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Bill: Welcome back to SalesProChat. This is the first SalesProChat podcast of 2017. I’m you’re host Bill Banham. This episode is focused on the basics of sales compensation: the what, why, who, how and when.
Many organizations have struggled for years to solve the problem of why they cannot get the results they expect from their sales people. In most cases, it's not bad performance, it is bad organization. There are many key elements that must be integrated in order to create sustained, competitive advantage over the competition. The good news is that once you have successfully achieved this alignment and the right programs are in place, not only do you perform better and succeed more often, but it's very difficult for your competition to emulate.
Our guest today is David Johnston. Dave is president of Sales Resource Group. He has a broad international consulting background that offers experience, active participation and a Sales Resource Group approach to consulting with clients. Dave has over 25 years experience consulting for organizations in diverse fields such as broadcast and print media, pharmaceuticals, telecommunications, information technology, retail, manufacturing and financial services. Dave Johnston, welcome to the SalesProChat podcast. It's great to have you here today.
David: Thanks very much for having me, Bill. It's always a good opportunity to sit down and talk about a subject that's very close to my heart.
Bill: In that case, let's get going. Let's start with the basics. What is sales compensation and why does it matter?
David: Essentially sales compensation is a management communications tool. To be effective it has to tell sales people what the organization values and wants to pay them for delivering, and secondly it has to tell them where to spend their time and effort. It's also a vehicle to be able to attract, motivate and retain top sales people. If you're looking to get a certain type of salesperson, certain types of sales compensation plans attract that kind of person. Somebody that is very accepting of a higher risk plan and is looking for more incentive and less base salary, that attracts a certain kind of sales individual. Other people look at the base as well as what the additional variable is on top and it attracts a different kind of person. Then, to motivate them to focus them on the things that matter and also retain them to make sure that you're not just training them so that your competitors can steal them away.
The sales comp plan does all of those things, but it's also a focal point to initiate and reinforce desired sales behavior. If you're looking for certain kinds of behavior, different kinds of sales compensation plans will initiate that kind of behavior and will reinforce it.
Finally, it supports the achievement of business goals. It makes sure that sales people are focused on the things that are important to the business, the sales objectives or targets, and in helping the company create a sustained competitive advantage.
Bill: Perfect. Thank you. In two or three lines, can you try and define what a sales compensation plan exactly is?
David: A sales compensation plan is an annual component that looks at what the company is going to pay the sales person, both in base salary as well as incentive compensation, and it identifies the types of measures and the weighting that's given to those measures, as well as the payouts that people will achieve for certain levels of performance.
Bill: Many sales organizations struggle to find the right formula of structure and compensation that will support their sales success. What are the variables and which formula is best, or does it depend?
David: I often get people will say to me, "If we could find the right sales compensation plan, it would help drive our success." In fact, sales compensation is an output. It's not an input into the process. Sales compensation is an output that starts first with business goals and objectives, then the sales, marketing and service strategies to achieve those objectives, followed by the tactics or the behaviors and activities that you need to execute to execute those strategies. Once you know the kinds of things that you want sales people doing, you need to make sure that the sales roles are structured properly so that people are focused on and their roles and responsibilities are set up in such a way that it aligns with these tactics.
Once you have the roles set up properly, you then look at the performance measures and say, "How will we know our people are doing a good job in delivering in these roles? How will we measure their performance?" Once you get alignment between the business goals right down to the performance metrics, then the sales compensation is fairly straightforward. It allows you to look at the kinds of variable pay that will support all of that alignment.
Bill: Sales is known to often have a higher churn rate and is more susceptible to change compared with many other departments. How does constant change cause poor channel performance and failure to achieve the required sales targets?
David: One of the key things in terms of sales compensation is that it has to be dynamic. We're seeing more and more of this. It used to be that you set up your plan for the coming year and you set targets for that year. Then you sent sales people off on their way to achieve those goals. Today things move much more quickly. Communication is much more efficient. We have a lot of change that takes place in terms of who the competitors are, how the information is getting back to the company in terms of changes in competitors' strategy, etc. Part of that churn rate is the fact that customers have certain expectations of sales people now that probably are higher than they were in the past.
As a result, sales people are really tasked with an awful lot of elements that are going to help them be successful, but they can't sit and expect that those things won't change. Companies are ... one of the struggles that they're having and one of the reasons why they can't seem to find that holy grail of sales compensation is because things do change fairly quickly today. We're seeing much more quarterly objective setting rather than annual. We're starting to see the fact that as sales people are moving away from transactional sales and more to solution sales, we're also looking at a very different kind of individual. It's less about personality and less about somebody who can provide the customer with a reasonable approach to the features and benefits of the product, and more about having somebody who is more consultative and who can analyze and provide value to the customer in terms of what they need and how the solution that the sales person has can meet that need.
Sales compensation, in order to resolve a lot of the issues that we see in the channel today, their comp plan has to reward them for doing more than just selling a product or a service. It's more about being a good resource to the customer and having the creativity to put solutions together that drive sales success.
Bill: Today's best sales people are brand ambassadors. They are subject matter experts. They are a go to resource.
David: Their customer needs to see them as that go to resource and if they have the technical skill or the product knowledge, that's fine, but very often what we are seeing as well is that the sales person will be the analytics person who will help analyze the situation. When they need the expertise, they'll bring in the experts with them. It's not just about one person out there selling. That person is the point, the lead, that helps manage the relationship with the customer and helps the customer identify their needs. The rest of the team comes in to help in terms of defining that need, putting together the solution in such a way that it can be implemented.
Bill: How can auditing your existing sales compensation plans identify elements which are working and should be kept, and parts which need to be changed to improve program effectiveness?
David: When there was less change in the marketplace, you could put a plan into place and it would last four, five, six years. In some cases I've seen some that have never been changed in ten years. Today that's not acceptable. Because things change, not just in the market, but company strategies change, very often they'll have new leadership who have different ideas and directions for the company. The audit allows you ... and they probably should be done every two to three years, depending on how much change is going on in the marketplace. The audit helps you to take a very structured approach to looking at elements that are important in the sales compensation plan. Things such as alignment with business strategy, measuring the things that are important to the business, looking at the support for different kinds of sales behavior.
One of the big ones today, for example, where everyone's looking for growth, is new business development. If you're looking for growth and you don't have something in your plan for new business development, and it's not prominent enough to make people accountable for it, then you may not get the growth that you're after. When you're auditing your plans you want to make sure that you're looking at what you have today, and looking at where you need to be in the next one, three, five years. The audit allows you to identify where the gaps are. Where is the gap between where you are today and where you need to be? The audit provides the feedback as to where the gaps are between those two.
Bill: Okay. We're going to get to the blueprint aspect very shortly, but before we do that, let's be a little bit negative for a second. What deficiencies can be identified from the audits? For example, how the roles are structured, process problems, and data issues that must be resolved that must be resolved to optimize the sales performance.
David: A large part of what we're looking for is alignment between business goals and what we measure for our sales people in terms of their performance and setting up performance expectations for them. When you do the audit, very often what you'll find is that companies are pretty good at looking at business goals and the sales strategies to achieve them. Where it starts to fall off the rails is when they try to get execution. Tactically, do the plans support the kinds of behaviors and activities that are necessary in order to execute the strategies? For example, if a company changes its sales strategy and ... if they change their strategy but the sales compensation plan does not change to align with the new strategy, then you can be reinforcing old sales paradigms. You can be reinforcing behavior that was fine before, but needs to be changed to execute the new strategy.
The other piece to this is, when we look at the sales roles. I think we've reached a point where we have to be able to take some stock as to what we're asking sales people to do. Over the last several years we've reduced the number of sales people, but we haven't reduced the expectations or the tasks that we're looking for, or the accounts. Today's sales people tend to be spread pretty thin. In order to be successful we want them to be focused. One of the things that the audit does, it will identify the kinds of things ... where the roles are maybe out of alignment with what we need them to do for the company to achieve its goals.
Maybe I can jump in with one last point there. That is, we have a lot of data. When we look at sales and we look at the kinds of things that we capture about the activities of sales people in our CRM systems and we look at the financials on the deals that we have, it generates a lot of data. The difficulty is that data's not in a format where it's solid information that we can use for making decisions. A lot of times we will see organizations that want to make change. They want to change the comp plan. They want to put in systems to do the tracking and the calculations, etc., but the data is terrible. If you've got bad data, you're not going to have a good plan. Before companies make significant change, they need to make sure what they're capturing is the kinds of information that they need in order for their plans to be effective. If you aren't capturing that information, you need to make sure that processes are put into place so that you can capture it and measure it. The key around measurement within the sales compensation plans, is that you need to be able to measure it accurately and consistently. Otherwise, it's pretty hard to put it into a comp plan and have people's pay based on it.
Bill: I like to imagine that people are doing that correctly. How can a sales manager use the audit report and the data to provide a blueprint for short and longer term improvements?
David: When you do the audit, typically there's a lot of items that will come out of an audit that the company can implement to improve the effectiveness of the sales comp plan. The difficulty, though, is some of those things require development, some of them may take a little longer to implement. There's others that are what we call quick wins that you can put in fairly easily in terms of change without having a lot of development time, and they'll focus on some key things that will help provide quick wins or improved performance.
From a sales management standpoint, one of the things that's important is to look at the short term. Over the next 12 to 18 months, what kinds of things can we do in the short term that are going to improve the performance of the existing plan? That may be changing some measures, it might be redefining the roles, it might be looking at whether we're paying commission or bonus. The longer term ones may be things where we're not capturing the information so we don't have any baseline. What we may need to do is have a year to two ... if it's something that will be evolutionary, we might need to get a year or two's worth of data in order for us to be able to really assess performance against the initiative, because we need to have that data in order to be able to assess it. From a sales management standpoint, the audit is a blueprint for them. It says to them, "What can we do now? What are the things that we need to work towards doing over the next two to three years?"
Bill: Let's switch focus a wee bit and talk about generations, Dave. Do millennials and Gen X's have different motivations and material needs from sales compensation outcomes? For example, would you say that there's a general need for more instant reward and recognition and constant feedback when it comes to millennials within the sales comp process?
David: My gosh, Bill. You could do a day's worth of discussion on this topic. I have a lot of senior sales and business people that say to me, "I just have no idea what motivates these young people coming into the organization." My response to that is always, "It's the same things that have motivated everyone else." It's looking at the things that are within their control, making sure that they're focused on the things that are important to the business, and making sure that if they achieve against it, that they're rewarded. That hasn't changed over the last 50 years. What is different about these folks is that they have grown up with instant communication. They see results very quickly in so many areas of their lives, and they expect that in their work. A lot of them get very frustrated if they've got a clear understanding of what they need to do, but the systems aren't in place, or the support isn't in place for them to do it efficiently.
The other thing that we are seeing as well, and this is a real ... for me it's a critical issue for Canada as a country. That is, from a performance standpoint, it used to be that we had a bell curve for performance, so that we had some people at the bottom end that were not performing, and then most people were performing around average or a little bit above average, and then we had a couple of people or a few people that were well above and were our top performers. What we're starting to see today is a bimodal distribution, where we have some millennials that are highly motivated, high performing, high expectation, and want to be rewarded that way. Less in the middle around the norm, and then another group that is disillusioned, that aren't very focused, that haven't got the same degree of drive, but they still have the same expectations.
For companies, I think part of this is going to be ensuring in your recruitment process that you're attracting the right kind of people. You also want to make sure that the incentive program is designed in such a way that it rewards and retains those people that are higher performing and sends a very clear negative message to those people that are performing at the lower end and should self select themselves out, or you're going to have to take them out at some point. With the millennials, there are some challenges, but I'm seeing different kinds of comp plans that are very effective in ensuring that the right kinds of people are staying with your business.
Bill: Okay. We've delved there into the differences between generations. Now let's get a bit international and look at differences in a couple of countries. Do Canadian companies tend to approach sales comp plans differently to their U.S. counterparts in any ways in your experience?
David: There are some differences. When we look at plans in the U.S., there are fewer regulations, less in terms of severance, and they tend to pull the trigger a little bit quicker than Canadian organizations. On top of that, they also tend to have much more risk in their plans. As Canadians we tend to be a little more risk averse. We like to make sure that people are going to be earning a decent base salary to enable them to be able to meet their obligations without putting themselves in the position where they have to maybe do things that you might not want them to do in order to earn their variable. We can see this, just recently, in terms of the issues around Wells Fargo down in the U.S., where the incentive programs were set up in such a way that it generated the wrong kind of behavior. It made people do things that were inappropriate. Funny enough, just recently, within the banking industry in Canada, we've also had that same sort of claims made about certain of the banks in terms of some of their sales practices.
When those issues get raised, typically it's because of the way that the sales incentive compensation plan is set up. If it's set up properly, as I said, it attracts the right kind of people, it motivates them to do the right things, and it enables you to keep them because they're satisfied and happy with the program. If you have a plan that isn't set up properly, you can oftentimes get unexpected and sometimes very negative behavior.
Bill: Okay. This is a Canada first show, so let's just keep on that theme for a second. Dave, what's new in Canada? Are there any recent or upcoming developments from Ottawa affecting sales compensation programs?
David: The recent federal budget put a lot of emphasis on innovation and ensuring that Canadian companies can compete effectively in the global marketplace. Today borders are ... unless you're putting up a lot of tariffs and you're restricting trade, and we're starting to see some of that falling away, even though there's been a lot of talk about scrapping NAFTA, I do believe that there's going to be a lot more free trade between different segments of the world. In order to do that, you have to have organizations that are able to sell their products and their services effectively. For sales people, that means opportunity.
In order to ensure that we are competitive in the global marketplace, we need sales people to be very focused on things that we need them to do in order to sell successfully and achieve the financial goals of the business. I do think we're starting to see a change in the kinds of sales compensation programs. We're starting to see more ... as I said, in order to get that growth, we're starting to see more of a combination of commission and bonus plans. Commission because we want sort of a direct drive type plan that will focus people on selling certain products or services and then maybe even modifying the payouts on those sales by some sort of margin modifier.
It's not just enough to say to sales people, "Go out and sell." We need them to hit the kinds of targets that the business has to have in order to fund that growth and to sustain the overall organization. What we are seeing in Canada is more direct drive commission type plans with a bonus measure for achievement.
Bill: Okay. That takes us towards the end of this particular interview. Before we wrap things up, Dave, in addition to the webinars that you present and the articles that you write on the CPSA website ... my little plug there for the CPSA. How can we learn more about you?
David: I'm very open to having conversations with people, even if they just want some information or they're looking for some data that they need in order to tell whether or not their plans are competitive. I'm very open to working with organizations of all sizes. I have clients that have thousands of sales people and others that have maybe three or four. If people want to get ahold of me they can reach me at Sales Resource Group.
Bill: Perfect. This show comes ahead of a new series that we're going to be releasing very soon, where Dave is actually a host of a series called Sales Compensation Strategies. He's going to be delving into some of the topics that we touched upon today in much more detail with some pretty amazing guests.
Dave, that just leaves me today to say I've had the privilege of working with you now for a little while, and you're a super impressive guy and an absolute professional. You and I are going to go to the baseball together soon, so I'm looking forward to that, but for now, thank you very much for being our guest.
David: Thanks very much for having me, Bill, and good selling.
Bill: I've been your host, Bill Banham. This has been SalesProChat, brought to you by the CPSA.
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