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Introduction
Sales compensation is a pay-for-performance reward program. Senior leadership expects those who perform the best to receive the best pay. However, what is the definition of “best”? Is it the most sales production or some other measure? In some cases, leadership might be looking beyond simple sales volume growth to additional measures such as new customer growth, price/ profit improvement or, in some cases—oddly enough—customer re-evaluation (i.e., eliminating unfavorable customers). In other words, the most sales production may not be the only or best measure of sales performance. The definition of “best sales performance” will shift as the senior leadership redefines sales success as driven by market conditions and corporate business objectives.
Sales Growth
Phases
This paper examines how sales growth phases (see Figure 1) affect the design of the sales compensation plan and thus how to align rewards for top performers, not just top producers.
Total sales volume production is the most common measure to calculate sales compensation earnings. Total volume, whether in sales dollars, margin dollars or units, represents the ability of a seller to persuade buyers to purchase the company’s products. At first glance, it would seem to be the sole expectation for any sales role. However, what if the seller is selling the least preferred mix of products? What if the sales representative is selling products at a price below margin expectations? What if the seller only focuses on current accounts and not on expanding his or her territory? Management often tries to include these “strategic” sales objectives in the sales compensation plan, but many times such components are either not effective, or not significant enough to have a meaningful impact on sales representatives’ earnings. Additionally, most sales leaders are reluctant to change compensation plans knowing that the change may adversely affect top producers. Leadership does not want to expose the organization to possible turnover or reduction in top-line performance.
However, as sales growth changes, management needs to ensure that sales performance expectations evolve, too. This means updating the sales compensation programs on a regular basis. Fortunately, sales force evolution and sales compensation design follow a predictable pattern. Sales compensation designers can anticipate these changes and thus keep the sales compensation program aligned with company business objectives. Sales organizations evolve in a predictable pattern, similar to the product life cycle curve. This evolution provides organizations the ability to anticipate changes in their go-to-market model and better align their sales compensation programs to drive desired sales outcomes. These phases have unique sales objectives, job roles, performance expectations and measures. Sales compensation plan designers need to modify sales compensation pay mechanics to drive the desired behaviors.
In the following sections, we will explore four growth phases and their impact on effective sales compensation design. Understanding these phases will help management effectively reward top performers not, simply top producers.
Phase I: Start-Up Growth
In Phase I, Start-Up Growth, sales organizations seek top-line growth.
All business is good business. Growth represents survival and significant growth leads to success. The sales strategy is to sell the limited product portfolio to as many customers as possible. The sales job is often described as a new business seller or “hunter.” Their job is to take their territory and grow it quickly.
In Phase I, the true top performer is the top producer. The game is top-line growth and the definition of success is the seller who can sell the most. The compensation plan is often simple with one volume measure, typically sales dollars. Using a commission plan paying from dollar-one is a proven pay mechanic. The plan is clear: sell more; get paid more. The company needs revenues. Salespeople are told to sell more to get paid more. A commission compensation plan communicates this clearly. Top performers are top producers.
Phase II: Volume Growth
In Phase II, Volume Growth, success begins to alter the role of the salesperson from a pure hunter to an account manager serving existing customers.
The sales team has been able to secure enough business to support the growth objectives of the company and expand its presence with more customers, leading to more sales offices, and more sales team members. This expansion causes the core sales job to evolve. What was once a hunter role now incorporates aspects of account management, retention and client development. The mix of new and current customer demands and various types of sales opportunities pulls representatives’ attention in multiple directions. Growth is still plentiful and many sales representatives develop unique growth strategies for their territories.
As revenue growth and the customer population expands, the company invests in new products through internal development or by acquisition. The sales strategy is a mix of old and new with goals ranging from new customer acquisition, current customer expansion and new product placement. These multiple pathways to growth make it difficult to define a single success formula for the sales team. Typically, the core product is still driving both top- and bottom-line growth. Competition is emerging. The sales team is still recording successes. However, sales management needs to start making changes to address growing challenges. Some accounts need deeper expertise. Some products require added support. Unfortunately, current sales strategy momentum makes changes to the sales focus difficult. This includes making changes to the sales compensation plans. Organizations are often reluctant to change things even though new products may not be successful or growth of current customers has slowed. The definition of sales force success becomes more problematic; the definition of a top performer is not as clear.
Phase II success requires management to define new job roles, with new performance objectives requiring new sales compensation plans. The legacy business developer is still essential for growth and still needed within the sales team. However, the needs of large customers and small customers diverge requiring account managers to cover large customers and territory representatives to handle the small accounts. These roles need compensation plans that support the selling environments in which they operate. For large account managers, measuring customer growth and product expansion through a goal based compensation plan supports customer-centric selling. These sellers need to sell a broad set of solutions to increase customer retention. General territory representatives need to sell the growing mix of products to both existing and new customers. Possibly, the use of a combination of commission and goal-based sales compensation plan mechanics will help bridge the new sales compensation plan with the Phase I legacy commission-only plans.
Top performers must drive growth based on the sales strategy of the customer types they are assigned. Measurements will differ based on the job role and assigned customer population.
Phase III: Re-Evaluation
In Phase III, Re-Evaluation, revenue growth slows and may even lag the industry’s growth.
In Phase III, Re-Evaluation, revenue growth slows and may even lag the industry’s growth. The sales team is under significant pressure from finance to improve pricing, product mix and margin performance. Leadership now considers many sales solutions to improve sales productivity. The sales team may have become costly, bloated and overstaffed. In trying to satisfy all customers and support all products, the sales team fails to meet its objectives. There are too many products, too many different types of customers and too many strategies to execute sales efforts successfully. The sales team becomes costly and ineffective. What was once a simple strategy to sell one product to any customer has become an amalgamation of multiple strategies, customer types, sales roles and product and pricing policies. The sales compensation plan that once took one page to describe now comes with 30 pages of prose with many measures, rules, qualifiers, multipliers and holdbacks. Defining successful performance becomes confounded.
This lack of clarity can lead to one of two results:
- Most common, an overly complex plan where it is difficult to determine how to be successful
- An overly simplistic plan where legacy top producers are still successful despite not supporting the company strategy.
Both outcomes do not help the organization drive its desired results. Top performers are often hidden in the ranks of the sales team, not able to demonstrate their abilities due to lack of sales strategy clarity causing sales job confusion.
Phase IV: Optimization
At some point during Phase III, leadership declares that not all business is good business and the sales transformation begins and so does Phase IV, Optimization.
In Phase IV, clearly defined customer segments are established based on sales opportunity and sales ROI. Sales management aligns highly skilled and expensive sales resources to customer segments with clear upside opportunities. Management uses lower cost channels to cover smaller less lucrative customer segments. Management defines sales jobs with clear focus and objectives. Sales ROI defines success. This makes defining performance and top performers much easier. Top performers must excel and execute a clear sales strategy. Production is only a part of that expectation.
Top Performers Versus Top Producers
So how can you determine if your top earners are your top performers?
The first step is gaining consensus on what is the definition of excellent sales performance. Does this performance apply to all sales roles equally or does it differ by sales role and/or geography? Once you clearly define what top sales performance is, see how it aligns with your current compensation plan measures and payouts. How much of the sales compensation plan payout comes from measures that tightly align with your definition of performance? How do your top earners compare to an aggregate analysis? Are earnings based on performance measures that align with the business/job strategy? Avoid measures based solely on legacy strategies. By clearly articulating sales success and aligning that with top earnings, best performers will earn the highest rewards. Sales compensation is an alignment program. It supports your growth strategy, go-to-market model and sales job design.
Top performers will be top earners at companies that take the time to ensure they clearly define and articulate what sales success is and support it by designing a sales compensation plan that clearly incorporates performance measures that directly measure organization success.
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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.