approach
Align Performance and Incentives
This company desired consistency in its plan design across selling roles while addressing high variable compensation costs. It also sought to meet margin targets while expanding market share or total volume. Talent retention was a top priority, so the sales compensation plan design needed to be both market-competitive and ensure that performance aligned with targeted business outcomes.
During the current state plan design review, Alexander Group developed a comprehensive catalog of plan variations across roles, interviewed key stakeholders and sales leadership, and compared historical incentive payouts to seller performance against expected business outcomes. We also used our proprietary industry benchmarking database to compare the productivity to client industry peers.
The resulting goal was to design a sales compensation plan aligned with sales objectives while providing a fair incentive for above-target performance.
Elements of the plan included:
Rewarding sellers for both volume growth and margin contribution: Introduced a new performance modifier to incorporate the total volume component into incentive calculation.
Limit excessive payout for over-performance: Used a multifaceted approach that included:
a) rationalizing territory sizes within roles to allow for consistent earning potential
b) adjusting commission rates in alignment with the expected territory size for the various eligible roles.
Key Findings
Runaway SIP Traced Back to Two Root Causes
Misaligned performance metrics and inconsistent earning potential across sellers were the two root causes of the company’s inconsistent results.
Our project revealed two primary issues:
Margin measures did not fully reflect corporate objectives or sellers' influence.
Sales volumes had been flat or declining in prior years, and sales margin contribution varied significantly based on market conditions. The designed incentive structure failed to account for market pricing fluctuations, which were highlighted during high inflationary periods. For instance, high-margin results against target could be achieved even though total sales volume declined and was not in alignment with the overall business strategy.
Existing plans were excessively generous for over-performance and provided the most significant upside to those with large territories.
Two critical reasons for this imbalance were:
Large variability in territory sizes across incumbents in the same role: Fixed commission rates for above-target performance created substantial discrepancies in payout rates for similar performance against the target (e.g., 110% to quota). Sellers with large territories far exceeded the expected payout ranges by 2-3x with only a nominal percentage of over-achievement. The resulting payouts were far above the target range by 3.5x-7x.
Discrepancies in typical territory sizes across roles: Commission rates for above-target performance did not fully account for differences in average territory sizes across roles, making key account manager and sales manager plans exceptionally rich. For example, the average management span of control was seven, and the payout rate offered to managers was only half that provided to sellers, making their overperformance payouts 3.5 larger than those of their direct reports.
Recommendations & Outcomes
Implement Core Changes
As a result of the project, the client’s stakeholders were happy to address the key project objectives and the two core structural changes to the plan design.
The company accepted the design changes, which positioned the client team to create greater equity across roles for sales performance. The new plan created an improved balance between incentive payout and organizational outcomes.
Alexander Group’s sales compensation expertise allowed the company to accomplish three goals.
Identify the root cause of run-away SIP in the gross margin increase, which was driven by price fluctuations while volumes stayed flat.
Provide ways to mitigate run-away SIP and align payouts to sellers’ expected behaviors.
Identify sales compensation cost savings, with a reduction in compensation cost of sales from 5% to 4.4% under the new plan, derived from tempering excessive payments above goal.
Expertise in Sales Compensation
Growth requires alignment between strategic objectives and sales compensation plans. With the right incentives, it will be easier for sellers to achieve prescribed goals. Alexander Group has the industry experience and knowledge leaders turn to for assistance.
About Alexander Group
Alexander Group understands your revenue growth challenges. Since 1985, we’ve served more than 3,000 companies across the globe. This experience gives us not only a highly sophisticated set of best practices to grow revenue—we also have a rich repository of unique industry data that informs all our recommendations. Aligning product, marketing, operations and finance efforts behind a successful sales organization takes insight and hard work. We help the world’s leading organizations build the right revenue vision, transform their organizations and deliver results.
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